So what did the recent Euro summit achieve? It agreed that
the EUR 400 billion or so borrowed to create the European Financial Stability
Facility (EFSF) could be used as security so that a trillion Euros could be
leant to protect banks who would now write off half of Greek debt.
Therefore, assuming that Greece can pay back the other half
and that no other Euro zone country defaults or writes down its debt that just
leaves the European banking system to repay the EUR1 trillion of borrowings. Of
course, it could do if it raised its share by probably the best part of EUR3
trillion of the total European banking sector capital shortfall. There are four
ways to achieve this:
1) Print 3-4 trillion Euros tomorrow and bail the banks. This
would reduce the perception of the Euro to basket currency status, potentially
spark stagflation but ultimately lead to a position where debts could be written
off and the Euro zone could grow again. Germany is unlikely to accept this,
scarred by similar memories from Weimar days.
2) Face reality, write off bad debts, discard the Euro and
close sitting duck banks like SocGen, BNP-Paribas, Deutsche, Commerzbank, etc.
Stock and property markets would collapse, unemployment would soar, social
unrest would run wild but within a few years a healthy functioning Eurozone
economy would achieve its full potential.
3) Pray for a miracle.
4) Just keep putting it off in the hope that something turns
up. This approach also involves large doses of 3) above.
As Gavekal recently pointed out, the announcement by Prime
Minister Papandreou that Greece’s latest fiscal plan and settlement with the
European Union will be put to referendum is the logical conclusion of a process
which, after two years of belt tightening, continues to promise more pain and
little light at the end of the tunnel.
Consider the following: even if the EU and the Greek
government’s rosy assumptions are met (and there is little in the recent track
record to suggest why this would happen), and even if European banks agree
voluntarily to the suggested 50c haircuts, by 2020 Greece will still have an
unserviceable 120% government debt to GDP (and again, that is only if everything
goes according to ‘plan’).
Against this, the temptation to ‘wipe the table clean’ and
start again must be very high. After all, what does Greece really lose in
breaking away? The country is already in a massive deflationary bust (with GDP
to fall as much as -5.5% for 2011, after last year’s -4.5% contraction) and is
shut out of capital markets.
Needless to say, the Greek referendum will only trigger
bafflement and anger in the corridors of Brussels and Frankfurt. The Eurocrats
thought they had a deal (or at least the promise of a deal, or perhaps a sketch
of a promise of a deal, or at the very least the outlines of a sketch of a
promise of a deal...) but now Greece is risking everything by getting the voters
involved! We are thus now entering the moment of European truth when democracy
meets Eurocracy in an open, and even, field of play.
Make no mistake about it: the question on the referendum may
be about some arcane point of fiscal policy but at stake is the country’s
membership in the Euro. At least, this is how most people will go out and vote.
And if Greece votes no, will it be possible for Portugal, Spain, Ireland or
Italy to refuse their citizenship the same referendum?
If nothing else, this means that the run on deposits in the
weaker Southern European banks will likely accelerate from here. After all, who
is going to keep any real money in Greek banks if the risk is that tomorrow
Greece decides to leave the Euro (a Greek exit would most likely initially
trigger capital controls, conversion of foreign currency deposits into new
Drachma, etc...)?
In turn, this means that either the EU responds to the Greek
referendum with an immediate genuine open-cheque policy of massive fiscal
transfers combined with large scale ECB purchases of Southern European debt, or
we will possibly be entering the final innings of the Euro as we know it (please
God!).
In reality though, European policy makers have chosen the
above option 4 interspersed with liberal doses of option 3. And the markets
liked it because it was their preferred option too. Now watch the governments go
and pull more wool over the eyes of pathetically grateful voters who would
rather happily buy into it the fantasy rather than face their own worst
nightmares.
The fight between democracy and Eurocracy is now on and the
gloves are off. We know whose side history typically smiles on so, in a sense,
we find this development highly encouraging and positive. Still, at the risk of
sounding Swiss, we think it probably makes more sense to watch this fight from
the sidelines!
|
The above data and research was compiled from sources
believed to be reliable. However, neither MBMG International Ltd nor its
officers can accept any liability for any errors or omissions in the
above article nor bear any responsibility for any losses achieved as a
result of any actions taken or not taken as a consequence of reading the
above article. For more information please contact Graham Macdonald on
[email protected] |
