Last Friday’s lunch in Paris with Agora founder, Bill Bonner was dominated with talk on the possible Greek exit. Is this the beginning of the end…or just a hiccup?
Bill and his economic team in Paris are certain Greece will exit the euro. They do not appear to be too fazed by the prospect of Greece being cast adrift. The European Central Bank (ECB) has had three years to prepare for this possibility. No one appears to be overly worried about a Greek default.
I get the impression Europeans have Greek fatigue. Enough of the melodrama…let’s move on.
As an outsider looking in, I’m not so sure the ECB has all their bases covered.
With seismic shifts of this magnitude, there are always unintended consequences.
My general premise is: central bankers are incompetent. In due course (albeit too late) more people will realise the validity of this premise.
The ECB may well be prepared to write off the Greek debt with the appropriate amount of ‘smoke and mirrors’ type proclamations. You can bet your bottom dollar they’ve dreamt up some scheme to announce the write off in a way that sounds like it is not a write off. That’s the world of double speak central bankers are well schooled in.
Greek banks are going to fail without ECB support. Which is why Greek depositors are queuing up to cash out while they can.
The bail-in precedent the ECB established with Cyprus means any sniff of banking instability
anywhere in the world all but guarantees a bank run.
The stability of the financial system is based on one thing. Confidence.
When confidence is lost it’s every person for themselves. Trying to predict the consequences of a panicked crowd — and what policy responses are needed to restore calm — is beyond any central bank computer model. Do you think their models factor in the possibility of the public losing faith in the ability of central bankers and government ‘guarantees’? Me neither.
The Greek exit may or may not set off a chain reaction in financial markets. But my guess is the ECB will again (like it did in Cyprus) make a mistake or three, and this will further unnerve us interested spectators.
Within the borders of the EU, a Grexit may impact the ability of Italy, Spain and Portugal to borrow funds. If Greece — under influence from an extreme political party — leaves, then one or more of the other highly indebted European countries may well follow suit.
Citizens may decide to elect a party with a popular anti-austerity message. Therefore why would investors (institutions) risk taking another ‘haircut’ from yet another (even bigger) sovereign default?
Rest assured the competently incompetent ECB — backed by the equally competent incompetents at the IMF — will do more of the same. It’ll include lots of talk with grand plans, printing more euros and trying to drop rates even further into the negative.
Hardly the actions one would use if all was well in the world.
However there is one absolute certainty that will come from this farce: Athens will blame Berlin. And Berlin will blame Athens.
It’s already begun…
The ‘truth’ commission
To uncover the ‘truth’ about the current crisis, the Greek parliament established the appropriately named ‘Debt Truth Commission’. What better way to establish who or what is to blame then to establish a ‘Truth Commission’.
The preliminary findings of the Truth Commission were released on 17 June 2015. Here’s an extract with my emphasis:
‘All the evidence we present in this report shows that Greece not only does not have the ability to pay this debt, but also should not pay this debt first and foremost because the debt emerging from the Troika’s arrangements is a direct infringement on the fundamental human rights of the residents of Greece. Hence, we came to the conclusion that Greece should not pay this debt because it is illegal, illegitimate, and odious.’
There you have the truth according to the Greeks — the debt is illegal.
I wonder what the findings of a German Debt Truth Commission would be?
If all this wasn’t so serious it would be funny.
The take-away from the Commission’s statement is Greece does not have the ability to pay this debt. That, folks, is the problem/conclusion this ever more deeply indebted world is facing.
We’re looking at hundreds and hundreds of trillions of dollars that cannot be repaid. PLUS unfunded welfare and healthcare promises lasting decades into the future.
Greece is just the tip of the debt and entitlement iceberg.
Whether it is Greece that blows the whole debt infused economic ‘growth’ model up or not is largely academic. The fact is, it is going to blow.
Editor, Gowdie Family Wealth
Ed Note: This article is an extract from Gowdie Family Wealth. If you like what you read in this article and want to know more click here.