By playing hardball with the French and Germans this weekend, Greece has bravely sparked a liberation which could topple the eurozone as we know it – and not a minute too soon
If you have ever tried to learn German, you will know that reading it is much more difficult than speaking it. The problem is the sentence construction, and the fact that the verb generally comes at the end of the sentence. So you spend ages trying to read practically backwards – or at least this particular grammatically-challenged student did.
Like all languages, after awhile there comes a time when your teacher gives you articles from a local paper to see if you can make out what is going on. I just about understood what the mass-market Bild was saying, but the real challenge was to figure out what was written in Der Spiegel.
In fact, German friends of mine used to joke that Der Spiegel was so highbrow and its readership so well-educated that even they had difficulty understanding the grammar it used. Der Spiegel uses the German of Schiller, Goethe and Heine. It is Germany’s paper/magazine of record, not given to running stories without foundation.
Its credibility has been bolstered in recent weeks because it has clearly been getting accurate leaks from German government sources about the thinking both in Berlin and Frankfurt.
Therefore, the news published late last Friday afternoon in the online version of Der Spiegel, that Greece would leave the euro this weekend, caused the markets to react violently. The euro has plummeted against a feeble dollar. The German leak stated that certain eurozone finance ministers – the ones from the richer countries – were meeting this weekend in the exclusive surrounds of Château de Senningen in Luxembourg, with the Greeks indicating that, if they didn’t get a deal on their debts, they would pull out of the euro. The usual denials followed the rumours, but it is clear that the Greeks are playing hardball – and good on them.
The Greeks know that, like us, their debt is unsustainable and that there is no way they can avoid default. They also know that their economy can’t take more austerity. Greece has already missed some IMF targets, and will miss more. The markets decided months ago that the Greeks would default – the issue for investors is how and when, not if. The same goes for us.
The Greeks also know that the one thing the Germans and French – particularly the French – don’t want is a ‘conditional’ euro, where commitment to the currency is conditional on whether it suits a country or not at a certain time in the economic cycle. The idea that a country could pull out is anathema to the French and German establishments, but this is exactly where their banks’ reckless lending to the likes of Greece and Anglo Irish has led us.
Anyone who has any knowledge of economics realises that a strong currency makes a weak economy, like Greece’s, weaker. We also know that, when debt can’t be paid, it won’t be paid. We also know that a balance sheet like Greece’s, which is carrying too much debt, is never made stronger by yet more debt. It is made stronger by less debt.
There are only two ways you can lessen debt. The first is when the economy grows strongly, generating the tax revenue to pay off all the debt without much effort. This clearly will not happen in either Greece or Ireland. The other way is when you do a deal and default.
Obviously, this is what the Greeks will do this weekend and, just to focus the minds of the rest of Europe, they have indicated that, if they don’t get a deal, they are off and will introduce a new drachma and leave the outstanding debt issues to the lawyers to sort out who gets what and when.
How would bringing the drachma back help them? First, they would announce that, from tonight, one new drachma is equal to one euro, and all former euro debts will be paid in drachmas at the prevailing exchange rate. At the moment of recalibration, all the old euro debts are to be paid in drachmas which, at that moment, have an exchange rate of one to one. So all the old euro debts are converted to drachma at an immediate exchange rate of one to one. So no default yet.
Then, they will announce that the drachma will be a free-floating currency. The currency’s value will fall like a stone, possibly by as much as 70 per cent. This will wipe out much of Greece’s debt problem at a stroke. But it’s not that simple, because the people who are owed money by Greece will be livid – and will demand payment.
The Greeks will have figured out in advance how much is owed by foreigners and how much is owed by locals. They will clearly be keener to default on foreigners than locals. This is what the Russians did in 1998,whenRussia defaulted on rouble-denominated debt, knowing that foreigners – greedy for yield – had bought up the rouble-denominated debt. The Russians roasted the foreigners and gave the lawyers headaches.
The same would happen if Greece pulls out of the euro – a prolonged legal battle between creditors and Athens would ensue. The Greeks would then print the new currency and inflation would rise, resulting in a greater haircut being taken by the creditors because, the higher the Greek inflation, the more the drachma would fall and the more the creditors would lose.
Greek banks that hold Greek government debts would see the ‘drachmasation’ of their assets, which would undermine greatly the value of these banks in euro terms. However, in terms of the currency they lend in, the change would not be that huge.
Middle-class Greeks would take all their money out of the country and this money would wait offshore until the crisis settled down. The government would probably have to enforce capital controls for a time to make sure that it could have some control over where the currency went.
It would be chaotic but, like the Asian Tiger devaluations, it would pass and the country would recover. The economy adjusts. If you think the like of this is unusual, it is not. This is what Finland and Sweden did in 1993.They both sacrificed the interests of their creditors – both local and foreign – for the long-term interests of the economy. And it worked.
The competitive gains that both Finland and Sweden enjoyed from devaluing their currencies in 1992 lasted well into the 2000s.The British are regularly at the same game.
The difference in devaluing your currency and leaving a currency union is one of perception. The former is not likely until it happens and then life goes on; the latter is inconceivable until it happens, and then life goes on.
The country becomes more competitive, holidays in Greece are cheaper, exports from Greece are cheaper, the Greeks will price assets in euro for a while – this is a process which will be known as ‘eurosation’ and is already a reality in most Balkan countries anyway.
For example, if you want to buy an apartment in Croatia or Serbia, the price will always be given in euro, and never in kunas or dinars.
The crucial thing is the currency of the country is now appropriate to the country. A much weaker local currency reflects the weakened economy and we start again. Imports are expensive, which they should be, and exports are cheap, which they also should be. Like in Iceland, interest rates would fall rapidly, and off we go.
By threatening to leave the euro, the Greeks have called the Germans’ bluff. The Germans were playing hardball with the Greeks, and now the Greeks have turned the tables and indicated that they are prepared to push the nuclear button, having decided that the fallout will be felt more abroad than at home. Nothing will focus the minds like this threat. The process of orderly default can now happen in the eurozone.
For Ireland, the one thing we can say with an element of certainty is that this weekend marks a liberation. Once the Greeks are given permission to default by the Germans, we will be next. The bondholders will not be paid, pure and simple.
This is obvious, no matter what language you speak. Some truisms are so clear that they never get lost in translation, even in Der Spiegel.
David McWilliams and Professor Joseph Stiglitz will be speaking at www. zeitgeistminds.com on May 16,on the future of the euro and the European periphery states
In relation to the suggestion that the Greek middle class will shift their money offshore, one downside of default/devaluation is that it tends to wipe out savings. If Ireland does default, which seems highly likely, what pre-steps can the citizen take to protect themselves?
David says “Greek banks that hold Greek government debts would see the ‘drachmasation’ of their assets,”
If the Irish government followed suit, presumably the banks would suffer the ‘puntification’ of their assets, so we should consider what this means.
Urban Dictionary
Puntification The act of creating an Irish currency for the purpose of dissolving bad debts. Posturing… pretending you are solvent to people that don’t really care what you say, as they know they are going to be screwed one way or another.
Greece suffers another downgrade of its credit rating. Standard & Poor’s gives country a B rating.
http://www.guardian.co.uk/business/2011/may/09/greece-suffers-another-downgrade-credit-rating
Hi David, Thought-provoking aricle. With the Euro (or its potential spin-offs, New Punt, Drachma etc.) likely to decrease significantly in value with the approaching climax of the sovereign debt crisis in Eurozone countries and given the how feeble the US dollar is at present, which currencies are best-equipped to weather this “EuroStorm”? I would say that the Swiss Franc might be one or the Canadian or Australian Dollar perhaps. The Japanese Yen might still be a risky play given that it is in the early stages of recovering from the tsunami. Good on Greece for bringing matters to a head.… Read more »
Greece is only a small part of the EU but the contagion effect is a worry. Ireland is coming a close second to Greece but the difference is that Irish citizens are willing to take the austerity. Morgan Kelly suggests that we should eliminate the deficit immediately. That would mean that we should introduce a budget cutting nearly 20 billion now. Thats how bad things are here. With the bailout the EU have kicked the Irish problem down the road for 2 years, they thought they had done the same with Greece with their 110 billion bailout. The problem with… Read more »
David.
How are we in Ireland going to insure that the insiders running this country DO NOT get to encircle the PUNT and its money printers when we drop the EURO.
Also, when the euro is dropped, does this mean that the greedy bastard insiders in ireland get away scott free with their swag debt free.
In good old economist fashion ;) I quote myself: What were words of truth by Fantu Cheru (UN Human Rights Commission) describing the former World Bank structural adjustment programs, are equally true words today, describing IMF/EU policies: “They [are] the expression of a political project, a deliberate strategy of social transformation on a global scale, whose aim is to make the whole planet a playing field in which trans-national corporations will be able to operate with total impunity. In other words, the structural adjustment programmes act as a “transmission belt” to facilitate a globalization process that is based on liberalization,… Read more »
McWilliams on Today PK: http://www.rte.ie/radio1/todaywithpatkenny/#Podcasts
Excellent, informative article from DmcW again. But it makes me want to weep. Papandreou is smarter than our useless negotiating team of DoF, Honahan, Elderfield put together. We had the full Royal Flush house beat in previous bailout negotiations with our threat of contagion spreading across Europe, but our gombeens instead of milking default for all its worth and rattling our cages with the threat of leaving the euro as Papandreou’s team have done with a deft whisper to Der Spiegel, we capitulated before the negotiations even began with full assurances given to our captors. We even came back cheering… Read more »
subscribe.
As we said on this site, several years ago, the next step in this wretched chain of events is political extremism: Focussing on the current outstanding debt (as opposed to the far more complex problem of the structural debt), looking for someone else to blame, and then all painting our faces and and going on some sort of giant student march. “Recover” is the key word in all of this smoke and mirrors. Apparently Greece will ‘recover’ after they let the drachma float, and so on and so on. So the idea is that the Greek economy was up, then… Read more »
Interesting and thought-provoking article. However, I’m not sure what you mean by
“Once the Greeks are given permission to default by the Germans, we will be next”
Surely the Germans will not agree to this – and can make life v difficult for Greece if they decide to push ahead anyway
If you want to learn German, learn the beautiful Schiller quote (not in Spiegel) which translates “We were born for something better” The EU is a bad bank trying to muscle taxpayers to keep it a float. The solution is the RDR era Glass-Steagall Act, now introduced by Congresswoman Marcy Kaptur in the US Congress as the “Return to Prudent Banking Act”HR1489. Reintituting Glass-Steagall sets the model for letting the banksters banking debts go down on their own, without being bailed out by the people . European finance ministers are holding secret meetings to discuss how to deal with the… Read more »
We live in a business run society with ‘bank holidays’. We have business parties masquerading as political parties and so called politicians who implement policies to favour and protect the interests of business (bank bailouts, continued payouts to bondholders, no referendum/consultation with the people etc). In return for this service, political parties receive donations and if very helpful positions on boards upon exiting the ‘political arena’. Naturally there are the cheer leaders of such a system, those who talk of wealth creation and innovation, of the great entrepreneurial alchemists and risk takers i.e. the Chambers of Commerce, employers groups, business… Read more »
I would beg to differ regards ‘the Greeks like us’. I would suggest it would be more accurate to say the Greeks unlike us. We are no Greeks. We have a spinless Government which is not prepared to represent the true interests of the Irish Nation. Rather they have a firm resolve to protect the few with the asinine believe that Ireland can afford this bail out and works its way out. The Irish Government clearly acts in the self interest of the few. We as a nation are a stupid people a very stupid people which is far worse… Read more »
If what Les Echo reported is correct, and I would not be astonished, again France and germany dictated the course according to a EU insider source that spoke with Les Echo. Essentially, another band aid of 25 bln is considered to patch what is already broken and no longer possible to be fixed. What we witness is how a crisis mechanism mutates to normality. The whole game played here by EU technocrats is DELAY UNTIL 2013 by force! This however does only one thing, and one thing only, it makes the inevitable default for Greece, and Ireland of course, much… Read more »
Part of the problem is that the trash appearing across the EA just can’t be hidden anymore, its even coming up out of K Club gold courses:)
http://www.youtube.com/watch?v=mK_PjUFWLns&NR=1&feature=fvwp
Bit of an attack on David McWilliams in yesterday’s IT
“Celebrity is not measure of an able economist”
by Richard Tol is a professor of economics at the Vrije Universiteit Amsterdam and is also research professor at the Economic and Social Research Institute.
http://www.irishtimes.com/newspaper/opinion/2011/0509/1224296491192.html
The ERSI certainly didnt cover themselves in glory in the past years. Richard Tol is a very interesting character also…. he’s quoted by the US Republican party as “scientist who doesnt believe climate change will have severe impact on humans” – has been accused of fabricating his science.
Any credibility left with ESRI at all?
Time for Outrage! The 93-year old author starts with a brief reference to his participation in the French Resistance at the end of the Second World War, pointing out that outrage was at its roots. He then outlines two, somewhat contradictory, views of history that have both influenced him, that of the French philosopher Jean Paul Sartre, who was his teacher at the Ecole normale superieure in Paris and that of the German writer Walter Benjamin, who was a close friend of and collaborator with his father, Franz Hessel. The author asserts that indifference is the worst of attitudes. He… Read more »
Just read John Brutons piece in the Irish times today. I was reminded of Irish history is a long story of how informers and traitors have blighted Irish stuggles for justice in return for money, lands or favor from the oppressors. On the main reasons for the financial industry employing John Bruton is to lobby the Irish people and government on their behalf. The exact same as Peter Sutherland. In this case they are both offically working for the financial industry. However they would try to make out that they care about Ireland and the best interest of the people,… Read more »
In fact I should add that Iceland has appied for EU membership in 2009 since not repaying its banks debts and the EU is going to welcome them with open arms in 2012 despite continuos referendums saying that they won’t even refund foreign depsoitors.
Mr. Bruton is really off the ball saying we would be emilimated from the EU and the single market for doing less than Iceland.
Peripheral Default We had this before over ten thousand years ago .At that time the centre of The Economy was what is now in the middle of the Atlantic and that was where the collective management centre was .It was during the age of Gemini ( Air Element ) when everyone believed between themselves that their ignorance was more intelligent than it was .Then an alignment occurred in the heavens where planets arranged in a straight line created a solar pull and resulted in the oceans appearing above and the earth sinking below and all that was left was the… Read more »
ECB DOES NOT HESITATE TO RISK CIVIL WAR Against the will of it’s own people, without a referendum on this matter of national importance, Greece was forced to take on E 110 bn in debts from IMF and EU. GDP is down and will continue to go down further. FT and WSJ both report additional E 60bn to be on the table. ECB refuses restructuring of debts. The political incompetence of the EU Leadership has got to the point that they risk civil war in Greece. How much more do the people in the periphery states need to understand that… Read more »
ENDA KENNY TOTALLY LOST ALL HIS MARBLES!!!
This is from May 5th 2011, and should tell everyone what this school teacher is really about. INCOMEPTENCE!
http://www.bloomberg.com/news/2011-05-05/kenny-says-ireland-can-handle-its-debt-in-sign-no-restructuring-is-planned.html
As I mentioned last year my German teacher, following a visit home, returned with a set of simplistic but strongly held opinions, which she said she had got from Bild (she doesnt’ beat about the bush) about the injustice of Germans bailing out feckless Greeks. I pointed out that it takes two to tango but I don’t think she was receptive to this line of argument. I like her. She came back here to live a year or two ago (she had lived here some years previously) and was entitled to no welfare benefits, but she didn’t mind and made… Read more »
COMING SOON….INTERVIEW WITH Dr. ANDY STOREY
Will be posted exclusively on Davids site…..Stay tuned…..
http://www.feasta.org/2004/04/03/the-european-project-dismantling-social-democracy-globalising-neoliberalism/
We still seem to be told “if only we could get more people spendind their money in the economy” spending on what?-more junk that we don’t need. The idea that we can somehow spend our way out of this mess would probably sound strange to a child, maybe that’s what we need running the country-children, children could hardly have done as much damage as the “highly educated” muppets/puppets that we have “running the country”
A High Court judge has extended the Director of Corporate Enforcement and Garda investigation into Anglo Irish Bank to the end of July only after expressing serious concern the progress of the two year probe “is not at all satisfactory”. Mr Justice Peter Kelly also strongly criticised the failure to mount any prosecutions in other Commercial Court cases despite “prima facie evidence” and even admissions of criminal wrongdoing in such cases and where papers to that effect had been sent years ago by him to the authorities. “This is not a desirable state of affairs,” he said. “An apparent failure… Read more »
Even the insider Harvard-educated finance minister Papandreou is making some effort to represent the interests of the Greek people. We’ve also seen leaders in Iceland and Finland refusing to make their population pay for other people’s debts. While this kind of reaction can be found in all kinds of countries from the Arctic to the Aegean, for some reason we don’t find it in Ireland. If the ECB decides something, you just have to accept it. The strongest statement that you’ll hear from an Irish minister is probably Leo Varadkar’s claim that Ireland should not pay more than Greece, whose… Read more »
Does anyone know some figures what the superfluous visitations of Obama and the British Royal Monarchy representative will cost the Irish taxpayer?
Oh my God…. is anyone listening to Noonan? Am I the only one with the impression that he has NO CLUE what he is reading there?
We have a new word tonight concerning Greece
REPROFILING of Greek Debt.
It is a politically correct version of saying “partial default”.
Merkel is talking about it publicly.
Sarko is completely silent. Whenever Sarko is looking for something that amounts to screwing taxpayers somewhere, or cutting people’s social services, in order to protect certain Finance houses, Sarko goes silent until the deal is changed in favour of his agenda.
This is the Greek populace versus the French Regime, with everybody else positioned somewhere in between. Barosso is on the side of the French regime.
“True Finns party chairman, Timo Soini launched the most scathing and accurate attack yet against Jean-Claude Trichet, Jean-Claude Junker, and the ECB for its policy raping taxpayers of various countries to pay back German, French, UK, and US banks that made stupid loans for stupid reasons.”
http://globaleconomicanalysis.blogspot.com/2011/05/true-finns-party-chairman-greece.html
For those of you who are interested, the following link contains the statement that David McWilliams made on the Irish economy in 2003. If only we had paid attention….
http://www.youtube.com/watch?v=GnCtav9OsV8&feature=related
Also, the extended debate on Prime Time with Austin Hughes (IIB Bank), a so-called economics expert:
http://www.youtube.com/watch?v=I8ypOqx95qw
The main plank of Noonan’s plan.
http://www.breakingnews.ie/ireland/pension-levy-a-tax-on-savings-504558.html
Not sure how this will work. But if we are trying to prevent a bank run in this country, is this a bright idea from Noonan. I mean, it would be nice if he were to get away with it – but sometimes you think you can get things done, and it does not work out that way….
The “Proof of Concept” theory of managing the PIIGS.
Basically, the ECB will arrange a fix of Ireland, that will act as proof of concept, when the news is eventually released concerning Spain.
Theoretically, this will sucker the markets into thinking that the ECB can fix Spain.
It takes massive intellectual arrogance to seriously think that such a theory would work. But that should not be in short supply from Brussels.
http://www.ncbresearch.com/fixed_income/IrishEconomyMonitorMay2011.pdf
Sucks Dryson & Swallow Today marks the beginning of the opening of a new firm of cosmic endurance .It will be affiliated to the holding company Moon Inc a Universal group of loonies who attach themselves to everything that moves including sporting fixtures and mandarins with a merrion touch .It will remain in the country for the next seven days and will oversee Everything around us .It displaces all known foreign viruses already in situ .It is noticeable by the PULL felt and watching a row of Topples within your eyesight distance .There is a heavy Heart Beat too that… Read more »
What David is proposing here is thievery, pure and simple.
Boy, I do wish them all the Best! :)
http://stcolumbanus.com/?page_id=303
Addendum http://www.youtube.com/watch?v=1gKX9TWRyfs&feature=related
I expect that those people who are on fixed wages and pensions (plus the deserving poor) would get hammered in a Euro exit as would those who hadn’t offshored their savings (or ‘savings’). So what’s in it for them? And the conscientious objectors who won’t play the game? My earlier hunch was that when a certain proportion of the population had offshored their savings (not too large as that would impair relative advantage and perhaps provoke retaliation from other countries if it became obvious that everyone was at it – there’s only hiding place for a few stowaways – anyhow… Read more »
Great, former Goldmann Sachs managing director Draghi who was director general of the Italian Treasury from 1991 to 2001, and who he headed Italy’s privatization program after 1993 will be the new ECB Mafia boss.
What more can you ask for?