The Greek Mess

Euro-Sceptics Party On

There’s probably no greater joy in a sceptic’s life than the ‘I Told You So’ moment, so one imagines there is a great deal of champagne corks going off in the private residences of Euro=Sceptics back in the 1990s for a point well-proven. At this juncture in time, it is really hard to refute the claims that the Euro zone and the Euro currency with it was unworkable without binding agreements on expenditure. To be sure, a country like Greece was always going to be the test case and Greece has failed with spectacular style. Now, as it threatens to unravel the Euro with it we’re seeing some articles appearing saying it could unravel the whole Euro project.

Most economists think Greece has no chance of paying the debt it already owes, currently approaching €340 billion ($500 billion) or 160% of GDP. Earlier this month, Standard & Poor’s credit-rating agency cut Greece’s rating to CCC, the lowest in the world and only two notches away from the benchmark default rating. Over the next few weeks, fellow E.U. members are expected to offer Greece further bailout funds, probably around €120 billion ($170 billion), but again the consensus is grim, with analysts figuring that this is a delaying tactic at best.

At some point, the E.U. may have to bite the bullet and accept that Greece will default on its debt in some way. “The debt burden and interest rates are simply too much,” says Zsolt Darvas, a research fellow at Bruegel, a Brussels-based economic think tank. “Unless the E.U. is ready to fund Greece up to infinity and forever, then Greece will have to default on its debt.”

That’s Time Magazine. The Economist has a raft of articles about Greece but this one that goes into detail but has this to say about the various scenarios:

Least damaging for Greek banks in the short term would be some form of agreement among creditors “voluntarily” to roll over their holdings of government debt. But that would not reduce the country’s debt burden. Nor would it allow Greek banks to reduce their exposures.

A second option could be some form of “soft” restructuring in which Greece extended the maturities of its debt while still promising to repay it in full. This is the option favoured by Germany. A rescheduling would reduce the net present value of the debt held by Greek banks, which might lead to impairments. But there would probably be only a limited impact on capital because accounting rules give banks wide latitude in calculating the net present value of the bonds, enabling them to reduce the hit they would take to capital.

A rescheduling of a specific chunk of their government bonds, such as those maturing between 2012 and 2014, would have an even smaller effect and could be easily weathered by the country’s biggest banks, according to Standard & Poor’s. Such losses could probably be absorbed by existing capital and, if need be, topped up by the €10 billion set aside in Greece’s 2010 bail-out package to recapitalise banks in a Financial Stability Fund.

A more radical third option, a “haircut” on the value of Greek debt, would have a significant impact on Greek banks because losses would have to be recognised immediately. Some analysts use a simple rule of thumb, given that holdings of Greek government bonds are about twice as large as their capital buffers, of doubling the size of a haircut to arrive at the reduction in capital. A haircut of about 20% would leave banks standing but probably in need of capital injections greater than those already budgeted for. A haircut of 50%, close to current market values for ten-year Greek bonds, would largely wipe out shareholders and require a significantly larger bail-out to recapitalise the banks (see chart). None of Europe’s leaders likes this option but it would be money well spent if it put Greece’s debt on a sustainable path.

That is to say, if it all works, the Greeks won’t run on their banks and neither will the Germans or French. That’s some serious ‘contagion’ they’re talking about and trying to stave off. Closer to home, the SMH had this article.

The Greek predicament is a system failure. Democracy works only where accountability bites, where taxing and spending within a given time frame are related to voting for party representatives. It arose in Greek city states, where people knew and could discipline each other in the arts of war and peace.

European union requires richer nations to subsidise poorer ones. These cross-subsidies, especially those supporting sovereign debts in Greece, Portugal and Ireland, enjoy no democratic accountability. They are the creation of banks and browbeaten ministers at late-night meetings. The ministers are the FIFA of high finance, an oligarchy in thrall to lobbies and special interests.

I assumed that one day Germany would get fed up with having its war guilt exploited by a spendthrift Europe. But that day is not today. German and other banks need Europe’s taxpayers to bail out their Greek and other loans. Everyone seems to agree that what should happen will not happen – that is a shrinking of the euro zone, a devaluation of Europe’s peripheral ”currencies” and a corresponding cut in their indebtedness. Germany and France, joint custodians of ”Europe”, are not ready for such a step.

It goes on to soundly chastise the EU, the ECB and the bankers, but it seems moot. You can just tell the joy in watching the Euro stumble so badly over Greece, bitten hard by the reluctance to do due diligence on a country that was totally unlike Germany.

As per the events in Iceland, perhaps the best article of them all is this Michael Lewis article in Vanity Fair which had this choice bit:

Just now the global financial system is consumed with the question of whether the Greeks will default on their debts. At times it seems as if it is the only question that matters, for if Greece walks away from $400 billion in debt, then the European banks that lent the money will go down, and other countries now flirting with bankruptcy (Spain, Portugal) might easily follow. But this question of whether Greece will repay its debts is really a question of whether Greece will change its culture, and that will happen only if Greeks want to change. I am told 50 times if I am told once that what Greeks care about is “justice” and what really boils the Greek blood is the feeling of unfairness. Obviously this distinguishes them from no human being on the planet, and ignores what’s interesting: exactly what a Greek finds unfair. It’s clearly not the corruption of their political system. It’s not cheating on their taxes, or taking small bribes in their service to the state. No: what bothers them is when some outside party—someone clearly different from themselves, with motives apart from narrow and easily understood self-interest—comes in and exploits the corruption of their system.

If the story of Iceland before it was about the strange aberrant behaviour of the Icelanders when thy found themselves at the centre of finance, then it appears that the story of Greece is that just about everybody in Greece was in on looting their own government, but now that the day of reckoning has come, they can’t figure out why they have to pay up. It’s laughable really if there weren’t so many high finance types caught in the eye of the needle, trying to squeeze money from spend thrift debtor Greeks. Michael Lewis is right to the extent that there isn’t a culture in Greece that would enable them to begin paying off that debt. It’s a write-off, baby.

On the face of it, defaulting on their debts and walking away would seem a mad act: all Greek banks would instantly go bankrupt, the country would have no ability to pay for the many necessities it imports (oil, for instance), and the country would be punished for many years in the form of much higher interest rates, if and when it was allowed to borrow again. But the place does not behave as a collective; it lacks the monks’ instincts. It behaves as a collection of atomized particles, each of which has grown accustomed to pursuing its own interest at the expense of the common good. There’s no question that the government is resolved to at least try to re-create Greek civic life. The only question is: Can such a thing, once lost, ever be re-created?

And there’s the rub. It would actually be interesting in a really sadisitic sense to see what would happen to a country should all its banks fail and suddenly it couldn’t afford to pay for any imports, couldn’t get loans except at high rates and see what happens. It would be terrifying and brutal – but that’s exactly the option the Greeks are staring down and there are still people opposed to the austerity measures. One can only attribute this to valuing the short term over the long term so much, they’ve totally discounted the long term consequences. But if the Euro-Sceptics really are right, then this might have to be the way it goes. Somewhere, Maggie Thatcher and John Major are laughing, although it’s really hard to see the fun in the chaos.

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