Friday, 23 September 2011
WHAT DOES GREEK "BANKRUPTCY" ENTAIL FOR EU AND THE WORLD?
About a year ago, I wrote that Greece was bankrupt. The question of bankruptcy is technical, if one follows how government leaders and bankers use the term 'bankrupt'. For example, Chancellor Merkel does not want Greece going 'bankrupt' in a sudden and mismanaged or unchecked manner. Those investing in CDS use the term 'bankrupt' to signify the official date of an announcement when servicing of loans take place, even if the servicing is temporary but then resumes - this is something that took place in the 1930s, and then FDR sent Cordell Hull to negotiate resumption of payments linked to new loans and trade deals.
I have argued endlessly that the Greek public debt will bring down the entire eurozone, which in essence means a crisis ten times worse than Lehman Brothers. Fear of the unknown, official bankruptcy, unchecked bankruptcy, some move toward temporary autarchy is what governments and markets fear. The recent drop in world markets reflects that kind anxiety emanating from a combination of fears that the public sector's inability to service loans will mean a prolonged recession. Some economists are already talking about banking as 'the economy's third rail' - public and private sectors are the two main ones - in which case what we are really witnessing is another banking crisis that the state cannot bring under control to the satisfaction of the markets.
The current turmoil surrounding the Greek public debt issue and the question of bankruptcy, especially after Moody's downgraded Greek banks on 22 September 2011, is about the integrity of the eurozone and by extension the ability of the European Union to overcome the public debt crisis of one of its members without breaking apart as some analysts fear. Just ahead of the G-20-IMF meeting in Washington this weekend, Klaas Knot of the European Central Bank governing council stated that Greek default “is one of the scenarios. I’m not saying that Greece will not go bankrupt."
There is no best and worst case scenario; only very bad and worst case scenario options as a result of the public debt crisis, inexorably linked to the banking crisis, of EU's periphery members - Greece, Portugal,. Ireland, Spain, Italy, and even France that has enormous exposure to southern Europe's financial system. The only question is the degree to which the privileged classes - political and financial - in Europe will be able to maintain their privileges without feeling too much pressure from the middle class and workers that will be protesting as long as gross social injustice continues.