Greece: Looking for the ‘right’ place to crash
By Kurt Brouwer
There is a specter haunting Europe and it is the debt crisis and likely bankruptcy unfolding in Greece. To put this in perspective, Greece is like one of our states — Illinois or California — that has been using budget trickery for years to get around a balanced budget requirement. Initially, Greece’s membership in the European Union (EU) enabled it to postpone the inevitable debt reckoning. Ironically, that same membership is now preventing Greece from doing that which is necessary to get out of this mess.
There are two steps necessary to restart an economy once it has fallen:
Step one: Devalue the currency
When a country with its own currency faces a severe fiscal imbalance in which deficits and debt have grown to unmanageable proportions, one solution is to simply devalue its currency. With the currency devalued, the country would represent a bargain for travelers and business folks alike. Exports become more attractive and economic activity slowly rebounds. Iceland is undergoing this very process right now. However, Greece cannot let its currency devalue because it is a member of the EU and it is bound to the euro.
Step two: Let those that took the risk (banks and investors) fail
Greece issued many billions in government bonds that are now trading a large discounts from their original value. That is, Greek bonds may be worth only 60% or 70% of their original value. Banks across Europe holding Greek bonds are now in a panic because they do not want to face the consequences of their own actions. They are pretending that Greek bonds are worth full value even though that is false. Germany, the European Central Bank and the International Monetary Fund are enabling this fantasy and thereby making the problem worse.
Iceland took both of the steps outlined above in the aftermath of the financial panic of 2008 and it is slowly getting back on its feet (see here for more on this). However, the European Central Bank and Greece’s other enablers are fighting this inevitable outcome and thereby exacerbating the pain that will come when Greece finally crashes.
Just looking for a place to crash
This report has the grim details on events regarding Europe’s dithering and bickering on the crisis of Greece [emphasis added]:
German Chancellor Angela Merkel could be forced into a major shift from her piecemeal approach to the euro zone debt crisis within weeks under rising pressure at home and in Europe.
…Since the crisis began in late 2009, Merkel has reluctantly agreed to bail out Greece, Ireland and Portugal one-by-one, vowing to do all that is necessary to save the euro. Contagion now threatens far bigger countries like Spain and Italy.
In my view, the discussion of contagion is ironic. We would not be having that discussion if the EU had taken bold steps to deal with this problem when it was still small. Unfortunately, it did not do so and now the bond market skepticism about Greece has spread around the region.
Key political leaders are hoping — dangerous word — that they can just somehow magically punt the problem down the field and it will go away. Anyone who views this more objectively can see that something that cannot go on indefinitely, will not go on indefinitely. Those who don’t want to face reality are frustrated with German Chancellor Angela Merkel who actually sees the problem as it is. Her approach has not been perfect, but at least she sees the issue correctly. Yahoo continues:
Frustration at Berlin’s tough line insisting that private bondholders must share the burden of a second Greek rescue has grown in Europe over the past weeks, bubbling over at a meeting of euro zone finance ministers in Brussels on Monday.
This part would be funny if it were not so dangerous. Of course, private bondholders must share the burden of owning Greek debt. They bought it so why should they not suffer when an investment goes awry? The debt is already selling on the open market for heavy discounts. That is simple reality. Trying to pretend otherwise is both futile and dangerous.
…“The truth is that for Greece, what we are really looking for is the right place to crash the plane. It should not be over a city, but in the countryside if possible.”…
In other words, Europe was trying to keep the plane named Greece flying indefinitely even though the engines had failed. Now, it just wants to find a soft place for Greece to crash.
Hat tip: Mish Shedlock for the Yahoo piece.
- Avgerinos Moesiotes · University of BelgradeFollow the money....this the right clue for every investigation where one gets stacked. In case of Greece, we should keep on looking where did the borrowed money go??? Astonishingly surprising would be the discovery that the money was split between the borrower and the lender private representatives....But how come, how`s that possible when EU is free from corruption????
- Neil CribbI am puzzled why there is concern to 'find a soft place for Greece to crash'. It appears to me this is precious time and energy wasted that could be better utilized resolving similar issues for Spain and Italy. No matter how and where they place the lipstick, Greece is still the pig. A Greek default is nearly a foregone conclusion while concerns grow over a EU contagion. This piecemeal approach may prove more costly than negotiating for a comprehensive, strategic approach.