Thursday, 23 February 2012

It’s still all Greek to some people [update 3]

You’ll have heard it reported in recent days that Greece has been “saved.” That the Greek government has been bailed out by the European Central Bank and the EU Rescue Fund (EFSF), that things will be tough for a while, but the Greeks will now be able to dig themselves out of their hole.

Nothing could be further from the truth—and the fact Gareth Morgan subscribes to this fiction (among three other fictions) is almost certain proof the outcome won’t be all rosy.

What has just happened in this second Greek bailout (remember how the first bailout was going to save things?) is another enormous tranche of borrowing lent to the Greek government to save it from its previous enormous borrowing. And if that sounds stupid, it is—but only if you think this is a rescue of Greece.

It is not a rescue of Greece.

Because it is not so much a bailout of Greece by European central bankers, but a bailout of European bankers put together by European central bankers—with German taxpayers picking up the tab.  Greece is now officially a ward of the international community—and as a ward its only job now is to make its guardians rich, or at least to provide a conduit for whatever of its mis-loaned money its guardians can claw back through good old EuroPolitik.

Face it, there was no other way European bankers were going to get any of their money out of Greece—not with Greek 1-Year Bond Yield having just hit 682%.  So when you hear bankers whooping it up because the “rescue” plan has gone through just remember to whom the lifebelt has just been thrown. And it’s not the Greeks.

Frankly, the best thing the Greeks could do now is default, and then leave the Euro Currency Zone.  And the best thing German taxpayers could do is let them—and then leave the zone themselves.

NB: Liberty Scott has an excellent summary of how things came to this pass, and how a Greek default would help:

PS: Oh, and in case you were wondering … yes, Virginia, bailing out banks is inflationary.

UPDATE 1: Mish summarises the options:

The sooner Greece exits the euro, the more likely Greece will be able to prevent still more capital flight. The smart money has already left. (Please see Germany Draws Up Plans for Greece to Leave Euro; Athens Rehearses the Nightmare of Default; Merkel's Denial Rings Hollow.)…
    The best solution would be for Germany to exit the Eurozone first, but that is not going to happen.
The next best option would be for a simultaneous bank holiday involving all Greece, Portugal. Spain, and Ireland at the same time as noted in
Why Greece Must Exit the Eurozone, How it Will Happen (and Why Portugal and Spain Will Follow); Does the Euro Act Like a Gold Standard?
That too is highly unlikely. Thus the odds of a protracted, one-by-one, and very costly breakup of the eurozone is the most likely outcome whether or not Greece survives the Ides of March.
For further discussion including an analysis of why it would be best for Germany to exit the Eurozone, please see
Eurozone Breakup Logistics (Never Believe Anything Until It's Officially Denied).

Short of a real gold standard emerging, my own opinion is that best economic outcome would see the more solvent countries (solvent only in relative terms, you understand) such as Germany, Finland, Austria, The Netherlands etc. leaving the Eurozone to go back either to their original currencies or a common one, which would quickly find their/its own value; leaving the less solvent, the halt and the lame, to soldier on under the (relative) discipline of a bargain basement Euro.

It would certainly make a southern European holiday something of a bargain.

UPDATE 2: Philip Bagus on “The Future of the Euro”:

“The problems of the eurozone are ultimately malinvestments…    even before the crisis, governments had accumulated malinvestments due to their excessive welfare spending.
    Two causes had incentivized social spending in Europe’s periphery. The first cause is low interest rates… an expansionary monetary policy by the European Central Bank (ECB) and … an implicit bailout guarantee…
    The second cause is that the euro is a tragedy of the commons.”

UPDATE 3: An overview on what just happened in Greece from Krazy Economy, “A Note on Greek Banks Recapitalization

As an overview, here is what we have:
The Greeks (actually you can insert any European Common Market country you want because the pattern is consistent throughout) borrowed from anywhere they could for a massive spending spree.
They required the banks to be a major lender.
They required the banks to have little or no reserves against the loans to the government.
The government can’t repay the loans.
The banks are failing.
The government, with money acquired from elsewhere because it has done stupid, insane things, is going to buy the failed [Greek] banks.
These banks are even more tied to government policies than before.
The government has ownership and control of the banks.
Does anyone think that the Greek banks will be better off?

Meanwhile, and this is perhaps the main point of the whole fiasco, the reality evasion in high places and low:

The failure of putting two and two together is a common theme in the entire European debt crisis. It is most blatant with the Greeks.
This week there have been more “strikes,” riots, and protests against the terms required by the agencies that would bail out the Greeks. Many of the chanted slogans and posters and banners declare that the foreigners are dictators and imperialists. The protestors want the politicians to “resist”!
    The Greeks appear like angry four year olds who have been told that they can’t have the toy on the shelf because mommy doesn’t have the money. How and what are the politicians suppose to resist? They are suppose to resist the requirement that they do not incur more debt. They are suppose to resist the requirement that they try to pay back their existing debt. They are suppose to resist the requirement that if they are given money they spend it wisely instead of like a drunken sailor (my apologies to sailors).
    The Greek protestors have no contact with reality. None. They have no idea that money has some connection to real things. That real things are made by someone who wants to be paid for their efforts. That borrowing actually means that the lender expects to be paid back.
    The Greek country is a testament to modern education and economic “thinking.”


  1. If I were a German taxpayer, I would be hating this. But there is something most commentators seem to be missing. If Germany were to leave the Euro, its currency would be far stronger, hampering its exporters. Seen in this light, there is little doubt that Germany is the greatest currency manipulator in the world, far larger than China. The Euro represents a transfer from German consumers to German export businesses. So, bailing out Greece and the bankers behind them is a continuation of the policy behind the Euro, namely boosting the competitiveness of German industry. As is it the Germans themselves behind this policy, one does not have to be as sympathetic to them as at first glance.
    Jeff W

  2. It is popular, especially in Greece, to see Germany as some master manipulator, like Jeff does. Somehow Germany is responsible for the crazy spending and budget deficits in Greece, Spain, Portugal, Ireland, Italy, and France. Somehow Germany is responsible for people regarding the debt of those countries as sound. That argument also ignores that Germany’s larges trading partners, besides France, are Britton, the US, and China. The other twenty some odd euro zone countries are a very large part of Germany’s trade, but that includes several countries that are not crazy spenders. All we really have is Germany trying to keep its own fiscal house in order while pursuing irrational social welfare schemes and absorbing a very backwards country (East Germany). My comments about Germany and Greece are at

    And then you get on the blame the bankers band wagan. That is really strange. European banks are much closer to the governments than the US banks are. They are much more political tools. See The banks outside of Greece are going through huge losses and are scrambling for assets. Many are really insolvent. To call a present value of about 30 cents on the dollar “good for banks” in nonsense. See today’s article: Greek banks are in fact being nationalized. I don’t see how that is good for bankers. My explanation

    I do agree that this latest round of Greek bailouts is going to fail. But, I do not agree that leaving the euro zone is going to be good for the Greeks. They are in a depression now. The financial chaos of changing currencies and defaulting, when that country is as dependent upon international trade as it is, could easily lead to a level of chaos we can not conceive. Unfortunately, that is a possible future for us all.

  3. I only see the typos after I hit the print button!

  4. Hi C.W.

    The bankers have already made their losses. As they deserve to.

    The bailout is their only means by which to get some of it back. That's what they're happy.

    (Good writing on this at your blog, by the way.)


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