Monday, 20 June 2011


The Turkish invasion of Cyprus and the fall of the military junta in summer 1974 was the last time that Greece was the subject of world headline news to the extent that it is in 2011. Mainstream political and financial news as well as blogs have Greece as a main subject, largely because it is as the US fears a potential Lehman Brothers-type of disaster waiting to explode and take down the world economy. Although Greece's economy is just a bit over 2% of the Eurozone GDP, that it is integrated with the EU, that its economy is in essence an extension of the EU economy, rather than a national one, that it represents a possible domino-effect makes everyone nervous except those betting to make money betting on default.
Those betting money on Credit Default Swaps (CDS) are 80% convinced that Greece will default eventually, and that will mean a large payday. A similar sentiment prevails among many economists and journalist-analysts who believe that Greece is a huge burden on the European Monetary Union (EMU). But how certain is a Greek default, or debt restructuring, given that there are so many different players in this global game of political economy. I have stated categorically that absolutely no one knows what will happen with Greece and everyone is making assumptions about the situation as it currently stands. Here are two scenarios; one of why default could take place and a second why default is out of the question.

a. unsustainable debt that cannot be serviced in the absence of a substantial 'haircut'; if a haircut or other form of restructuring (prolonged service payments, lower yields, etc.) takes place the markets would treat government bonds just as skeptically initially, thus more EU bailout money would be needed.  

b. immense domestic and foreign business and political pressure to stick austerity measures that will eventually derail the entire economy and force massive debt restructuring or default, or EMU withdrawal;

c. immense domestic public pressure to end austerity and establish national economic sovereignty after unemployment rises above 25% and consumer spending is reduced by more than 35%, as could be the case in 2012. Such a scenario would have destabilizing impact on Europe's political economy and it could be more costly than pouring money down the Greek public debt-service drain.

d. inability to borrow from the private bond markets even after the new EU loan of an estimated 120 billion euros. such a scenario could mean EU bailouts could continue for the next five to ten years and drag down the euro's value.

e. Germany and France cut their losses and focus on strengthening the euro, once Greece is out of the EMU. this scenario would in essence entail the end of the EMU and EU as we knew it so far. Der Spiegel is correct in this respect that the old euro is dead and buried with the Greek flag on top of the coffin and inside the coffin all the other periphery members resting in eternal public debt.

f. EU negotiates a new economic integration arrangement with Greece and other periphery debtor nations and treats them as it does associate members that use national currency. this scenario has been around for some time, but the argument is that the economies of Greece and the peripheries are really not national but northern European in any case, so the scenario is more or less one of severing limbs at best and suicide at worst.

Dilemma upon dilemma is the end result of all five scenarios in favor of debt restructuring, default, and/or Greece's withdrawal from EMU.

a. European Central Bank (ECB) president Jean-Claude Trichet, and Mario Draghi, candidate for ECB leadership role, are adamantly against debt restructuring, to say nothing of default that spells disaster for the ECB. But can they prevent restructuring or a default, considering that the ECB is just as adamant about austerity measures that are rapidly impoverishing a large percentage of the population?

b. Two large French banks operating in Greece would take serious losses in case of debt restructuring or default or the country's EMU withdrawal S and P has already put both French banks on watch for a downgrade and it is watching all businesses with large exposure in Greece. The French position of maintaining the status quo in  Greece arises from an immense exposure of French firms, while the German position of possibly cutting Greece off is one of preventing further losses down the road. As far as the Germans are concerned, Greece must still rely on northwest Europe to buy just about everything, so stopping the bailout bleeding would not be such a great loss. However, Germany reluctantly goes along with France owing to pressures from the US and IMF and out of fear that it will be blamed for a new global recession in case Greece defaults.

c. Ireland and Portugal would follow Greece in a default situation, and that would mean that Spain will have to take some measures to appease its own rebellious population. Can EU withstand the pressure of the entire periphery in turmoil? The euro would stand relatively if the defaulting nations withdraw from the EMU, but the EU economy would take at least two years, possibly five, to recover from the mess of re-configured disintegrated European economy. Germany does not want to have that kind of burden on its shoulders.

d. Fortune 500 companies listed on Wall Street do more than 20% of their business with Europe and they stand to take a bath in case of a default by Greece that would have a snowball effect globally. The US is leaning very heavily on Germany to make sure that at this juncture at least bailout continues for Greece. This does not mean that down the road there cannot be a 'transitioning phase' for Greece. However, every EU associate member is watching how the EU is behaving toward Greece and is not anxious to become a full member. Turkey is certainly content to keep the status quo, instead of joining the tumultuous EU economy amid a recessionary climate. 

There are no easy choices for Greece, the EU periphery, the EU creditors. No matter what happens, the losers will be the workers and middle class across all of Europe and not just in the periphery, because German taxpayers are providing tax money to bailout Greece that pays German banks interest on bonds. The time has come for EU to decide what kind of integration model it wants to pursue, what countries it wants in  and out of the EMU, what kind of monetary, fiscal, trade, investment policies it wants. Day-by-day policies only postpone and prolong the pain for everyone. Europe needs visionary leadership for the long-term, not just how much money can be paid in the next quarter to bondholders. 


Anonymous said...

Yes, Greece is small and inconsequential, except when it's completely dysfunctional. In 1974, Turkey's intervention in Cyprus brought Greece democracy, and set the country on to the path to the EEC, thanks to Valery Giscard's emotional peculiarities. Billions of Deutschmarks (or Euros) later, Greece has defaulted, since it started living way beyond its means. The corrupt Greek political class must take a large part of the blame and so must the Greek in the street who prefers to pay cash to the doctor and not pay taxes, and thinks it's his/her right to retire at 42 with great benefits.

Every Ponzi scheme must come to an end.

Anonymous said...

I can only agree with Anonymous of 6 Jul 11. To make the euro work, Greece must be enslaved and impoverished. No one is willing to do this, so writing off the losses, and allowing Italy, Ireland, Spain and Portugal to default as well is the best, cheapest and most humane solution.
The Germans should stop throwing good money after bad. They don't want Greece, Italy, Spain, Ireland, Portugal, and especially, God help us, France as German Lander, and of course, none of the above wish to join up.

Anonymous said...

"Greece should be enslaved and impoverished", what an unintelligent thing to say. 10 million people be made to suffer for the sake of the banking system, and shady Euro deals made in the back rooms.
Greece has been enslaved for centuries, by the ottomans then the English, then America played games with internal politics(1950s -1970s)
Germany raided and raped Greece during the second world war.
Of which Greece received no compensation for. This amount alone runs into the hundreds of billions of Dollars.
Now that Greece is on its knees once more the same countries oddly enough are as much a part of the Greek disaster as the Greeks themselves.
US financial Crisis caused by criminally incompetent.British financial institutions corrupt dealing cause them to collapse. German Telecommunications company shady deals with greek Telcos.
Greece is a fall guy for the outlandish Eurozone which has failed dismally only a matter of time before the whole thing is scrapped.
If you make Greece suffer, only the impoverished will feel it. Just like what has happened in the good old USA. The corrupt political and corporate players will continue on there merry way. Be they Greek, Germans, Americans or British.

Anonymous said...

Well, no need for slavery in Greece..just end all kinds of social security, like minimum wage, strike freedom and capital will arrive iin Greece paying people according to market law
No regulations, no burocarcy, no governmemt approval..just do whatever you want without killing or robbing anyone
This will bring investment, jobs, comsumption and taxes

Greece and all the world need a Libertarian Revolution, they need Austrian macroeconomics
Capitalism makes some mistakes, but politicians make more..
Total liberty for the capital gauranteed by an impossible to change constitution wiil bring prosperity