Is the end nigh for the Euro? [vol. 3]
Discussion
Art0ir said:
Jim Edwards has some contrarian thoughts this morning (that I'm sure many on here won't like)
Now that's what I was talking about!Jim Edwards said:
Greece has effectively voted to default on its debt to the IMF and the EU, and it is a massive defeat for Germany's Angela Merkel and the troika she led, which insisted there was no way out for Greece but to pay back its massive debts.
The vote is huge lesson for conservatives and anyone else who thinks this is about a dilettante government of left-wing idealists who think they can flout the law while staging some kind of Che Guevara-esque dream:
Wrong.
This is what capitalism is really about.
From the beginning, Merkel and the EU have operated from the position that because Greece took on debt, Greece now needs to pay it back. That position assumed — bizarrely, in hindsight — that debt only works one way: if you lend someone money, then they pay it back.
But that is NOT how free markets work.
Debt is not a guarantee of future payments in full. Rather, it is a risk that creditors take, in hopes of maybe being paid tomorrow.
The key word there is "risk."
If you're willing to take the risk, you'll get a premium — in the form of interest.
But the downside of that risk is that you lose your money. And Greece just called Germany's bluff.
The IMF loaned Greece 1.5 billion euros, due back in June, and Greece isn't paying it back. Greece has another 3.5 billion due to the ECB in July, and that looks really doubtful right now.
This is how capitalism works. The fact that it took a democratically elected government whose own offices are adorned with posters of Lenin, Engels and Guevara to teach this lesson to Germany is astonishing.
More astonishing still is that Merkel et al knew Greece could not pay back this debt before these negotiations started. The IMF's own assessment of Greek debt, published just a few days ago, states: "Coming on top of the very high existing debt, these new financing needs render the debt dynamics unsustainable ..."
"Unsustainable"! Germany's own bankers knew Greece couldn't pay this back. And yet Merkel persisted.
Take a look at Greek GDP. In order to pay back debt, you have to have a growing economy. That's a basic law of economics. It's how credit cards work. It's how mortgages work. And it is how sovereign/central bank debt works. But Greece's economy was never in a position to benefit from debt, because it has been shrinking for years:
greece gdpGoldman Sachs
There is another key fact that the Greeks are keenly aware of (but which everyone else has forgotten). This debt was initially owed to private investment banks, like Goldman Sachs. But the IMF and the ECB made the suicidal decision to let those private banks transfer that debt to EU insitutions and the IMF to "rescue" Greece. As Business Insider reported back in April, former ECB president Jean-Claude Trichet insisted that the debt transfer take place:
The ECB president “blew up,” according to one attendee. “Trichet said, ‘We are an economic and monetary union, and there must be no debt restructuring!’” this person recalled. “He was shouting.”
The result was that the ECB made this catastrophically stupid deal with Greece, according to our April report:
And so there was no restructuring agreed for Greece. The country paid off its immediate debts to the private financial sector — investment banks, basically — and replacement debt was laid onto European taxpayers. The government agreed to a package of harsh government spending cuts and structural reforms in exchange for loans totalling €110 billion over three years.
Trichet made a colossal, elementary mistake. The right place for risky debt by definition is in the private markets, like Goldman. The entire point of private debt investment is that those creditors are prepared for a haircut. The risk absolutely should not be borne by central banks who rely on taxpayer money for bailouts.
Had Trichet made the opposite decision — and left the Greek debt with Goldman et al — then today's vote would be a footnote rather than a headline in history. "Goldman Sachs takes a bath on Greek debt." Who cares? Goldman shareholders and clients, surely. But it would not have triggered a crisis at the heart of the EU.
Now Italy, Spain and Portugal are watching Greece closely, and thinking, hey, maybe we can get out of this mess too.
Now, before we all start singing "The Red Flag" and breaking out old videos of "The Young Ones" in celebration, let's inject a note of realism. Greece isn't actually a country full of crazy socialists who don't understand how the FX markets work. In fact, a huge chunk of its tax collection problems stem from the fact that there are two and a half times more self-employed and small business people in Greece than there are in the average country. And small businesses are expert at avoiding tax, Greece's former tax collector told Business Insider's Mike Bird recently.
Conservatives who hate paying taxes and who urge small businesses to pursue tax avoidance strategies take note: Your dream just came true in Greece.
If Greece was more socialist — more like Germany, with its giant corporations that have massive unionised workforces paying taxes off their payrolls — then tax collection would be a lot higher in Greece.
Greece is now likely an international pariah on the debt markets. It may have to start printing its own devalued drachma currency. It will have no access to credit. Sure, olive oil, feta and raki will suddenly become incredibly cheap commodities on the export markets. Tourism in Greece is about to become awesome. But mostly it will be awful. Unemployment will increase as Greece's economy implodes.
But the awfulness will be Greece's alone. Greece is now on its own path. It is deciding its own fate.
There is something admirable about that.
The vote is huge lesson for conservatives and anyone else who thinks this is about a dilettante government of left-wing idealists who think they can flout the law while staging some kind of Che Guevara-esque dream:
Wrong.
This is what capitalism is really about.
From the beginning, Merkel and the EU have operated from the position that because Greece took on debt, Greece now needs to pay it back. That position assumed — bizarrely, in hindsight — that debt only works one way: if you lend someone money, then they pay it back.
But that is NOT how free markets work.
Debt is not a guarantee of future payments in full. Rather, it is a risk that creditors take, in hopes of maybe being paid tomorrow.
The key word there is "risk."
If you're willing to take the risk, you'll get a premium — in the form of interest.
But the downside of that risk is that you lose your money. And Greece just called Germany's bluff.
The IMF loaned Greece 1.5 billion euros, due back in June, and Greece isn't paying it back. Greece has another 3.5 billion due to the ECB in July, and that looks really doubtful right now.
This is how capitalism works. The fact that it took a democratically elected government whose own offices are adorned with posters of Lenin, Engels and Guevara to teach this lesson to Germany is astonishing.
More astonishing still is that Merkel et al knew Greece could not pay back this debt before these negotiations started. The IMF's own assessment of Greek debt, published just a few days ago, states: "Coming on top of the very high existing debt, these new financing needs render the debt dynamics unsustainable ..."
"Unsustainable"! Germany's own bankers knew Greece couldn't pay this back. And yet Merkel persisted.
Take a look at Greek GDP. In order to pay back debt, you have to have a growing economy. That's a basic law of economics. It's how credit cards work. It's how mortgages work. And it is how sovereign/central bank debt works. But Greece's economy was never in a position to benefit from debt, because it has been shrinking for years:
greece gdpGoldman Sachs
There is another key fact that the Greeks are keenly aware of (but which everyone else has forgotten). This debt was initially owed to private investment banks, like Goldman Sachs. But the IMF and the ECB made the suicidal decision to let those private banks transfer that debt to EU insitutions and the IMF to "rescue" Greece. As Business Insider reported back in April, former ECB president Jean-Claude Trichet insisted that the debt transfer take place:
The ECB president “blew up,” according to one attendee. “Trichet said, ‘We are an economic and monetary union, and there must be no debt restructuring!’” this person recalled. “He was shouting.”
The result was that the ECB made this catastrophically stupid deal with Greece, according to our April report:
And so there was no restructuring agreed for Greece. The country paid off its immediate debts to the private financial sector — investment banks, basically — and replacement debt was laid onto European taxpayers. The government agreed to a package of harsh government spending cuts and structural reforms in exchange for loans totalling €110 billion over three years.
Trichet made a colossal, elementary mistake. The right place for risky debt by definition is in the private markets, like Goldman. The entire point of private debt investment is that those creditors are prepared for a haircut. The risk absolutely should not be borne by central banks who rely on taxpayer money for bailouts.
Had Trichet made the opposite decision — and left the Greek debt with Goldman et al — then today's vote would be a footnote rather than a headline in history. "Goldman Sachs takes a bath on Greek debt." Who cares? Goldman shareholders and clients, surely. But it would not have triggered a crisis at the heart of the EU.
Now Italy, Spain and Portugal are watching Greece closely, and thinking, hey, maybe we can get out of this mess too.
Now, before we all start singing "The Red Flag" and breaking out old videos of "The Young Ones" in celebration, let's inject a note of realism. Greece isn't actually a country full of crazy socialists who don't understand how the FX markets work. In fact, a huge chunk of its tax collection problems stem from the fact that there are two and a half times more self-employed and small business people in Greece than there are in the average country. And small businesses are expert at avoiding tax, Greece's former tax collector told Business Insider's Mike Bird recently.
Conservatives who hate paying taxes and who urge small businesses to pursue tax avoidance strategies take note: Your dream just came true in Greece.
If Greece was more socialist — more like Germany, with its giant corporations that have massive unionised workforces paying taxes off their payrolls — then tax collection would be a lot higher in Greece.
Greece is now likely an international pariah on the debt markets. It may have to start printing its own devalued drachma currency. It will have no access to credit. Sure, olive oil, feta and raki will suddenly become incredibly cheap commodities on the export markets. Tourism in Greece is about to become awesome. But mostly it will be awful. Unemployment will increase as Greece's economy implodes.
But the awfulness will be Greece's alone. Greece is now on its own path. It is deciding its own fate.
There is something admirable about that.
I don't think we have forgotten this
"There is another key fact that the Greeks are keenly aware of (but which everyone else has forgotten). This debt was initially owed to private investment banks, like Goldman Sachs. But the IMF and the ECB made the suicidal decision to let those private banks transfer that debt to EU insitutions and the IMF to "rescue" Greece. As Business Insider reported back in April, former ECB president Jean-Claude Trichet insisted that the debt transfer take place:"
Many of us said at the time it was a ridiculous decision, and didn't deal with the fundamental issue, indeed at we have repeatedly pointed out the madness of EU schemes in which failing banks are given money by bankrupt governments who then borrow from failing banks.
The entire ESF is a sham, it has leveraged its actual cash by around 20-1 and has effectively only got vague promises from the other EZ members to cough up their share if the s
t hits he fan. At almost every turn some other commentators have said - "too big to fail" - "the project must continue" - "the EU will never allow it to happen" or "The Euro currency will always continue"
Chickens are coming home to roost, and the terrible decisions made since 2008 for Greece and other bailouts are having the consequences predicted (though avoided for a good while)
Similarly since inception the Euro Currency project has been doomed to fail in its current form - an arguably it already has, that it hasn't happened yet, should not be taken as a guide to the future.
Gargamel said:
I don't think we have forgotten this...
Nor do I.We had this:
'This is what capitalism is really about'
followed by this:
'There is another key fact that the Greeks are keenly aware of (but which everyone else has forgotten). This debt was initially owed to private investment banks, like Goldman Sachs. But the IMF and the ECB made the suicidal decision to let those private banks transfer that debt to EU insitutions and the IMF to "rescue" Greece.'
This is what politicking is really about.
anonymous said:
[redacted]
Oh sure...my point was that, in the preceding decade, no-one was looking into Brown's figures and deciding how to vote. Times were good and people frankly didn't take much notice of what was going on. Only after it all very visibly went to crap did anyone really start taking notice, which is really the same that has happened to the Greeks....we just had a better foundation to weather the storm.Digga said:
Maybe my conspiracy radar has been set too high after reading the excellent "The Untouchables", by Nick Webb & Shane Ross, but is there not a huge conflict of interest between the likes of GS and its former employees within such places as the IMF and ECB?
Oh you mean Draghi, Monti, Borges, Sutherland and the rest all being GS, either former or current non execs and advisers? We don't talk about that sort of thing round here.Edited by Art0ir on Monday 6th July 13:43
Mermaid said:
He's looking at it from an Irish perspective as well as a rational one. The creditors are trying to absolve themselves entirely of any responsibility in this when the truth is that debt is a two way deal.He's spot on about Ireland. Should interest rates rise and/or the US/GB slows, they are knackered.
Art0ir said:
Digga said:
Maybe my conspiracy radar has been set too high after reading the excellent "The Untouchables", by Nick Webb & Shane Ross, but is there not a huge conflict of interest between the likes of GS and its former employees within such places as the IMF and ECB?
Oh you mean Draghi, Monti, Borges, Sutherland and the rest all being GS, either former or current non execs and advisers? We don't talk about that sort of thing round here.Edited by Art0ir on Monday 6th July 13:43
Revolving doors.
Art0ir 01/07/2015 said:
What's to stop the Bank of Greece issuing Euros?
Telegraph said:
Hardliners within the party are demanding the head of governor Stournaras, a holdover appointee from the past conservative government.
They want a new team installed, one that is willing to draw on the central bank's secret reserves, and to take the provocative step in extremis of creating euros.
"The first thing we must do is take away the keys to his office. We have to restore stability to the system, with or without the help of the ECB. We have the capacity to print €20 notes," said one.
Such action would require invoking national emergency powers - by decree - and "requisitioning" the Bank of Greece for several months. Officials say these steps would have to be accompanied by an appeal to the European Court: both to assert legality under crisis provisions of the Lisbon Treaty, and to sue the ECB for alleged "dereliction" of its treaty duty to maintain financial stability.
They want a new team installed, one that is willing to draw on the central bank's secret reserves, and to take the provocative step in extremis of creating euros.
"The first thing we must do is take away the keys to his office. We have to restore stability to the system, with or without the help of the ECB. We have the capacity to print €20 notes," said one.
Such action would require invoking national emergency powers - by decree - and "requisitioning" the Bank of Greece for several months. Officials say these steps would have to be accompanied by an appeal to the European Court: both to assert legality under crisis provisions of the Lisbon Treaty, and to sue the ECB for alleged "dereliction" of its treaty duty to maintain financial stability.
We should be backing Greece more instead of acting like a toy poodle to Germany.Our top politicians are a gutless bunch.Maybe because when they are out of politics a top bank or Multinational job is waiting for them.
You only have to look at Tony Blair how he sold himself to the money people.We the people in Europe should all stand up against this lousy financial system which isn't working for the majority.Alternative banks should be their to serve people and be payed for their services.Not charging sky high interest rates for the money they lend out.Exspecially small bussines need more help and the multinationals should pay their taxes instead od evading their duties.
People on a very low income relying on subsidies because their bosses won't pay a living wage.
We need change but don't expect the politicans to make the change.
You only have to look at Tony Blair how he sold himself to the money people.We the people in Europe should all stand up against this lousy financial system which isn't working for the majority.Alternative banks should be their to serve people and be payed for their services.Not charging sky high interest rates for the money they lend out.Exspecially small bussines need more help and the multinationals should pay their taxes instead od evading their duties.
People on a very low income relying on subsidies because their bosses won't pay a living wage.
We need change but don't expect the politicans to make the change.
Foppo said:
We should be backing Greece more instead of acting like a toy poodle to Germany.Our top politicians are a gutless bunch.
True enough, I've no idea what the polls look like regarding the UKs appetite for an exit. In terms of backing Greece, well of course the BBC is exhibiting the kind of impartiality we saw during the election, they have a very clear bias and that sets the tone for most of the media. Digga said:
Art0ir said:
Digga said:
Maybe my conspiracy radar has been set too high after reading the excellent "The Untouchables", by Nick Webb & Shane Ross, but is there not a huge conflict of interest between the likes of GS and its former employees within such places as the IMF and ECB?
Oh you mean Draghi, Monti, Borges, Sutherland and the rest all being GS, either former or current non execs and advisers? We don't talk about that sort of thing round here.Edited by Art0ir on Monday 6th July 13:43
Revolving doors.
Mermaid said:
Or relief that the stronger hands will remain in the Euro. I'd be nervous shorting the Euro at this stage.
Except that most people are counting France in that number and I personally don't think - partly due to the Greek crisis - their problems have received anything like the attention they warrant.Gassing Station | News, Politics & Economics | Top of Page | What's New | My Stuff