Endgame (part 1): the cauterisation of Greece
1. Greece is being cauterised. The EU, ECB, and others have prepared the ground for Greece to be detached from the eurozone. It isn’t what they want, but there was profound shock at Papandreou’s use of a referendum threat last autumn. So they have prepared the eurosystem for a Greek exit, that theoretically can be handled by the rest of the eurozone. This has considerably lessened Greece’s bargaining power.
2. It will be up to the people of Greece to decide whether they want the prolonged chronic pain of Troika-led adjustment within the eurozone, or the violent shock of euro exit, savings destruction, and devaluation. Some of this is being played out in the prolonged, delayed political negotiations in Athens right now. Whatever the details, and the vote expected in the next day or two is a knife edge moment. But the real test will be possible elections within weeks, insisted on by Greece’s conservative leader Antonis Samaras.
This is the “yes or no” moment for Greece. This is important for Germany. The eurozone‘s reluctant imperium does not and can not be seen to be dictating terms to the Mediterreanean countries. It will provide some necessary democratic legitimacy and national ownership for what will be awfully painful policies. It’s easy to see why many Greek MPs believe that it is a choice of “die or be killed”, but the real choice is between chronic social economic pain inside the euro, or a heart attack and some of the same outside. A horrible choice. But it is for Greece to make.
3. Greece is now the exception. By far the most significant political policy move last year was Angela Merkel abandoning her insistence on private sector burden-sharing (private sector involvement ie haircuts for the bondholder bankers) for future bailouts. It was an incredible U-turn considering that it was her insistence on exactly this in Deauville in 2010, against the warnings of the ECB, that precipitated both the Irish bailout and the contagion spreading to Italy, and Spain.
4. Commentators fundamentally misunderstand the German approach to high bond yields in the PIIGS and the credit ratings downgrades across the eurozone. These are reported as bad news. The house view in Germany see these factors as good news. Why? Because for a decade they tried to impose budgetary discipline through the Stability and Growth Pact – an abject failure (partly, of course because Germany and France themselves ignored its strictures).
High bond yields and S&P’s credit downgrades are the best Stability Pact, the best stick that Germany could ever hope for. The bond vigilantes were disarmed by the creation of the virtual euro in 1999. In fact, the very high bond yields suffered in Italy, France and Spain are still lower than they were before the euro.
5. Mario Draghi fired the bazooka in December. He did so in a rather cunning way, basically offering 3 years of free money to the financial system. Half a trillion euros was snapped up. The net result has been absolutely massive demand and issuance of Eurozone corporate bonds from Telecoms companies, banks even in the euro periphery (Telefonica etc etc).
A market contact who has studied the bond prospectuses tells me that 90 per cent of this money is being used to pay down bank loans. Some proportion of this is also being used by banks to buy government debt, the so-called “Sarko carry trade”. Banks borrow off the ECB for free to invest in Italian and Spanish debt at high yields. A measure of the success of this is that the ECB has wound down their own purchases of PIIGS debt.
Part 2 of this blog post on Germany’s spread of what it calls “the stability culture” tomorrow.
There are 6 comments on this post
Watching the mainstream media and, read comments by vile prejudice people, both smearing the Greeks and talking of them as if they are a country of incompetent fools and shameful debt creators, is absolutely disgraceful and shocking.
The Greeks have become the fall-guys along with Irish and Spanish for this very predictable situation. Predictable 40 years ago.
When a system allows colluding wealthy people in privileged positions to be manipulate rules to their collective benefit and, set in place totalitarian repressive firewalls to prevent accountability, it inexorably leads to where we are today.
Right across the western world the wealthy Mafia like dictators have colluded together in their own interest to serve themselves by using predatory capitalism & light touch governance. This has resulted in the citizens being terrorised far far worse than any religious fanatics could do in a thousand years.
The mainstream media of the west covers aspects of PR stunt announcements superficially, like servants of this evil financial Mafia. Daring not to look deeper for the reality of it’s lies & spin.
I predicted EU would end in civil strife. I was correct. And, it will get far far…
Merkel and Germany are fully responsible for the situation :
1)They promote a Stability Pact after deliberately ignoring the previous one . Furthermore , if you take into consideration that Spain was the only country respecting the previous Pact until 2008 and you look at their situation today , you really wonder what interest it has to be a good country ; of course except that it is interesting for Germany.
2) As you mentioned it Merkel and her permanent indecision and changes of policy have been a disaster.
3) Let’s not forget that Germany with their deliberate policy of salary deflation have been boosting their own exports but at the same time preventing their EU partners to export in Germany. This kind of policy ; everything for me nothing for the others ruined the southern Europe economies.
4) Germany is the only beneficiary of the creation of the Euro , because it is much lower than the Deutsche Mark and this is helping the exports. They continue with the same approach as each time the Euro goes up you see a German politician jumping to talk about problems so it goes down again.
5) As I said it before Germany owes Greece 15 Billions of war damages ; why don’t they…
This is a clearsighted analysis of Germany’s motivation in driving Greece to the wall (or kicking Greece out of the door) at the precise moment, when the ECB claims to have covered positions that will be called in when Greece exits the Eurozone. However, what is missing is an assessment of what the political repercussions will be after the events of this week (whether the Greek parliament votes for more austerity, or not). It isn’t just the Greeks who are saying Germany is deploying Euro-imperialism. In Portugal yesterday the largest trade union demonstration for 30 years was told by the leader of the main trade union confederation, Armenio Carlos of CGTP “the country needs to remove the rope from round its neck” while the crowds chanted “IMF don’t come here”. The demand for popular, democratic sovereignty in a country such as Portugal that has lived under corporate dictatorship and has overthrown it in living memory is not to be underestimated. Under conditions of global economic boom the glaring absence of democracy in the EU could be glossed over. It can’t anymore.
You’re quite right to highlight the moral hazard provided by the (formerly) assumed guarantee that all Eurozone Sovereigns were equally ‘safe’. Bond buyers assumed ALL Euro-binds were equally underpinned and banks bought bunches of PIIGS bonds without themselves ever questioning their credit-worthiness.
Yes, that fallacy gave the PIIGS a massive subsidy of low interest rates that should never have been given to them.
Added to that huge subsidy were the EU’s structural and social funds. In Ireland’s unique case those funds were provided against the explicit EU policy that those funds were intended ONLY for areas where average incomes were > 20% below the average EU income. Quite unjustified!
Handing out such largesse is mistaken (if laudable) but led to the truly horrifying withdrawal consequences we are now witnessing.
Each & all of Europe’s MEPs and Council Members are to blame for these messes and should be scourged in some way for their excessive politeness. I certainly alerted my MEP about the problem some years ago: no response.
EU discussions need to be much more robust!!
Poor Greece, sacrificed by the tightening Euro rope around her neck and to keep the eurocrats in the manner to which they have become accustomed.
You’re correct!
We should all be ashamed that we’ve allowed this to happen.
And the Eurocrats you correctly accuse include all of those who saw this coming and said nowt.
Includes me. I accept that complaining to my MEP was not enough.
Nothing like as bad as the Treaty of Versailles. But of the same category. How can we make amends?