It’s all Greek to me

There’s a complete disconnect between how the mainstream media reports the Greece debt crisis and the reality. This New York Times report, assumes that for Greece, a sovereign entity populated by 10.7 million with a 25.8% unemployment rate, it’s necessary and desirable to pay back its estimated $250 billion in foreign debt owed primarily to European monetary institutions like the ECB, and European banks.

A pre-dinner drink in Athens in 2015

A pre-dinner drink in Athens in 2015

The reality is that it isn’t necessary, and definitely not desirable – a nation like an individual can declare bankruptcy and renege on some or all of its loan agreements. There would be nothing ground-breaking about this process that has happened to sovereign entities hundreds of times before. The only historical footnote would this would be the first country in the euro currency bloc (since it was formed all the way back in….drum-roll….2002!!) to declare bankruptcy, and as a result would be the first country to leave the bloc and return, presumably, to the drachma (the old Greek currency). In global terms there are dozens of examples of partial or full sovereign defaults since 2002, with Argentina, Iceland and Zimbabwe probably the pick of the bunch. Private creditors took a 53% haircut in the on their Greek bond holdings in 2012 but this was never going to be enough with much of the write-off being replaced by new emergency loans from the ECB and IMF which sent the country’s debt to GDP ratio back to its current unsustainable level of 175%.

Short of physically invading Greece, seizing its assets and enslaving its citizens, there is nothing the rest of the EU can do to stop Greece simply refusing to pay.

The Germans have been to Athens before....

The Germans have been to Athens before….

In fact enslaving the population though austerity (low government spending, with high tax to generate a surplus for the creditors) and seizing national assets via “reforms” (in the shape of a privatization program) is precisely the effect of the current debt payback terms. These terms are being policed by the “troika” made up of the EU Commission (unelected Supra-national executive body), IMF (unelected Supra-national financial regulator) and the European Central Bank (unelected Supra-national central banking entity), at the behest of their own balance sheets and some private creditors (think banks and hedge funds).

So really Greece has nothing to lose, and any extension of credit terms under discussion is simply kicking the can down the road. This is clear from the NYT article (emphasis is mine) “There is little doubt that the lenders will continue to scrutinize Greece’s finances, and they could make additional demands on Athens before making the next loan disbursement, which would be €7.2 billion, or about $8.2 billion — money the Greek government needs to meet its debt obligations.” So let’s get this clear – they (the ECB via other EU governments) are lending Greece more money to satisfy an existing debt repayment stream to European institutions and private entities. There is no aid for Greece’s impoverished middle class or unemployed youth. All the so-called “bailout” cash returns to northern Europe. It’s an accounting circle-jerk to keep the lunatic ‘European project’ on track.

So why are the new Greek government even negotiating? One would hope it’s to buy time as they plan their Euro exit, and the adjustment process to follow – a possibility that is completely ignored by the NYT article.

Polonius had it right. "Neither a borrower nor a lender be; For loan oft loses both itself and friend."

Polonius had it right. “Neither a borrower nor a lender be; For loan oft loses both itself and friend.”

What the ‘pay your debts’ scenario completely ignores is the moral obligation on lenders/creditors to take responsibility for their own credit exposure. In this case multiple institutions kept lending money to a small country, with a clearly dysfunctional tax collection system and a (previously at least) corrupt government, on the tacit assumption that the mechanisms of the single currency would somehow guarantee repayment. Well the new Greek government should call their bluff. And the lesson for Europe and the world is that you can’t expect private financial institutions to behave responsibly if they believe they are shielded from risk by a mishmash of bonkers political accommodations, like those that underpin the EU.

German Fin Min Wolfgang Schauble. I guess he thinks he's doing the right thing but his moral compass is confused.

German Fin Min Wolfgang Schauble. I guess he thinks he’s doing the right thing but his moral compass is confused.

What the financial markets most fear is a government actually following up on its democratic mandate and who can blame them given they typically have their own men in the positions of power. German finance minister Wolfgang Schäuble, said in late December ahead of the Greek elections that “New elections change nothing about the agreements that the Greek government has entered into.” An interesting interpretation of democracy and one to be pondered by German voters!  This is a reflection of the bloated size of the financial services sector in modern developed economies and their consequent influence over public policy and the regulatory climate they operate under. Often politicians confuse the interests of the financial sector with the interests of the country or body politic as a whole.

Thus the German, French, Dutch, UK etc governments are dead against  a Greek euro exit knowing a default would impose massive costs on huge private institutions that form a significant sector of their own economies. But why should a Greek taxpayer care about that? The average Greek does not have $23,700 (the external debt divided by the population) to simply pay back and won’t work for the rest of his life to make up the shortfall, so they logically and legally voted for a Government that would tell the shylocks and spivs in Frankfurt, Paris & London to go and stick it.

Nobody forced these besuited, MBA cradling, ivy-league baboons to buy Greek bonds so why shouldn’t they share the responsibility for their own catastrophic misjudgments?

The note should be a Euro but you get the idea.

The note should be a Euro but you get the idea.

If Greece goes, its economy would crater in the very short term (6 to 12 months) with runaway inflation as the price of imported goods soars on the return of the drachma. This would undoubtedly be painful on a collective and individual level with a short term fall in living standards from even the current low levels, but the end of the pain would already be in sight. Overnight there would be a boom in tourism (as well as being the best place to holiday in Europe it would now be the cheapest) and traditional industries like agriculture would benefit from a leap in productivity (people would have no choice but to work harder). Unemployment would fall, tax revenues would start to rise faster than expenditure, and a very rapid return to growth would follow, as in Iceland post 2008/2009.

All this could be yours for not a lot and the Greek economy would finally recover!

All this could be yours for not a lot and the Greek economy would finally recover!

Ofcourse once that happens the international credit markets would reopen and Greece would be able to borrow again, just as Iceland and Argentina found – although presumably the lending institutions would engage their brains this time and price the debt according to the real risk of default, rather than putting their faith in a daft twentieth century Franco-German inspired political agreement.

The problem with this rosy scenario for the rest of the Euro zone is that the citizens of other indebted nations like Portugal would likely follow Greece’s lead and seek exit, which would impose more losses on the aforementioned Gnomes of Frankfurt. That’s the nightmare scenario for bankers, but is what should and can happen. You can only buck the market for so long and it’s time the Euro’s debt ponzi was laid bare, and the rich of northern Europe started paying the price for their political naivety and avarice.

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