German Chancellor Angela Merkel is one of the Euro leaders who appears to be slightly too relaxed about the fact that the Greek government has not yet finalised an agreement with creditors in respect of its Sovereign Debt. Now there is the rumour of a German Government memo indicating that Eurozone Banks are just about ready and able to cope with a Greek default. If that is the case then it would seem that the Greeks have been “played” while Euro reorganisation has been taking place behind their backs. The latest wheeze is the IMF expressing dissatisfaction about Greece’s progress in implementing those draconian austerity measures. That means that Greece’s next tranche of bailout money is nowhere near being agreed. It is now possible that even if Greece does capitulate and agree to everything that the IIF demands, it is still not guaranteed a bailout. Tempus Fugit.
I just have a look at the European stock markets and on the surface everything appears to be quite normal.
The banks are doing especially well!
Today’s showing in the markets is the most clear indicator so far, as to the utter confusion generated by the intransigence and incompetence of senior politicians.
Today President Nicolas Sarkozy of France and Chancellor Angela Merkel are involved in pointless discussions with Greek Prime Minister George Papandreou. Why pointless? Because they probably all began their telephone conference chat with this afternoon’s communique already written.
Chancellor Merkel has expressed the schizophrenic views of the Eurozone. She has stated that the Eurozone will not allow Greece to default but on the other hand Greece will not secure access to the next 8 billion euro bailout unless new budget cuts are made.
Greece will be running out of cash in about three weeks.
Everyone, understandably, is beginning to feel frustrated and impotent at the pace of the so-called rescue package.
If the Eurozone is serious about the Greek bailout, the cash should be handed over today. That more than anything will placate the markets which must by now be feeling as if they’re on a bad acid trip. The current situation is certainly a candidate for the old 1960s hippie slogan ‘Stamp out reality’.
In reality though, the politicians will wish to leave all options on the table rather than make a move which could be catastrophic. The fact is that whichever move they make, there is bound to be either a national catastrophe or a pan-European catastrophe. More likely both.
That in turn will generate an American catastrophe ; the U.S has been teetering on the edge for many months.
There is only so much time that we can all just stand staring into the abyss.
Currently we are all keeping an eye on Ben Bernanke and the Federal Reserve, because we fully expect them to start printing money at any minute.
In fact we should be looking at the French because it cannot be too long before they make a similar decision – and they will probably ink their printing presses well ahead of the Americans.
If the French go ahead and print money in order to provide a cushion for the French banks against a Greek default and the Greek default overhead anyway, it will be the equivalent of them having unnecessarily dumped billions of euros.
Unfortunately, that’s the ONLY plan which the French government has.
Today, the United Kingdom has announced another 80,000 unemployed between May and July. That is NOT the sign of an economy in recovery. THAT is the sign of an economy still in recession. The official unemployment figure in now in excess of 2.5 million. In fact, the actual number has probably been in excess of 3 million for quite a while.
In recent months there has been a bit of Schadenfreude-induced gloating from the United Kingdom’s senior politicians and commentators in respect of the Eurozone’s woes. That will stop very soon – as our meagre exports dry up because no-one in Europe has the cash to pay for them.
It is not just the Eurozone which is crumbling, it is EUROPE.
It is NOT just the European Economic Class System which is going to be everyone’s downfall. It is NOT because the “HAVES” dictating to the “HAVE-NOTS”.
On a macro level, the vast socio-economic differences within the Eurozone do no more than reflect socio-economic differences within individual states.
They tried an experiment whereby the poor (countries) were expected to compete with the rich and as we should all know by now, this type of “Faux cross-border Socialism” can never work.
There can always be “liberté” and “fraternité” between such disparate states but there can never ever be anything even vaguely resembling “égalité” between the rich and the poor.
In the Eurozone, some are definitely more “égal” than others.
Currently, the more equal are terrified that the less equal will take them down.
(Personally, I believe that Greece will be allowed to default. Glad I kept those Drachmas!)
Last week I predicted that it was Sarkozy’s turn to deliver yet another mealy-mouthed statement. Looks as if it’s this afternoon!
The question is CAN he save the French Banks whilst convincing an increasingly cynical public and sceptical markets that it’s all about saving Greece?
Money Market Funds have been selling French Bank Shares for about a year, during which time they have reduced their holding in French banks by about 50%.
After Sarkozy (or Angela Merkel) tells us that Greece is “doing the right things” or that ” it is making good progress“, it will be interesting to see what the markets make of it all.
The MOST likely outcome of today’s meeting between Sarkozy, Merkel and Greek Premier Papandreou is a statement indicating that Greece needs more time.
The Euro and the Eurozone both need time – another commodity which is fast disappearing.
Today’s summit has an interesting sub-plot. Rating agency Moody’s has just downgraded France’s two major banks. Credit Agricole has been busted down from Aa1 to Aa2 and Société Générale from Aa2 to Aa3.
Once again, this has come as both a surprise and relief to the experts because the downgrades were “not as bad as expected“. It seems that these days, NOTHING is as expected.
For politicians and most economists, these are indeed The Days of Mystery!
The seriousness of not-only the Greek but the entire Eurozone situation is exemplified by the fact that The US treasury secretary, Tim Geithner, will be attending Friday’s meeting of EU finance ministers.
Even the Americans can see that Greece is the No1 domino!
The hard fact is that Greece ought never have been allowed to join the Euro. It was a predictable accident waiting to happen.
As many politicians will attest – especially those who attended boarding school, the “Greek Entry” was always going to be painful.
After three years, the scales have fallen from our eyes and finally, the light has flooded in. It has been long time coming but suddenly – an Epiphany!
The politicians, bankers, economists and even the Central Bank astrologers have absolutely NO IDEA as to how to deal with the gradually building waves of a massive economic crisis which is about to sweep the world. They’ve been gambling that random fiscal and economic measures would somehow provide a solution and make everything well again!
Money has been printed and distributed, bonds have been issued, promises have been made, false political visions have been shared and yet the self-amplifying problem continues to self-amplify.
Some of us finally realised that the Eurozone had run out of ideas when the German authorities temporarily banned “naked short selling” of Eurobonds. The action had absolutely NO effect. However, it did demonstrate that the politicians (who initially blamed the bankers for the pit of shit that they had help to create) were now turning a rheumy eye on everyone’s new bête noire – the SPECULATORS!
Bankers were greedy bastards with large bonuses but now it was the turn of the “casino-banking” speculators. Spit!
In any crisis, it is always a good idea to look for the root or initial cause. In the case of the Euro and the Eurozone it was an ill-conceived plan which , without tighter integration of fiscal policies between states was doomed to failure.
Make no mistake, the increasingly pathetic bleating of the French and Germans in respect of the looming Greek collapse and default has absolutely NOTHING to do with Greece.
It is all about their joint delusive attempt to prevent the inevitable collapse of their banks – which are holding billions in Greek IOUs. Nothing at all to do with Franco-German altruism.
As the French and Germans intertwine, hug each other and panic, their assault on the “speculators” and the markets , although understandable is also ironic. Why? Because eventually, the Western-European begging bowl will be waved at the markets and the “speculators” – in the vain hope that they will lend the impoverished Eurozone BILLIONS so that the sacred Euro cow can be reprieved.
Biting the hand that could feed you is never a good plan but currently, the markets are dealing with increasingly desperate politicians who have painted themselves into a Euro corner with absolutely NO way out.
Euro and Western economies in general are in debt – both in the public and private sectors. Several countries are bankrupt.
The only REAL solution is GROWTH which unfortunately is NOT achieved by insisting that the weakest economies attempt to restore growth through the unusual and meritless medium of The Austerity Plan.
Austerity gains you a lot of points with the rating agencies, makes it easier for you to borrow more but in the long-term, it is NOT a sustainable strategy – as we in the West are ALL about to discover. Overborrowing is what caused the problem in the first place.
The economic affliction is the mire of public and private sector debt and uncompetitiveness into which the weaker economies of southern Europe have sunk.
The cure should be to create an atmosphere for economic growth.
Unfortunately, the generally accepted (unproved but imposed) speculation is to force broken countries to try and balance their budgets and restore economic growth whilst slashing expenditure and demotivating taxpayers through increased unemployment, inflation and the resultant decimation of tax-revenues.
It will NOT be long before the inevitable wake-up call is heard!
Casino economics does not work.
The politicians are very happy to accept credit for taming the debt dragon which, in fact, they themselves created by allowing the banks a free rein for far too long.
The Bank of England’s solution of Quantitative Easing, that is to say handing more and more cash to the banks has done little else apart from allow institutional investors and the investment banks to maintain Stock prices at falsely high levels and to push Commodity prices to new stratospheric levels.
These days, the name of the game is to hunt around for any excuse to push the markets higher and higher – not by buying stock and holding it but by keeping it on the move, i.e. “working those shares”, thus making a dying market look as if it is in rude health.
Last week’s announcement about a possible Greek bailout moved prices up as did the Greek government’s announcement that their austerity measures had been voted through. Good news is all that investors want to hear.
They are all in La-la land!
Scratch the surface and what do you see? How do all the investors really feel about the possibility of a Greek default? In short, they KNOW that it is going to happen.
That is clearly demonstrated by how much they are willing to pay in premiums for the insurance contracts which are designed to protect them from future losses in case of default.
The equation is simple, the more the likelihood of a default, the bigger the premium.
The billions in bailouts have made no difference to the perceived likelihood of Greece defaulting and in fact, the likelihood of a total collapse and default is increasing daily.
Today, the cost of insurance against a Greek default is FOUR times greater than it was when their Euro partners announced the very first bailout package.
On May 12, 2010 the European Union (EU) and International Monetary Fund (IMF) announced a €110 billion bailout for Greece. At that time, the cost of insuring $10 million in bonds against a Greek default was close to $540,000. Last week, it was $2.3 million – FOUR times more!
As a comparison, when Lehman Brothers failed and even when the likelihood of a global collapse was at an all-time peak, the absolute maximum that investors were willing to pay for $10 millions-worth in Greek debt-default insurance was only $52,000.
So, the premium for the cover has increased from $50,000 to over $2 million for the same amount!! THAT’S FORTY TIMES MORE!!!
To put it simply, investors believe that the likelihood of a Greek default is over 40 times greater today than it was at the height of the 2008 financial crisis.
Meanwhile the politicians are celebrating. Do they really believe that as far as the Greek economy is concerned it’s “job done”? Of course not. Not really!
It’s all window dressing, prevarication, obliquity and procrastination, designed to protect the Sacred Cow of the Euro for the time being, in the vain hope that by some miracle, under-investment and austerity will reboot the Greek economy.
The austerity measures which have been agreed for Greece – massive tax increases and suffocating spending cuts will make it impossible for Greece to pay both its bills AND its debts.
In the United Kingdom we are following the same path to decreasing government revenues by killing entrepreneurial confidence and creating the ideal conditions for another recession – or worse.
Like any business, making staff redundant and selling assets is not the way to generate higher net revenue because in the background, debts are constantly increasing. Both Sovereign States and Commercial enterprises have been forced into this totally nonsensical process.
Without new revenue streams and by “over-slashing” costs there is only one possible end-game. All that we are all achieving is putting-off the evil day whilst at the same time hoping for the lottery win which never comes.
The lotterry win which our own Chancellor is hoping for, is a sudden Phoenix-like rising of non-existent entrepreneurs who do not have the non-existent backing of the banks. These entrepreneurs’ job (theoretically) is to create new businesses or grow existing ones in order to create employment and produce goods which we can exchange for foreign currency.
Greece is hoping for a similar Miracle on Skid Row but in reality, it will survive through the summer and then the begging bowl will reappear. This time, however, it will remain empty.
So, who do we believe? The politicians who have achieved very little except boot the can along a narrowing cul-de-sac OR the investors who are willing to pay incredible insurance premiums to protect the money that they have lent? The Dreamers or the Pragmatists?
In spite of very generous Euro handouts, Greece is already twitching and Rigor Mortis will have well and truly set-in by the final quarter of 2011.
The answer of who to believe is telegraphed to us daily by people who know – the global investors. Nowadays “buy and hold” investment seems almost anachronistic. If you look at Stock prices every day,you will see that they move up and then down , then up again….etc……What is known as a volatile market.
So what WILL the end game be? What will the Greeks do for us?
Firstly, both European and American banks will collapse (again). European Banks have loaned money to Greece but it is the American Banks who are holding a lot of European bank debt. If European bank shares plunge to ridiculously low levels, financial markets could freeze whilst at the same time, investors will want to withdraw their non-existent money.
Incidentally, money is already being withdrawn and in the last 10 days, over $50 millions has gone from primary money market funds.
Secondly, the market for short-term debts — especially corporate IOUs (commercial paper) may freeze up. (That’s what happened in 2008 as a result of the Lehman Brothers collapse). The difference is that for instance in the United States, the Federal Reserve will not step-in with guarantees or cash – they have said so. Safety net gone.
No doubt other Central Banks will come running-in with the sticking plaster and splints but hopefully, by then, we will have learned to recognise more futile attempts at a temporary fix.
Thirdly, Greece has more cash tied up in debts than their economy produces in a year (debt/Gross Domestic Produce ration of over 100%). Greece is not alone. Their protests and riots may be just a foretaste of what most Western economies will experience in the not-too-distant future. America is just one example of an economy which has passed the danger threshold and is currently playing a waiting game.
It is not just the well-publicised countries such as Spain, Portugal, Ireland and Italy which are on the brink. The United Kingdom is not far behind.
So what do we do? Do we dance to the politician’s drum-beat?
To a certain extent we have to. Even a wounded tiger is dangerous, so we are forced to ride it along with our governments.
However, we should follow the facts and not believe government “spin”. Do not forget that a skilled tailor can make a hunchback look straight – and our governments have been sewing like crazy for nearly three years!
We (as individuals) should ensure that whichever institution (bank or insurance company) is holding our money, has the ability, will and wherewithal to fulfil its obligations. Not all of them do. Some will have to rely on more government handouts and guarantees. When you want your money, you want it in full and NOW.
Finally, we should all be very very vigilant.
Remember the 2008 crisis? The banks did see it coming but to all outward appearances, it all seemed sunny and “business as usual”. Profits….. bonuses……..obsequious governments prostrating themselves before the Gods of Banking…..
Nearly forgot: Happy July 4th