Greece will default. And live happier ever after
Peter Kellow writes
There is no better way to spoil a film than to be told the ending. If the whole audience knows the ending the only people in the cinema who carry on behaving as if they did not know it are the actors on the screen.
The way that the Greek crisis will end is known, but the curious thing is that the politicians who are participating in the events carry on as if the ending is not known and as if they still have some power to determine the way it will end. The actors include the leaders of France, Germany, the European Central Bank, the IMF and practically anyone in authority who is involved the crisis. The only players on our screens who clearly know where this is going are the Greek people. And, now safely remote from the action, the former US Federal Reserve chairman, Alan Greenspan, also knows default is coming. The chances are "so high that you almost have to say there is no way out", he has said. Default is coming. It is only a question of when.
As we concentrate on the events of the moment we should not lose sight of the fact that the Greek crisis is part of the ongoing financial crisis that broke in 2008 and is still far from over. The idea that the western economies are recovering from the crisis is a fiction. There are still plenty of other “Greek crises” out there waiting their time. Multiply those with the effects of so-called “contagion” and we are looking at a long turbulent decade. And back in the Kingdom, we have the subplot whereby the austerity measures are pushing us into a recession from which it is going to be impossible for the government to collect anything like enough tax revenues to achieve its aim of balancing the books.
The BBC’s Paul Mason deserves full marks this week for his reporting of the crisis. Unlike most economic correspondents, he deserted the statistics and computer screens and went out on the streets of Athens, not just to experience the demonstrations first hand, but to talk to the Greek public. He reported on Newsnight on Thursday 17 June that “We are nowhere near a solution and the Greek people are going to push this to a default scenario whether the politicians want it or not.“
This is not just an economic crisis. It is a crisis of democracy for, as Mason says, the Greeks see their politicians “as IMF yes men”. They have little sense of commitment to the European Central Bank and the European Union which with some justification they see as causing their problems through membership of the Eurozone. The problems the Germans have in contributing to the bailout do not touch them much. The Germans after all looted their country in the Second World War and have never offered compensation.
To understand the problem let’s remind ourselves of a few basic figures. The Greeks currently owe 340 billion € to a variety of lenders. This debt of 340 billion € has to be paid back by an economy with a GDP of 266 billion €. Short term Greek debt is yielding a massive 28% - quite a bit higher than you probably pay on your credit card, if you have one. Assuming that the Greek government on average pays less than this, say, 20%, this means interest payments per year would be 68 billion €. This is the amount that the government has to see as a surplus of tax revenues over expenditure. On a GDP of 266 billion €, this is clearly way out of the question. And that is just interest payments assuming no capital is repaid – ever.
The list of lenders for the 340 billion € looks like this:
Greek Banks ............................ 23%
Other Greek Holders ................ 20%
IMF ............................................. 4%
European Governments ........... 12%
European Central Bank .............. 8%
Foreign banks ...........................23%
Source: Capital Economics
The Greek banks and other holders will be first in line to take the loss but what worries outsiders more is the ECB situation. The ECB is only carrying 8% but if another debtor country defaulted (like Ireland, for instance) this would push it into bankruptcy – and where would that leave the euro?
European governments will just accept their loss and hammer their tax payers who will be expected to remain as compliant as they have done in the past. The foreign speculative bank lenders, which are chiefly French and German, would feel a lot of pain, but this would be passed onto the tax payers again in the form of bailouts, to protect the global "investors" (read "speculators"), in the way that is now familiar. The fact that the speculative banks were daft enough to lend to Greece in the first place is of course not an error (deliberate or not) for which they will be expected to pay.
The stretching out of the crisis, that the ECB and EU is intent on, is going to provide a lot of mileage for the speculators. It is to be expected that the road to Greek default will be paved with miles of sticking plaster provided by Europe and the ECB. This will provide plenty of opportunity for profiteering, just as Britain’s forlorn attempt to stay in the EMU did in 1992.
As Bill Bonner wrote in The Daily Reckoning recently “[investors] know that the European Central Bank and the financial authorities worldwide are afraid of a “Lehman moment”. They fear disaster. They hate catastrophes. They think their job descriptions include avoiding calamities of all sorts. Investors don’t know quite what to think. The danger is high. But there are rewards too. If the authorities pull off another bailout speculators stand to make a lot of money on the long side of Greek debt.” So the delay in arriving at the inevitable conclusion will benefit some – but they will be speculators not European people and Europe’s productive businesses.
wrote a few days ago in his speculators’ newssheet The Right Side "I’m still short the banks. They’re the big holders of sovereign debt and they’re the ones that are going to feel the brunt of restructuring of these bonds." So we should cheer up. If you have money you can still make money out of a crisis even where a whole country is going down the pan.
To take another example, credit-default swaps, which are basically like bookies’ bets for financial speculators, are currently anticipating a 78% chance that Greece won’t pay its debts. Those buying these swaps are throwing their money away even at 78%. But then when you are a major private speculative bank you know you will be bailed out when you lose and so the 78% theoretical chance can be maintained. Meanwhile, you will have collected your fees and income on the swap.
By drawing out the inevitable the EU and the ECB are creating massive opportunities for such gambling. If we did not know better you might almost suppose that the European authorities are working hand in glove with the speculators.
And remember it was the ECB that last year subjected Europeans banks to “stress tests” to make sure the assets (loans) they held were viable. All passed these tests. Few people trusted the tests and the Greek crisis has emphasized how farcical they really were. The phoney tests have now opened the door for shorting the banks as Bengt Saelensminde
is recommending to his readers
The orthodox solution to the problem of Greek debt is to implement a British/IMF style austerity package. But the figures just wouldn’t allow this to stand any chance of working. And the Greeks are too savvy to swallow the idea. They know austerity measures would crucify what is left of the economy and sink what chance they have of a future.
To grasp the significance of the Greek crisis we have to realise that it is moving away from being an economic crisis to being a political one. For the Greeks the way forward is to assert their national identity against the larger forces of Europe and the IMF. They know that they have to go it alone. Restructuring the debt will only put them in hock forever. The debt is not the fault of ordinary Greeks. It results from the ideological drive to a European super state in Brussels and Strasbourg and the corrupt political elite at home.
Democracy has failed in European Union politics with treaties and laws pushed through without proper consultation with the people. This fateful error is now unraveling. Democracy has failed in Greece as its politicians have become more and more remote. But at this point democracy is not abandoned. It transfers to the streets where it can live and be effective. People who were in Egypt during its “Arab Spring” and have seen Athens as it is today say the former was much much calmer.
Greek problems stem from the euro being founded on a lie. The people who pushed it through were really interested in creating a European superstate and they knew that no state had ever created a currency that was not coterminous with the borders of that state. So the thinking was that a state would have to be created that embraced the whole of the Eurozone. Except the strategy has backfired as politically the European superstate is deeply unattractive to most voters in Europe. Only the Eurocrats in Brussels and Strasbourg are truly interested in it.
The Greeks are being told that they cannot renege on their debts as they will suffer poverty and opprobrium. Well, they already have those things and the majority of them feel they have been betrayed and have nothing to lose by returning to the drachma.
In fact things might not be that bad for the Greeks following a default and exit from the Eurozone and most probably the EU as well. The speculators would gather like vultures to ruin Greece and see it carved up by international speculative finance. But Greece outside the EU would be a sovereign country with enormous capital assets and a well-educated, highly civilized population with a deep culture and powerful sense of identity.
In going it alone, the secrets of success will be as follows
- Reintroduce the drachma. The government must create and manage the money supply with a properly constituted authority (see Republican Party Newsletter No. 70).
- The government will spend newly created money into the economy at a rate that stimulates the productive economy but does not fuel asset prices
- The drachma must be fixed (at a low level) to the euro to deny currency speculators their game and to make Greek exports, especially tourism, attractive.
- Introduce strict capital and exchange controls. Foreign purchase of Greek property and assets trying to take advantage of the exchange rate and bid up prices will be tightly controlled. Capital flight will be made difficult.
- Private Greek banks (or foreign banks operating in Greece) will operate under iron controls. They will work to a 100% reserve ratio among other measures. Liquidity will come also from the government's money creation programme and the low taxes that will accompany it.
- As tax revenues balloon with the properous economy, money creation can be cut back.
- No government bonds will be issued and no foreign ones bought.
- The main thing to avoid like the plague is printing drachmas to buy things from abroad. That really is the road to hyperinflation. (In spite of what orthodox economists tell us, it is the only one.)
Orthodox economists will argue that the above looks like a seige economy but this is only a response to the malign jungle that they have created everywhere with their neoliberal theories. We do not live in a normal world. States have to act accordingly.
Imports upon which Greece is dependent will be dear but there is going to be pain somewhere. The big gain is that Greece can then develop its internal economy. Its hardworking, talented people will know that the fruits of their efforts will accrue to their country not to foreign banks. And of course the Greeks will still have their wonderful climate to enjoy. Yes, seriously, that does make a difference.
All that should be for the future – probably the not too distant future. Meanwhile the European institutions and EU members are going to carry on denying reality claiming there is a fix whereby you can force destitution on the Greek people and get them to eat dirt in order to squeeze impossible amounts of money out of them. This is a fantasy. The default when it comes will expose further the real fragility at the heart of western economies. It is this that speculative banks and European policy makers fear most. This is the real reason for their denial.
As David Roche and Bob McKee wrote in "The New Monetarism", one of the handful of key texts on the continuing financial crisis, :
“The grim reaper of reality never rides far behind the fair maiden of delusion, for very long”.
COMMENTS ON NEWSLETTER NO 67
Your article and comments on immigration in your May 20 newsletter were absolutely spot on. Well done.
COMMENTS ON LAST NEWSLETTER NO 70
You put your case very well, Peter.
However, I'd like to make a few points about the United States.
Although the Constitution gives Congress responsibility for the currency,
in practice, power is exercised by a a semi-private organisation, the
Federal Reserve and the chain of accountability is more than a little
tangled. The actual legality of this position is open to question and
repeated attempts to clarify it have met with silence from all those in
the Federal Reserve system and the US Treasury. It seems, therefore, that
the Founding Fathers' wishes can safely be ignored, no matter how clearly
expressed they were.
I profoundly disagree with the idea of elected judges, for which you
expressed some sympathy. American judges are influenced by the opinion of
the mob and by selfish political calculations.
In the UK, our judges are (along with the few remaining responsible,
independent and courageous journalists) a last bastion of liberalism,
withstanding the onslaught of the Corporate State. They are not perfect
but no one is and they are certainly much better [in the sense of "more
independent"] than the alternative.
We need to remember that a Liberal-Democracy is a marriage between a
Liberal State and Democracy. Both elements are important (and the
protection of liberal values and human rights might just be more important
to most people than the privilege of marking a cross on a piece of paper
in a primary school or church hall, once every two or three years).
Unchecked democracy results in irresponsible government [eg the bankruptcy
of the State of California] and a sort of mob rule; in which there can be
no reasonable discussion of the issues; in which basic civil liberties are
not respected; in short, in which might is right.
If American judges are elected at local level, they often become leading
lights in the "Hang 'Em and Flog 'Em Party", in order to show the media
how tough they are (and draw rednecks to the polling station, next time
round). Occasionally, they head in the opposite direction (in areas, where
people are generally liberals or libertarians).
If judges are appointed by the President, they are- more or less- legally
qualified party hacks. They perform favours for their parties and the
parties help them to climb the greasy pole. It's all very well, saying
that judges are appointed for life but if a political party thinks that a
candidate for judicial appointment will "do an Earl Warren" and start
thinking for himself, that person won't be bashing his gavel, within the
It's worth noting that the only significant use of Congress's impeachment
and dismissal powers, over the last fifty years, have been in cases
involving bent Federal judges. I also note that one such offender became a
congressman, a few years after the scandal that ended his judicial career.
He even chairs a committee, I believe! [President Clinton was merely
impeached. That is the congressional equivalent of being "indicted by a
grand jury" in criminal proceedings.]
Hey, Richard, I cannot defend views I did not express. I agree with everything you said and did not say otherwise.
I agree entirely judges should not be elected. Where did you get the idea I thought anything else? I simply said that I agreed with the Founding Fathers that a democratic element should be present in the construction of certain vital civil institutions. The Supreme Court is one. But the democratic element does not mean popular elections, it just means offices who are elected by popular vote (in this case the President and Congress) have a say.
Judges in the Kingdom since the 2005 act are appointed by the Judicial Appointments Commission, which is itself is appointed. This is probably fine and preserves the separation of power between Judiciary and Parliament. The Supreme Court is more tricky as, like the US version, it is effectively a Constitutional Court. So it can be almost making laws and making laws has to be a matter for elected politicians. Hence the belief that there should be a democratic element in its selection. The way out of this in France and, I think, most modern republics is to have a separate Constitutional Court which then can have a more democratic aspect. Again in France the Constitutional Court consists of ex-Presidents. The French system seems to me to have merit.
I 100% agree that we should not rely on democracy for everything and as Jonathan Friedland convincingly argued in his book, “Bring Home the Revolution”, America has too much democracy. Yes you can have too much of a good thing. He pointed out the Americans are expected to vote tens of times each year. That produces voter fatigue for one thing, and may partly explain why so few vote in the elections that do count like the Presidential elections.
Civil institutions are by definition not democratic. A corollary of this, and this cannot possible be overstated, is that they must be open and transparent. OK we do not participate in the election of say the UK Supreme Court, or the Treasury Select Committee, but we, sure as hell, should see exactly how the appointment was arrived at.
The big word here is scrutiny. If it is not open to scrutiny it can be, and almost certainly will be, corrupted.
Recommended article of the week
"Nothing exposes the hypocrisy of those currently running the EU and almost every one of its member states more than the recent discovery by French journalist Jean-Louis Denier that one government is being encouraged to spend vast sums of money on a range of hardware which no-one needs and no sane person wants."
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