Greece should switch to the US dollar as its currency while renouncing all debt denominated in euros. I don't mean a "haircut", I mean billiard-ball bald: 100pc of all debt denominated in euros would be renounced. Not one euro will be repaid.....
The reason is that the banks (lenders) knew darn well that Greece remained a weak economy, and eliminating the currency arbitrage by accepting the euro did not magically strengthen Greece's financial fundamentals. It was all a scam that the banks exploited, including the European Central Bank, and so they will have to accept the losses now that the scam has collapsed.
Nobody put a gun to the head of lenders who fronted Greece stupendous sums of money at low rates of interest. It was their gamble and they lost. End of story....
There is an undeniable internal logic to the crazy idea that Greece should jettison the Euro and accept the U.S. dollar as its national currency....
Before you dismiss my crazy idea out of hand, hear me out. It might not be as crazy as it seems on first blush....LOL
I have a straightforward three-point plan to set Greece on a sustainable, positive pathway. But before we can understand how the plan resolves Greece's no-win situation (yet another Kobayashi Maru scenario), we first need to understand very clearly why the euro currency failed.
I have covered this many times before: Why The European Union Is Doomed (March 28, 2011)
Why the Eurozone and the Euro Are Both Doomed (June 23, 2011)
Three More Reasons the Eurozone Is Doomed (September 22, 2011)
Yet Another Reason Why the Euro Is Doomed (October 17, 2011)
If we had to distill the dynamic down to a single paragraph, it would be this: By accepting the "strong currency" euro that was supported by promises of fiscal prudence, Greece and the other weaker economies of Europe artificially raised market willingness to lend them money and lowered the interest rate they would pay. At the same time, the euro also lowered the cost of goods from Germany by eliminating the market arbitrage of currencies. I know this may sound complicated, but we can grasp the core dynamics using household analogies.
The willingness of lenders to lend and the rate of interest they charge is based on economic fundamentals: the balance sheet of assets and liabilities, and cash flow: how much income goes to pay liabilities and how much is left over as surplus to spend or invest. Households and nations with weak balance sheets (i.e. liabilities exceed assets) and weak cash flow balances (i.e. much of the nation's income is already committed to entitlements and liabilities, so relatively little is left to fund future borrowing) will find it difficult to borrow a lot, and the rate of interest they will pay will be high.
Nations have another mechanism to differentiate between strong and weak balance sheets: national currencies. Countries with weak cash flow and risky balance sheets will have weak currencies, as people price the risk into the currency.
In effect, Greece was like the poorer brother who suddenly got the wealthier sibling's credit card. In this sense, the euro was a scam, because it stripped the market of the pricing mechanism that we call currencies. By pricing all money the same regardless of national balance sheets and cash flows, then weaker countries got the credit card of their stronger brethren.
Predictably, these nations over-borrowed. When presented with the opportunity to borrow huge sums at low rates of interest, it is "rational" to accept the opportunity.
Who benefited from this elimination of market pricing via currencies? Germany and the banks. In pre-euro days, it took a lot of Greek drachmas to buy expensive goods from Germany. After the euro was introduced, German goods became cheaper in terms of hours worked and interest rates paid.
German exports to the rest of Europe have been strong, and these exports within Europe are the backbone of the German economy. (Exports are roughly 40% of the German economy, the highest in the world for major economies. Exports make up about 10% to 15% of the economies of Japan and the U.S.)
The pool of apparently creditworthy borrowers expanded greatly, and the banks promptly began lending vast sums to both the public and private sectors of these fundamentally weaker nations.
You can't fool Mother Nature with artificial games for long, and now reality has trumped artifice: the nations with weak balance sheets and cash flows cannot support the monumental debts they acquired during the decade of the euro-scam.
If you eliminate the market's ability to price risk and credit, the market breaks down. That is the eurozone in a nutshell.
The no-win situation is clear: if it wants to continue using the euro, Greece must pay its debt and interest in euros. Its economy simply isn't large enough or productive enough to do this, so that's simply not possible. Wishing it were possible doesn't make it possible.
As a result, the weaker, over-indebted nations are in death-spirals of higher taxes and higher debt servicing costs. Each bleeds vitality and trust from the economy, driving it deeper into fatal contraction.
These nations are also in political death spirals. I spoke at length with a well-informed young Greek friend who has lived in both Germany and the U.S., so he is well-acquainted with the perspectives of Germans and Americans.
He reports that the Greek people are profoundly divided on the question of whether to stay in the eurozone or risk leaving it. He said that even within the various political parties, there are two camps. In his opinion, the odds of either camp surrendering their deeply held beliefs and fears is very very low. Those who want to stay in the euro are terrified that a return to the drachma would wipe out the nation's savings and further reduce the already diminished incomes of households: in effect, the middle class would be wiped out.
Others see a deeply sinister master plan in all this: pushing Greece back to the drachma would immediately render the nation poorer and make its assets very cheap to foreign Elites, who would rush in and snap up Greek assets at fire-sale prices. Greeks would lose their country.
This is indeed part of the dynamic when nations radically devalue their currency: if a villa in Greece was 300,000 euros before the return to the drachma, it might be only 100,000 euros when the drachma is re-instated. Priced in euros, the whole of Greece would "go on sale".
I hope you can see that there are two parallel no-win situations here, a financial one and a political one. This is the Kobayashi Maru scenario on a national scale, and there is no exit if you stay within the rules of the game: euro or drachma, etc.
Here's my "crazy idea that's so crazy it might just work": Greece should switch to the U.S. dollar as its currency while renouncing all debt denominated in euros. I don't mean a "haircut," I mean billiard-ball bald: 100% of all debt denominated in euros would be renounced. Not one euro will be repaid.
The reason is that the banks (lenders) knew darn well that Greece remained a weak economy, and eliminating the currency arbitrage by accepting the euro did not magically strengthen Greece's financial fundamentals. It was all a scam that the banks exploited, including the European Central Bank, and so they will have to accept the losses now that the scam has collapsed.
Nobody put a gun to the head of lenders who fronted Greece stupendous sums of money at low rates of interest. It was their gamble and they lost. End of story.
Whatever else you can say about the U.S. dollar, it retains global trust as a medium of exchange and a transparent store of value. Your $100 bill is good in Laos, Bolivia, Russia, China and everywhere else. Its value fluctuates because the market is free to set the risk of holding dollars.
Ultimately, all fiat currencies are simply physical measures of trust. People know the U.S. has plentiful problems of its own, but they also know the problems are well-known and transparent to all, so the market can price risk in the dollar. They also know the U.S. isn't going away tomorrow, and that there are enough dollars floating around the globe that there will always be someone who will accept the dollars in trade for tangible goods at a transparent price.
The problem with returning to the drachma is the risk of the transfer is unknown, and so the risk will be transferred to the drachma. By making the process into two steps--exit euro for the dollar, then later, exit the dollar for the drachma--much of the risk and distrust is removed from the initial step of exiting the euro.
Here's the beauty of Greece accepting the dollar: since Greece cannot print dollars, then everyone will know the currency cannot be depreciated by the Greek state. If Greece can print drachmas in unlimited quantities, then the drachma will quickly lose whatever value it begins with. In contrast, regardless of the policies of the state or central bank of Greece, the dollar will still have the same value day to day.
All euros in accounts would convert to dollars.
This will immediately restore trust and trade, both domestically and internationally, as everyone will know the U.S. dollar will retain its value everywhere.
Does Greece need the Zioconned U.S. approval to take the dollar as its interim currency? No--the dollar is ubiquitous and in sufficient quantity that there are enough physical dollars floating around the world to serve as the currency for a small nation such as Greece. It would help if the U.S. accepted Greece's choice, but American acceptance would be optional.
The third critical step in my plan is that Greece must reach a political consensus on taxation and governance. Everyone knows that tax avoidance has undermined the Greek state's finances, and the people of a democracy have to reach a consensus themselves: it cannot be imposed by bureaucrats from afar.
Greece desperately needs a visionary politician to emerge who can clearly state Greece's choices in taxation and governance: the State needs enough income to do what the people want it to do, and so everyone is going to have to pay taxes. Those who evade will have to be shunned/coerced by public opinion into compliance, for the national good. The institutions of taxation will have to restore trust in their fairness and transparency.
Greece must have a transparent national dialog on taxation and governance, and reach a consensus via the democratic process. Without this step, then it won't matter what currency Greece uses, it will slip further into a death-spiral of dysfunction.
So here is the 3-point plan:
1. Renounce all debts denominated in the euro, i.e. a 100% writedown.
2. Accept the U.S. dollar as the national currency of Greece.
3. Engage in a transparent national dialog and reach a consensus about taxation and the role of the state in the Greek society and economy.
We might add a fourth point: renounce scams and kicking problems down the road rather than addressing them directly, sweeping dysfunction under the rug, etc.
There is a compelling internal logic to my crazy plan: when trust in national currencies and institutions is lost, then the black market becomes the trustworthy place to engage in trade. The world's favorite black market currency is of course the U.S. dollar. In this sense, for Greece to officially accept the U.S. dollar as its currency is simply a recognition of the natural progression from a currency that is no longer viable to one that is.
New Max Keiser: On the Edge with Charles Hugh Smith. I was sharper in the "live in Paris" interview but Max is always worth watching: "Renouncing debt would be the way forward and eventually that will happen everywhere--either the currencies will go to zero, what people call hyperinflation, or the debt will be defaulted on."
Germany has drawn up plans to make Britain pay a share of the multi-billion pound clean-up costs if Greece is ejected from the euro, risking a clash with Downing Street.
A finance ministry draft shows that Berlin is preparing a fresh bail-out to stabilize the Greek economy and stem EMU-wide contagion after a return to the drachma, should the country reject EU austerity demands.
The funds would come from Europe's rescue machinery but costs would be shared among all 27 EU members – not just the eurozone – on the grounds that Greece has a right to Brussels crisis funds, like any other member state with its own currency.
The scheme aims to contain fallout from a Greek exit and "limit the losses of the European Central Bank" on the country's bonds.
The plan, leaked to Germany's Der Speigel newspaper, was disclosed as markets braced themselves for another week of drama, with fears of an EMU break-up and a banking crisis in Spain infecting confidence across the world.
Romano Prodi, the former EU Commission chief, said those threatening to eject Greece were playing with fire. "Exit would bring down the whole house of cards, with one state falling after another: it would reach Portugal, Spain, then Italy and France," he said.
If the German plan gains broader EU backing, it would effectively recruit Britain as a loss-absorber to protect the ECB. Downing Street has said repeatedly that Britain will help only through the International Monetary Fund.
The plan is also part of a German-led pressure campaign against Greece, intended to drive home the message that refusal to comply with EU-IMF terms means expulsion from the euro. Patrick Honohan, Ireland's ECB member, said a Greek exit would be disruptive but "technically feasible".
Eurogroup chairman Jean-Claude Juncker said Greece should be given more time to meet austerity targets if a "stable government" is installed. "We should stop shouting at them and telling them what to do," he said.
Karolos Papoulias, the Greek president, met party leaders on Sunday in a last-ditch effort to forge a government before calling new elections. Polls showed the hard-Left Syriza party on 25.5pc, making it the dominant force in Greek politics.
The crisis is escalating in a string of countries. Italy is mulling plans to deploy troops to protect tax offices and industrial groups after petrol bomb attacks. The head of Ansaldo Nucleare was shot and injured by anarchists last week.
France's new president, François Hollande, meets Chancellor Angela Merkel in Berlin on Tuesday and any sign that the Franco-German marriage is fraying badly would call into question the long-term viability of monetary union.
Mr Hollande says he will reject the treaty if there is not more stress on growth. Mrs Merkel brushed aside the demand, yet the Greens in Germany will block the treaty unless it moves away from austerity. "Without us it is not going to happen," said Jürgen Trittin, the party co-leader.
Mrs Merkel's Christian-Democrats were heading for a heavy defeat in a state election last night...
It could happen voluntarily, but both the Greek people and Greek politicians are still clinging to the idea that they can put an end to austerity yet still stay in the euro. In order to try to achieve that, a new government may call the eurozone's bluff....
At that point, the other eurozone members would face an awkward choice. Doubtless there would be voices in favour of providing the money, willy nilly. That might well be the French position. But if the eurozone gives way on this, what chance would there be of painful austerity being continued, not just in Greece but also in Portugal, Spain, Italy and Ireland? The northern countries would face the prospect of pouring money into a bottomless pit.
Accordingly, it is likely, I think, that they would say: "It's your choice: we want you to stay in the euro (which isn't true yet has to be said) but you cannot do so on your own terms."
If the Greeks did not yield, then they would be out. For if they don't get the money, it isn't simply a matter of not being able to honour their debt obligations (i.e. defaulting); they would not be able to meet their obligations to pay wages and pensions. Moreover, if they could not get ECB funding for their banks, then their banking system would face implosion. At that stage, the only way out would be to move to a system where they can get funding from their own central bank – in other words, to come out of the euro.
What then? I would expect serious efforts to be expended to hold the rest of the eurozone together. Firewalls would be extended; bailout mechanisms would be increased; solemn commitments would be entered into. I wouldn't even be surprised to see Germany agree to some of François Hollande's wishes. For a time, the euro crisis might subside, with the markets deciding that the remaining members would indeed stick together. And they might. But I doubt it.
Those who not long ago were adamant that no country would leave the euro are now saying of course Greece may leave but, if it does, this would have no impact on the continued membership of the other countries. I think they are wrong – again.
Much would depend upon what happened in Greece. Initially, it would be a complete mess. And it is possible that it would descend from that into abject chaos and economic ruin, perhaps accompanied by hyper-inflation. After all, some countries do. Zimbabwe comes to mind. If that happened, throughout the union the advocates of austerity would be strengthened. In the peripheral countries there would be a widespread fear that if they did not buckle down they would "end up like Greece". It would serve as the hobgoblin of the eurozone, being used to frighten countries into swallowing their nasty medicine.
Yet, when your back is against the wall, the response can be surprising. The big danger for the rest of the eurozone is not that Greece makes a complete horlicks of monetary independence but rather that it makes a comparative success of it. For this to happen, life in the proximity of Syntagma Square does not have to become a cakewalk; it just needs to be better than the current situation of economic collapse without prospect of relief.
Suppose that within a year or so of exit, it looks as though the Greek economy is starting to recover. How then would the governments of Portugal, Spain, Ireland and Italy persuade their electorates that there is no alternative to austerity stretching out until the crack of doom? The game would be up.
What's more, the markets would know it. Bank deposits would flee from these countries and end up with German banks which, through the Bundesbank, would recycle them to beleaguered banks in the periphery. In the process, Germany and the other northern countries could end up taking on the risk of the whole banking system of peripheral Europe.
I reckon that well before that stage, either the ECB or the Germans would say "enough". At that point, staring a banking collapse in the face, the peripheral countries would have no choice but to fund their banks by issuing their own money – i.e. leaving the eurozone.
"Why are you so gloomy about the eurozone; can't you be more bullish?" people often ask me. They don't understand. What I have sketched out is the bullish scenario! The bearish scenario is that the current system staggers on, with the peripheral countries locked into depression and deflation for decades to come. I am sufficiently bullish to believe that, somehow, this is not going to happen.
Roger Bootle is managing director of Capital Economics
In the midst of a severe financial crisis, the French have just elected a champagne socialist on promises of a 75 percent top tax rate and a lower retirement age. The Greeks also had an election in which the established parties lost to a ragbag of splinter groups. The outcome of the election was that they need to have another election. (Cue Zorba the Greek theme music.) Meanwhile, the wailing gloom of the flamenco emanates from Spain, where youth unemployment is now around 50 percent.
Within a few hours of arriving in London, I hear the following announcement on the train: “We apologize for the late departure of this service. This was due to the late arrival of essential personnel. [Translation: the driver overslept.] However, we are happy to inform customers that the London Underground is running a nearly normal service.” It’s that “nearly” that is so quintessentially English.
Three days later, in Berlin, I finally reach the Europe that works. Well, sort of. As usual, I find myself marveling at the sheer idleness of the richest and most successful country in the European Union. Lunchtime in the leafy garden of the Café Einstein on the Kurfürstenstrasse shows no sign of ending even at 3 p.m. It’s Thursday. Did you know that the average German now works 1,000 hours a year less than the average South Korean? That’s why when you go on holiday the Germans are already there—and when you go home, they stay on.
Understandably, many American investors have simply given up on Europe. After two years of the world’s most tedious soap opera (“Can Angela get on with François, the new boy in town? Is Mario the real thing after phony old Silvio?”), they have come to the conclusion that it is only a matter of time before the whole euro zone comes crashing down, with Greece in the role of Lehman Brothers.
Carlo Hermann / AFP-Getty Images
Meanwhile, in Berlin they still talk of “buying time.” They mean by this that as long as the European Central Bank keeps printing money, lending to weak Mediterranean banks so that they can buy the bonds of weak Mediterranean governments, it will all work out in the end. This is a delusion. The economies of the Southern European countries are in a disastrous state, comparable with the conditions of the Great Depression. True, they no longer have the Keynesian option to engage in deficit finance; their debts are already too large. But the German prescription of austerity tax hikes and spending cuts in the teeth of recession is losing political credibility with every passing week.
Suddenly it is no longer so hard to imagine a Greek politician deciding to gamble on exiting the euro zone, restoring the drachma, and letting a drastic devaluation do its work. Suddenly it is no longer so hard to imagine the horrendous consequences, with investors asking the obvious question: “If they can leave, who will be next?”
As last year’s Nobel economics laureate Thomas Sargent pointed out in his brilliant acceptance lecture, Europe is now roughly where the United States was between the Articles of Confederation of 1781 and the Constitution we know today, which replaced them in 1789. What is desperately needed is an Alexander Hamilton, prepared to take all or part of the debts of the individual states onto the federal balance sheet. What is desperately needed is a recognition that Europe’s present confederal structure is incompatible with monetary union created in 1999.
The solution is available. Since November of last year the European Commission has been actively considering how to create “Stability Bonds” that would put the full faith and credit of the EU (i.e., Germany) behind at least part of the national debts of the member states. Taken individually, some of these debts are hopelessly high. Added together and compared with total euro-zone GDP, they are manageable.
What stands in the way is not French socialism or Greek populism. It is quite simply German complacency. Life in Berlin is good. In Munich, the capital of the German manufacturing machine, it is even better. You should try explaining to the average Bavarian beer drinker at the Stammtisch why he needs to get ready to finance an annual transfer to the Mediterranean countries of up to 8 percent of German GDP. I never get very far.
Here, then, is the twist in my tale of national character. For two generations, the Germans really did want to take over Europe—by force. But today, when they could do so peacefully, they can’t be bothered.
It is tragic. Many people will lose all their money, savings, livelihood, and more because of this...
What is it? It is a picture taken at the Athens ministry of finance.
It is part of a full documentary (go to 24 minutes in for the lack of money shot) released a few days ago by German TV station ZDF called The Greek Lie. It is self-explanatory, and shows where 2 years of bailout funds went, or rather didn't, and why 2 years to the day after the first bailout, not only is Greece not fixed, but is days away from leaving the Eurozone, but at a cost to taxpayers of nearly half a trillion.
We urge anyone, even non-German speakers, to set aside 45 minutes and view the clip below. It is unsettling at best.
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