Now it looks as if the EU/IMF/EMU rescue of the Greek government is not happening after all. Since the need for repairs was last year or before, any future bailout is likely to have diminishing effect.
The problem is there is no political benefit to sending funds to a nation that really does not need them. If Greece can solve its own problems, why bother to get involved? Only if Greece is sure to fail will the wealthy Euro nations write a check. Unfortunately, the only way to be sure is to wait for Greece to actually fail. By then it’s too late!
After Greece defaults, all the Euro nations will be offering bailouts which will – of course – be useless.
The same ‘Dynamic of Denial’ along with the ‘Dynamic of Persistent Contradictions’ exists with Peak Oil and with Climate Change. By the time consumers are clear that oil production is declining relative to demand, it will be far too late to do anything about it.
The problem with doing nothing in Greece is that banks have lent Greece a lot of euros. If Greece fails, the banks are in distress. The Greek government is in distress because it – like most other governments – borrowed funds on its own account to bolster its banks. Now that Greece and other sovereigns are suffering, the pain will be fed right back to the banks.
The banks wouldn’t have problems if more people would borrow. People won’t borrow because they don’t have jobs. They don’t have jobs because the banks won’t lend – people without jobs won’t borrow because they are embarrassed. Or, because the banks have cut them cold! Governments borrow in place of the jobless citizenry but doing so in currency other than one’s own is dangerous.
If a country borrows in its own currency, there is no danger, but unless citizens take the lead of the government and borrow themselves, there is no effect either. In crises such as ours, it’s not the governments’ solvency that matters so much as it is the citizens’. The Eurozone is living the general insolvency of Greek citizens. Along with that hapless country are the citizens of half of the countries in Europe.
Big business has been successful at wheedling citizens into exchanging their wealth for useless – but fun – junk. Today’s economic funk is the outcome of big business success! There is little wealth left to trade for. What do Greeks have … that anyone wants?
What do Irish have, Spaniards have or Italians? What the Germans have is more junk to be traded for wealth. The junk- for- wealth trade is called by mainstream economists, “Sustainable Growth”. We live in the ironic universe.
But as much as there are ample reasons to suspect a bailout will not come together in time, there is one big reason to think that the powers that be will perceive it to be necessary: a Greek default would push the European banks over the edge. The large institutions were thinly capitalized in the good times, and have recognized even less of the losses sitting on their books than their US peers. John Mauldin quotes Lisa Hintz of Moody’s:
The recent credit crisis was over a few trillion in bad, mostly US, mortgage debts, with most of that at US banks. Greek debt is $350 billion, with about $270 billion of that spread among just three European countries and their banks. Make no mistake, a Greek default is another potential credit crisis in the making. As noted above, it is not just the writedown of Greek debt; it is the mark-to-market of other sovereign debt.
That would bankrupt the bulk of the European banking system, which is why it is unlikely to be allowed to happen. Just as the Fed (under Volker!) allowed US banks to mark up Latin American debt that had defaulted to its original loan value (and only slowly did they write it down; it took many years), I think the same thing will happen in Europe. Or the ECB will provide liquidity. Or there may be any of several other measures to keep things moving along. But real mark-to-market? Unlikely.
Yves here. This is to remind readers that as much as the press and the pols are depicting the Greek/Club Med problem as the the spendthrift vs. prudent nations, the problem not just the prospective extension of credit, but all the debt from these countries and their banks now sitting on the books of institutions in France, Germany, Switzerland, and Holland.
Bruce Krasting raises a related issue: that a lot of economists are focusing on external debt of the various wobbly countries, but that may not be the best metric for a looming crisis:
In the early 80’s damn near every country South of Texas went belly up. I know. I ran part of Citi’s FX biz during that period. All my public and private sector Latin American customers were shut out of the capital markets. Their existing debts traded for pennies on the dollar.
From my seat I saw that the problems always started with the domestic banks. Their offshore funding lines were canceled one by one. They could not reduce their balance sheets fast enough; they went to the local Central Bank who said “No Mas” and the next day all the lights went out.
Things are much different today than 30 years ago. But there are some similarities. Financial institutions in every country have enormous cross border exposure. If you want to measure solvency it is appropriate to base the calculation on a country’s net external debt number. But if you want to measure a country’s liquidity risk you have to look at the gross number.
Yves again. Of course, there is also a separate and yawning political problem: if you think bank bailouts went over badly in the plutocratic US, imagine how popular they would be in Europe. So trying to persuade the average German voter that a rescue of Greece is really in his best interest, because the collateral damage to European banks and the blowback to the real economy would be even more costly, is not a message politicians appear able to deliver successfully.
It’s all very circular and incestuous … the EMU needs to take into account the drain on the Greek and other Eurozone economies of high priced oil imports. Right now, the cost of inputs is reverberating though finance and credit. Euroland is between the Hobbesian rock and hard place – it’s a wealth wasteland! If countries constrain fuel use, the lack of business is reflected in lost GDP. Unchecked fuel consumption is adding bankruptcy pressures simultaneously by pushing costs higher and forcing allocations that none of the consuming nations’ economies are structured to manage.
In this case, buying diminishing amounts of time and exponentially increasing cost cannot have effect unless it also buys less consumption. Less consumption means less business of the type that has exemplified modern commerce. The outcome of less business is less wealth. That business wealth has diminished to the point of negative returns suggests an ending point of an era rather than an episode in the long run of ‘Business As Usual’.
This ‘fin de siecle’ reality changes the nature of the problem. This isn’t simply a finance- centric technicality of containing funding risk or rate risk. It is rather one of remapping basic economic structures and institutions. Obviously, this is a far more complex and difficult problem: we can’t even imagine what these new institutions are supposed to look like … or do!
Banking issues are ignorably obtuse. What is proposed now is social reordering, a repudiation of modernism along with industrialization and a development of new social modes … done under extreme duress and with diminishing resources and without a road map.
At least we seem to instinctively understand if social reordering is not done the outcome is the end of modernism along with industrialization. That’s certainly progress!
The European ‘Street’ is left to consider what is to be the case. This is not ‘A’ crisis, rather ‘THE’ crisis. As things stand now, the winners and losers here are to be fixed permanently in their social states due the the ineptitude of economists, politicians and the greed of business elites. European history is made up of a long sequence of these sorts of transformations- tending to revolutions then vicious wars. It’s going to be very interesting to see what the outcome is going to be when it is clear what the ‘Niewe European Economy’ means to citizens … will be all of them giving up their cars!
Sacrebleu!
This is the issue at bottom: the choice is between all having (low paying) jobs and all driving cars and living large, like Americans. So far, the issue has always fallen in favor of the driving. Because of its fundamental nature, the working vs. consuming issue has never been adequately joined or even illuminated. Such a juncture has never been considered necessary! Unfortunately, the inconceivable ‘default’ position (no pun, thanks) is that extreme poverty will end up constraining Euroland fuel consumption as fuel consumption is constrained right now in Uganda and Equatorial Guinea. Extreme poverty seems to be the most likely outcome in the Eurozone as its inhabitants – lost in denial – cling to their talismans of modernity with all their might. What is taking place in Greece right now is simply the operation of the appropriate poverty- creation mechanism, intermediated by credit.
It’s deja vu, 1931 all over again.