Sigmund Freud once noted that: “Illusions commend themselves to us because they save us pain and allow us to enjoy pleasure instead. We must therefore accept it without complaint when they sometimes collide with a bit of reality against which they are dashed to pieces.”
Europe and the EU are soon to go through one of those ‘collisions with reality’. The reality of the latest deal in Greece is that it drives the Greeks deeper into the mire and as the economy there contracts yet more, the wheels of this deal will fall off.
Before we go into what the deal means for us, let’s examine the latest illusion. Last year the illusion was that ‘austerity creates growth’. The 6pc contraction in the Greek economy in the final quarter put paid to that canard. As does our rising insolvency and mortgage arrears data here.
The latest illusion that the EU has now come up with is that ‘120’ is the new ’60’. A debt/GDP ratio of 120pc is now regarded as sustainable. A few weeks ago during agreement of the fiscal compact, a debt ratio of 60pc was regarded as the sustainable target. Now we know — well, for Greece at least — 120pc is the new 60pc.
One has to wonder is the new target set at 120pc of GDP because that’s where Italy and Belgium are right now and to suggest that this was anything other that a good outcome for Greece might shine the light on these other outliers?
Whatever the reason, what is interesting for Ireland is that private bondholders took a 53pc haircut on their holdings. They have been burnt. It is estimated that the ECB owns up to €55bn of these Greek bonds, which it bought at a discount. Obviously because it didn’t buy these bonds at face value, the loss the ECB will take will be less than 50pc but it is interesting in itself.
For Ireland, this means that we will get a deal on bank debt most definitely. It might take time because the last thing the ECB wants is a queue of ‘me too’ demands from Ireland and Portugal. But it is clear that our hand has been strengthened, if we decide to play it.
But just in case you think this is a victory for the citizen, let’s examine in a bit more detail how it works. There will be no default. Greece will be given a €130bn loan. With that loan it will pay out €100bn to bondholders, who will have seen their bonds fall 53pc in value. After the penal interest Greece has paid on these bonds already, we still see an insolvent country paying bondholders 50pc of face value when they should be getting nothing.
So Greece gets €100bn written off, but borrows €130bn in order to achieve this, so it is still borrowing more making its overall debt not better but worse in absolute terms.
Now it needs to grow to bring these figures down and that is going to be impossible. So we are going to be back to square one in a few years except for one crucial thing.
After all this is done, private creditors to Greece will have been paid by European public money stumped up by the taxpayers of other European countries. The banks have been bailed out again. Without help they would have got nothing. They now get 50pc of their worthless holdings and the subsidy comes from the taxpayer.
The illusion of a great deal was exemplified by Jean-Claude Juncker, the chair of the meetings of eurozone finance ministers, who said that the Greek debt deal “will preserve the financial stability of Greece”.
It will do no such thing. And Mr Juncker knows it.
According to Bill Bonner at the wonderful www.dailyreckoning.com: “A 10-page ‘strictly confidential’ report on the country’s debt projections prepared for eurozone leaders warns that the principles of the new deal will (a) cause debt levels to rise by further weakening the Greek economy and (b) scare off future bond market funding.”
The report also reveals that Greek debt could still be at 160pc of GDP by 2020 and that it could require another €245bn in bailout funding.
It concluded: “Prolonged financial support on appropriate terms by the official sector may be necessary.”
So let’s go back to Freud. Why would Europe’s financial and political elites insist the deal is sound when they know it’s not? The reason goes back to the dirty little secret. The ‘bailout’ of Greece is really a bailout of eurozone banks.
But they can’t say that, so they maintain the illusion of success because, as Freud said, “it saves us pain” and obviously the collision has been postponed for a little while more.
As this column has said many times before, you don’t make a balance sheet with too much debt better by adding more debt; you fix it with less debt.
Greece is not making progress on this basis. All it is doing is incurring new debt to retire old debt .
Contrast this with Iceland. In the same week as the eyes of the EU were focused on Greece, Iceland — a country which in 2008 suffered a monumental crash — is now recovering strongly.
It has done exactly what economic mainstream thinking would advise. It dropped its currency by over 40pc to make itself more competitive and mainly to choke off unnecessary imports. It defaulted on its bank debt by simply telling the creditors that there was no cash and they could take equity in the banks if they wanted.
So it devalued and defaulted and, far from the markets punishing Iceland, the markets rewarded them. Iceland is now borrowing again, the economy is growing, inflation has fallen and there has been large-scale mortgage debt relief. Crucially, unemployment is now at 6pc and falling. And it is running at 6pc of GDP budget deficit, borrowing from abroad and at home to do so. Who says people won’t lend? Of course they will, because the debt default means that the balance sheet is fixed.
The Icelanders took control of the situation and did things their way. They were rewarded. They didn’t try to be ‘best in class’, but laid out things as they were to the creditors. The markets moved on. They would do the same here.
Make no mistake, the way mortgage arrears are rising here and the way companies are going to the wall due to their debt burden, huge debt deals will have to be done here.
It’s just a matter of when, not if. Greece shows us how not to do things. When it comes to debt, Iceland gives us a roadmap.
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Ireland could do the same as Iceland but unlike in Iceland there is simply no political will to do it.
It’s a political problem now
The Irish government want to sell off state owned companies to raise money ,part of the money they raise is going to help create jobs ,for a start this is mad and mad because they should stop paying the bond holders and use the money to stop hammering the Irish people.if they want to sell something sell off the revenue, the HSE,any state run body that is costing us the tax payer money one example of this is Dublin city council selling a bin round that it ran at a loss ,to grey hound wast who will make money out… Read more »
I enjoyed your talk to the student Review last night in Trinity especially as you enlivened it with some great side commentary.
As I wended my way home I passed an ‘ould fella’, walking his dog, neither of them wearing Prada, and he bellowed to me, “any chance of a thousand euro?”!
The market is efficient; he had priced in the future!
Yeah , yeah , yeah , this stuff has been recycled time and again . Last week DMcW said they would leave the euro , a prediction he has made several times.
Even the Greeks dont want to leave the euro .
Anyone could write this stuff.
Fitch said it was downgrading Greece to “C” from “CCC,” and would follow up with further downgrade to a “restricted default” when the bond swap is completed. It will then reassess the country’s ratings when new bonds are issued as part of the debt exchange. I think I might have the answer to all our Euro-woes. Split up Belgium, which is broke. Sell the Walloon bit to France and the Fleming bit to Holland. Use the proceeds to recapitalize the ECB. Then we can all go back to our customary partying. Some fans of the Eurovision Song contest would be… Read more »
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Your previous article was much better than this one and the best to date in my view because for the first time since I became a fan of yours you appear to be making political analysis first and then offering economic analysis which makes your commentary much more powerful. The first 3/5ths of the last article were purely political observations thank god and subsequently the economic commentary was much more revealing. In this article you correctly state at the end the unsustainable debt will be written down eventually. But what you failed to point out was by then Peadair and… Read more »
Who runs Europe ?
If I was an investor with a lot of cash I wouldn’t touch Portugal, Ireland, Italy or Greece UNTIL they had defaulted. The simple reason for this: I wouldn’t invest in a bankrupt country. That’s why Iceland is (reportedly at least) doing so well.
I don’t think people understand the fundamentals of what they are dealing with. People (especially banks) have shown themselves utterly incapable of understanding basic business.
If the Greeks are getting 130 bn bailout to pay off 100 bn of 200 bn bonds at approx 50% haircut then the Greeks are not getting more indebted or am I missing something? Transfer of public money to private institutions yes, but the balance sheet of the country is no worse. Or am I reading that wrong..
Great article today David.
Came across this on the web. Pat Kenny the man on the video clip who headed up a group of people who sent a bailiff and the police away from a house they were trying to repossess. They intend to take a case against the State because the Constitution says a person’s home is inviolable. Not paying a debt is not a criminal offence, so the police have no part to play.
If the politician won’t stand up and be counted then the citizenry can and will.
http://www.itsnotourdebt.com/
What it sounds like to me is this: The banks are making massive profits (interest on loans) on the back of schmuck investors who are taking so many haircuts I wonder if its more like brain surgery at this stage.
as a matter of interest David, how are the teachers,and policemen,and other civil servants getting along in the new Iceland.?
Are their wages cut?
Give us an in depth report on this success story in your next article.
World Bank, IMF, ECB and the FED are making the rules up as they go along, they have now entrapped vitually all the nations of the world, they couldn’t have Libya so they took it by force, Iceland has shaken them off for the moment, until they become valuable again. The Governments are now complicit willingly or unwillingly, when it looks like a country is sliping a technocrat is installed Greece, Italy. The battle the ordinary citizen faces is monumental if not lost already, the only thing we irish have at the moment is our Constitution and the help of… Read more »
Excellent article. It seems that illusions abound in the European Project. And the schemes eminating from the European project have something about the love of being propped up by monopolistic, unchallengable, bigness as the solution to the problem. They never solve the problem. They simply believe in outscoring, and out-jawboning it. Europe – the ponzi scheme continues. Drucken-Kliene-Drucken. Or whatever that is in the land of Aesop. Poor old Aesop. He only ever had common sense. He would not be needed by the EU or the ECB. To simplistic a fellow. Too honest. He would never grasp the necessity of… Read more »
David,
Illusion.
Hall of Mirrors.
Look today.
Greece package wrapped up yesterday.
Today we get announcement that OUR assets, the peoples assets are been flogged off for pennies on dollar to very same investors whom the Irish people bailed out with austerity.
So, OUR assets will be sold to foreign asset management ponzites who will buy em with money they originally pillaged from us viz a viz authority,
The economic system is RIGGED and a criminal system of money laundering and industrialized pillaging on an unseen scale.
…on an unseen scale runs things politically, economically and they are now taking the piss laughing in our faces telling us to lick their fascist corporate boots.
…on an unseen scale runs things politically, economically and they are now taking the piss laughing in our faces telling us to lick their fascist corporate boots.
Irish constitution showdown on Max Keiser.
http://maxkeiser.com/2012/02/22/constitution-halts-sheriff/
Is this time pocketry extending or reductive?
David, you comment on the newly increased/decreased debt Greek debt burden: ‘Now it needs to grow to bring these figures down and that is going to be impossible. ‘ It would be helpful to expand on this. Why do you think economic growth impossible for Greece? If the austerity straight-jacket is applied with Irish rigour, surely there’ll be a flood of entrepreneurial vigour to ‘create wealth’? Or maybe not…..Let me elaborate: Greece appears to be comprehensively fucked. They have a totally destroyed ecological land-base due to deforestation: ‘wood for warships’ as Plato complained back in the day. Goats eating everything… Read more »
Simon Coveney told us on the radio this morning that we needed to have a “review”. As a matter of fact Simon had hired Merrill Lynch to carry out some sort of review around his department and just like the Dickens character Mr. Macawber he was “hourly expecting something to turn up” Was tempted to txt in from OZ and politely tell Simple Simon that we are in fact WAY past “review” territory and are nearer in fact to totally bollixed and by my back of the envelope calculations heading for a second bailout early 2013…….. Simple Simon and pals… Read more »
RBS reveals £2 Billion losses in 2011 but still manages to pay out £785 Million in bonuses!
Jeez, the stupidity is mind boggling
650 jobs in Rep of Ireland to go this year, no point in cheering this! these are low hanging fruit, ordinary Joe & Jane Soaps you see behind the counter.
Wonder would the 785 million been enough to secure these jobs?? my guess is yes.
The elephant in the room, Private Debt, starts to peek out over the top of the duvet, here it comes!!!
Aladdins Cave There are many secrets of Greece not on the popular news channels . Our perception is read from the coastal Atlantic .Sometimes as choir boys/ girls in a church ( on this site ) we read too much from the same hymn sheets . ‘ Nasserisation ‘ is more relevant to the current progression in Greece today .By this I mean, that period from the rule of Nasser to Mubarak . Greek civilisation once dominated in Egypt and even today living cultural communities dominate especially in Port Alexandria where they ( the Greeks ) eat speak and read… Read more »
Greece has been sacrificed on the high alter of commerce, the people are too stupid in the eyes of Greek politicians and eurozone politians to make up their own minds and determine their own futures. Nationalism, Republicanism and Citizenry have no place in the entity which is the European Project, the Banking sector is to be the all seeing eye. The Banking sector will look after all our interests, if we cannot provide for the banking sector we will be cast aside to whither and die,labelled as non-conformist, irelevant, useless, it is now the sole duty of every citizen of… Read more »
good article David.
When all is said and done the only recourse is to renege on all the private debt that is foisted on the taxpayer to support private business failure and let those businesses go to the wall. that includes the bankrupted banks.
Then cancel the Euro and regain National sovreignty by having an Irish currency.
Then eliminate fractional reserve banking, eliminate unbacked fiat currency and regain sound ,commodity money to become the rich nephew of europe.
There is an easy plan and it is the time to implement it when change is forced by circunstances.
How is it ‘ Europe’s dirty little secret ? ‘ The money has gone to Greece’s creditors while the nervous German and French governments want to drive the Greeks into the ground through austerity . It is hardly a secret that they are bailing out the creditors so as not to risk another Lehman type event . Personally I am buying Gold and Silver and I am putting it into my safe which I have just installed in the floor of my new extension . I can’t for the life of me understand how the US and the ECB can… Read more »
Since European tax money has been used to bail out Greece , Im assuming Greece now owes European tax payers 130 billion ( and the rest ) , so if they default its now European tax payers money that goes down the drain right?
What clever clown came up with this?
Interesting article David. You are right this “bailout” is a complete illusion as to what is really going on. One interesting fact about this has turned up in the small print. (always read the small print). It turns out that Greece has pledged it’s 110 tons of gold to secure this bailout plus has pledged to sell off a host of it’s most valuable assets. http://www.mineweb.com/mineweb/view/mineweb/en/page504?oid=145823&sn=Detail&pid=110649 What a sweet deal for the banking elites. They digitally create this currency at NO cost to themselves and end up with Greece’s gold and a rake of assets. Nice work if you can… Read more »
Where do we go ? When is our “turning point” ? What do we do ? How,as a people have we become so docile when our reputation through the ages was of the “fighting Irish” and yet we have become a soft people.Our People have contributed to Nation Building and the growth of Our adopted homes. Saint Patrick’s Day is celebrated across the World , from the biggest cosmopolitan Cities to small towns in Africa,For one day in a year,everyone in the world can “claim to be Irish”,knowing this claim for a day will offend no one…….That is quite a… Read more »
WONDER WHERE WE ARE NOW!!! AND WILL WE EVER KNOW SEEING AS THE COURTS SERVICE DECIDED TO DENY THE RIGHT OF PUBLIC ACCESS TO INFORMATION HELD IN THE DISTRICT & CIRCUIT COURTS IN nUOVEMBER 2010.. The value of consumer judgments such as bills not being paid in the first quarter of 2011 rose by more than 28% year-on-year This is according to Irish Judgments, the company which collates judgment information from the Four Courts. Almost €113.1 million of consumer debt was registered in the first quarter of this year, compared with just €88.2m over the same period last year –… Read more »
Very good, DMcW, to bring Freud into this. As for “illusion” consider how it is to be used by Lord Bertrand Russell in his 1951 “Impact of Science on Society”. It is a bit long, but gets to the point : “Physiology and psychology afford fields for scientific technique which still await development. Two great men, Pavlov and Freud, have laid the foundation. I do not accept the view that they are in any essential conflict, but what structure will be built on their foundations is still in doubt. I think the subject which will be of most importance politically… Read more »
Plato’s Dream A Japanese construction firm claims it could execute an out-of-this-world plan to put tourists in space within 40 years by building an elevator that stretches a quarter of the way to the moon. Obayashi Corp claims it could use carbon nanotube technology, which is more than 20 times stronger than steel, to build a lift shaft 96,000 kilometres above the Earth. The company said it would carry up to 30 passengers at a time and travel at a speed of 200 kilometres per hour for a week, stopping off at a station at 36,000 kilometres. Tourists would stay… Read more »
Article 45 Bunreacht na hEireann Article 45 The principles of social policy set forth in the Article are intended for the general guidance of the Oireachtas. The application of those principles in the making of laws shall be the care of the Oireachtas exclusively, and shall not be cognisable by any Court under any of the provisions of this Constitution. Section 1 The State shall strive to promote the welfare of the whole people by securing and protecting as effectivly as it may a social order in which justice and charity shall inform all the institutions of the national life.… Read more »
[…] […]
The constitution showdown video, as of today 2:30 PM
>104 K views
1,721 likes
61 dislikes Hahahaha!
So the banks…I mean Greece…get another bailout; and the Greek nation, and nationhood generally in Europe, moves deeper into insolvency and closer to capitulation. The bailout is not about helping Greece; nor is it about helping the banks. It’s about managing the transition to a federal Europe. The banking system and financial markets are being wielded as instruments of war. An invisible war. A war which will bring about the dissolution of the nation state and the emergence of a new global order. In many ways this is inevitable and necessary. Humanity must utterly change its manner of living on… Read more »
We are witnessing the Shock Doctrine in action. Not only are they using this (engineered) financial crisis to buy the weak countries assets for a song but they are now eyeing on their gold reserve…
http://www.goldcore.com/goldcore_blog/greece%E2%80%99s-lenders-have-right-seize-national-gold-reserves
I call that looting a country and they don’t even need to stage a war to do that nowadays!
Also, here is the transcript of a speech that Lord James of Blackheath made in front of the house of lords last week. In it, he unveils a scam of a monumental scale. A scam involving the Federal Reserve, the Royal Bank of Scotland and 15 trillions dollars.
http://www.publications.parliament.uk/pa/ld/ldtoday/l_29.htm
It all correlates the investigation done in Divine Cosmos called “Financial Tyranny”, that was posted by someone else a few days ago: http://divinecosmos.com/start-here/davids-blog/1023-financial-tyranny
It’s a loooong read so I suggest you read Lord of Blackheath speech first.
This is dynamite and no one in the mainstream media is touching the story…
I am here in the Lourdes hospital with my 83 year old mother I took her to her gp at 11 and told me to take her to the hospital.we are here since 12 and slow is not the word,her doctor said she has a chest infection,kidney infection and is under 7 stone and is very sick she is in a wheel chair in the Lourdes for the last 4 hours ,my mother has no been given a trolley not even a cup of tea James Reilly hang your head in shame.
Europe’s banks bleed from Greek wound Thursday, February 23 16:01:09 The scars of Greece’s debt crisis were laid bare in heavy losses from a string of European banks today, and bosses warned the region’s precarious finances would continue to threaten economic growth and earnings. From France to Germany, Britain to Belgium, four of the region’s biggest banks lined up to reveal they lost more than 8 billion euros last year from their Greek bonds holdings. “We are in the worst economic crisis since 1929,” Credit Agricole chief executive Jean-Paul Chifflet said. Credit Agricole reported a record quarterly net loss of… Read more »
GREECE
“We condemn the policy of the government, the EU and the IMF, which is demolishing the state healthcare and killing its personnel,” hospital doctors from Athens and the port city of Piraeus said in a statement. (C ) Reuters
The Greek debt crisis: it’s, like, totally over – video
http://www.guardian.co.uk/world/video/2012/feb/22/greece-debt-relief-animation-video
Former ceann comhairle and minister for justice John O’Donoghue has started what appears to be an orchestrated campaign to secure the Fianna Fáil nomination for the next general election in Kerry South.
HERE WE GO AGAIN ANOTHER DISPLAY OF BRASS NECK SYNDROME
What’s the difference between Mary Harney and James Reilly?
Did anybody hear what was mentioned on Tonight with VB last night?? I only saw the last few minutes of the programme, but Charlie Flanagan went on the defensive in regard to the other panellist mentioning that the wording of the Memorandum of Fiscal Understanding being worded in such a way that the Irish electorate wouldn’t be required to have a say on it. If that’s true then we’re definitely entering extremely ‘dangerous waters’ altogether in regard to democracy as a whole.
We use to complain about people on trolleys now no trolleys arm chairs if you are picket we are going backwards at full speed
Maybe the Austrians are right about the liquididty boom being released into the banks as being a waste of time, and an illusion.
http://blogs.wsj.com/marketbeat/2012/02/23/baltic-dry-dr-copper-flashing-warning-signs/?mod=yahoo_hs
http://globaleconomicanalysis.blogspot.com/2012/02/liquidity-floodgate-set-to-backfire.html
Anyone see the scale of the protests in Valencia