In today’s Daily Reckoning, we’ll do something we can barely stand to do: we’re going to write one more time about Greece. If you can stand to read it, you may come to the same conclusion we reached.
That conclusion is simple: what’s going on Europe has nothing to do with solving a debt crisis and everything to do with preserving a corrupt system based on limitless debt and growing government power. The sooner you understand that fact, the sooner you’ll be able to prepare for what happens next. There are two options for what happens next, and we’ll get to those shortly.
First, though, doesn’t it strike you as strange that all of Europe can be brought to its knees by tiny little Greece? Greek GDP is just 2.4% of Europe’s GDP. In economic terms, Greece doesn’t matter. Its lack of growth or economic competitiveness shouldn’t be factors that can destroy Europe’s 13-year single currency experiment. Yet, Greece obviously does matter; otherwise the European financial markets wouldn’t be celebrating the latest €130 billion bailout that’s on its way to Athens.
So here’s our question: Why do Greek finances matter to anyone outside of Greece? If you rule out the obvious things that don’t matter, that leaves everything else. Or as Sherlock Holmes was fond of saying, “when you have eliminated the impossible, whatever remains, however improbable, must be the truth.”
First, let’s see why the possible explanations for Greece’s importance to the world are actually impossible. Take the issue of debt reduction. As we wrote last week, the deal before Europe would reduce Greek debt to 120% of GDP by 2020. The IMF says that level is sustainable.
Back in a universe where common sense prevails, you can see that the plan is a joke, at least in terms of debt reduction. A plan to reduce Greek’s debt to 120% of GDP…EIGHT YEARS FROM NOW…is not a serious plan about debt. Therefore, the plan cannot be about debt reduction.
Will the plan make Greece more competitive in the long run? Well, probably not. In order to get more money by March 20th, the Greek Parliament had to agree to certain structural reforms. Some of those reforms might even be a good idea. But cutting the minimum wage isn’t going to be popular. And with Greek GDP shrinking by 7% in the fourth quarter, years of austerity won’t make Greece more competitive. The lifestyle of the Greeks will be destroyed and the debt will remain. Therefore, the plan cannot be about making Greece more competitive.
Does saving Greece save the euro? Not at all. The euro would be better off without Greece and Greece would be better off without the euro. The Germans are even planning for a euro that doesn’t include Greece. With its own currency, Greece could default, devalue, inflate and start over. Argentina did it in the last 10 years. It’s not rocket science. Therefore, saving Greece is not about saving the euro.
If saving Greece is not about saving the euro, and if it’s not about reducing Greek debt, and if it’s not about making Greece a more competitive economy…then just what IS it about? Well, now that we’ve rule out what’s impossible, let’s look at what’s left.
Saving Greece means preventing a technical default…even though Greece has already defaulted in a real-world sense. So why is avoiding a technical default so important to the European Central Bank (ECB) and the International Monetary Fund (IMF)? The current plan certainly looks like a default. Under the plan, €100 billion worth of Greek debt would disappear, thanks to a debt swap agreement with private sector investors. The ECB has twisted enough arms to get creditors to accept a 70% haircut on their current Greek debt without actually calling it a default.
And yet, bizarrely, Greece’s creditors could be forced to accept this not-a-default default losses recourse to the credit default insurance they purchased. That’s right; they might lose 70% of their capital and still be denied a payout on the default insurance they purchased. That would be like an insurance company refusing to honor a fire insurance policy because only 70% of your house burned to the ground.
It gets kind of wonky here. But really, it’s about who gets to make the rules. To you and me and everyone else in the universe where common sense prevails, a non-voluntary 70% loss on your government bonds is a default. But you and I don’t get to decide what constitutes a credit default. That honour belongs to the International Swaps Derivatives Association (ISDA). The important thing to keep in mind here is that the ISDA is a trade group made up of banks and financial firms. Those are the firms that have the most to lose if Greek bonds default. It’s in the interest of the members of the ISDA that a non-voluntary credit event in Greece NOT be called a default.
It gets even murkier here. The ISDA essentially represents the global banking system. In Europe, the banking system is full of government bonds. Those bonds are nominally assets. If Greece defaults, it sets a precedent for how other countries might deal with unsustainable debt levels. This imperils the collateral of Europe’s entire banking system.
If you want to put it in simpler terms, let’s say that Europe’s banking system is full of rotting meat. Some investors bought that meat thinking they were going to get prime rib. But they can smell the stink of the meat from a mile away. They want to be compensated for the bad meat. The ISDA, which owns the freezer in which the meat went bad, says, “Well, we’ve decided the meat isn’t bad after all. And you have less of it than you thought anyway, as of now.”
This is a crude analogy. But this is exactly what happened last week. A “determinations committee” of the ISDA ruled that Greece’s default is not a default. The committee determined that “no credit event has yet occurred” for holders of credit default protection on Greece.
You can see the basic problem: everyone else knows that if Greece defaults (officially), the value of other government bonds in Spain and Italy and Portugal will plummet too. A Greek default wouldn’t be important because of the size of the default (although French and German banks would stand to lose a fair bit). It would be important because it would begin the process of blowing up bank balance sheets all over Europe.
When you realize that the ISDA and the ECB and the EU are in league to save their financial skins, you realize that the Greek rescue plans is about preventing other countries from realizing that default is an option. In fact, it’s not even about preventing the realization. It’s about making it impossible for a country to default on its obligations…even if it means erasing the word “default” from the English language.
If the centralized European Welfare State model is to survive, banks must not take losses on their government bond holdings. Individual and private investors, on the other hand, will be forced to take losses through a “collective action clause.” This clause allows your securities to be revalued without your consent if a majority of other bondholders agree to it.
Now we’re coming to the real nuts and bolts of what’s at stake. The technocrats in Europe are at war with private investors. The members of the ISDA are in league with the technocrats to preserve their system. That part is easy to understand.
The technocrats are employed by government and get to spend your money. This system is good for them. It’s good for the members of the ISDA too. Loaning money to the government is good business. Collecting rent off the expansion of credit is easy money. They want the system to last as well.
Who is the system not good for? Everybody else who’s on the outside looking in. Investors who want their capital to be productive are out of luck. And taxpayers who question the value of austerity measures and debt reduction plans that don’t really reduce debt are also out of luck. No wonder they are angry.
We’ve come a long way, then. Greece isn’t about saving Greece. The only reason something so small and insignificant could matter so much is that it matters in a way no one is willing to say. It’s about the subversion of sovereignty and democratic processes by removing decisions from people and giving them to trans-national financial elites. It’s about preserving a global system that’s based on the accumulation of debt and growing government power because there are two groups of people who benefit tremendously from that system, even if most people don’t.
This is simply the latest example of corrupt government operatives colluding with the financial elite to steal money, liberty and big chunks of “the pursuit of happiness” from “we, the people.”
Dan Denning,for The Daily Reckoning
Dan Denning is the author of 2005's best-selling The Bull Hunter. A specialist in small-cap stocks, Dan draws on his network of global contacts from his base in Melbourne, Australia, and is a frequent contributor to The Daily Reckoning Australia.
Default has always been an option and if the Greeks had any brains they would realize it is their only option.
Why can’t they look to Iceland and realize the rational alternative? Iceland told the banks to get lost and now they are doing very well.
Iceland is presently rounding up several bankers and putting them behind bars, the best news I have read all week.
Denning can’t tell the difference between corrupt corporate power, and the government. In a Fascist system, the two do tend to merge.
A few powerful corporations want to stick someone else with their mistakes. Isn’t that what it all boils down to?
This article by Dan Denning is the first one that I’ve read (and I’ve read a zillon on this topic) that explains this rather complicated Euro mess in terms that I can understand. Many thanks, sir. Write more!
What a comic farce! Tha bankers get to rig the rules and stick it to the rest of the ignoramuses.
This is the reason I enjoy reading the daily reckoning. It is good to know that people such as yourself, are out there shedding some common sense on the issue.
After seeing what happened with Greek debt, anyone who buys the sovereign debt of Western welfare state must be missing a cerebral cortex.
And seeing how a credit default was voted not a credit default, why would anyone would waste money buying credit default swaps on Welfare State sovereign debt sovereign debt instruments?
THANKS for that Dan — I was wondering how individual bondholders would be forced to take a cut on their face value legally without default — “collective action clause.” Sounds nice and yes it certaintly cuts up? I was also wondering how the phony CDSwaps would pay up if ever hit by a big default — simple just don’t pay – change the language and well just don’t pay. … the day of the cannibals…. has arrived
A good read. For sure, the European banks have a lot of rot. Further, with sluggish growth and high government spending coupled with over leveraged consumers (in many places), the issue is larger and a very prolonged one.
The LTRO ans others are just short-term solutions to a bigger disease facing the economy. However, more money printing is very much on the cards until the entire system collapses.
Good article, but one crucial piece of information is missing: the hidious ESM treaty. This treaty will end the financial sovereignty of all euro-countries that sign it “to rescue Greece”: http://www.youtube.com/watch?v=QMgnzGhidhs
Whatever up or down. Whatever blather is to be topped up. Whatever gold or silver is going down trend. Bare fact, trillions denomination debts is not going to be settled with hard currency. Rather soft currency comes easily with the powerful printing industry. That’s the only way out, deflate away, paper annihilation, value destruction. What else? The distance between now and the grave is directly proportionate to the rate of feverish spending binge. Ha! ha!
Excellent job.tying together all the threads/concepts into one simple coherent read. This is an article I can send to friends who have no clue what is going on and bring them up to speed instantly.
IF Greece withdraws from the Euro:
Banks take a bath (as do US pension and investment funds) and a lot of little people get screwed
and a domino effect starts to take down Spain, portugal, Italy, Belgium, and France (In that order). This will destroy the EURO and the EU
And all the political parties in europe are vested into the EU and Euro (the major parties)
They are invested in the creation of a United States of Europe. So they are making political rather then economic choices
Why do I get a duplicate post message when my comment is not posted?
“If saving Greece is not about saving the euro, and if it’s not about reducing Greek debt, and if it’s not about making Greece a more competitive economy…then just what IS it about?”
man, you just don’t get it.
the currency is a debt pyramid scheme. the currency is debt. everyone relies on someone else to pay their debt plus interest or the entire system collapses. there’s nothing special about greece. greece is merely the last man on the totem pole, the bottom of the food chain, the end of the line, the one holding the bag, the musical chair participant without a chair, the biggest sucker. they cannot foist off their debt onto anyone else because there is no-one else left. so they default. that means their creditors default. that means those creditors’ creditors default. and on up the chain until EVERYONE defaults. including germany.
it’s like mountain climbers that are all tied together. greece has fallen. this pulls down the next man, who pulls down the next, and the next, and the next. until everyone goes over the cliff and the only ones left are the bankers who print the currency and who gaze in wide-eyed wonder at how gullible we are.
that’s how debt currency works. that is its function. that’s what it’s for.
“It’s about preserving a global system”
no. it’s not about preserving anything at all.
I think greece has her own grievances to table. When the whole wide world is on printing euphoria, euro zone still outdatedly adheres to the rigid central piping system. Central committe to decide speeed and volume of paper product. Little more flexible than the vintage gold standard. How can? When Peter can print, Tom can print, why does he need endorsement from the big brothers. Apropriately, liberty and equality be revised to embrace the explicit authority to edit and print. That would be truly sovereign yielding. Isn’t?
i just stashed another case of single malt scotch in the bunker and a couple more boxes of OO buckshot. i’ve loaded up my kindle with a ton of good books and waiting for the sky to get dark – you know how it gets when the chickens come home to roost.
Excellent article on the greatest bank robbery in US history.
Only it is the bankers in collusion with government that is doing the robbing!
Soon after WW2, division of crime had outshined division of labour quadrupledly. That qualifies the former prime economic mover of the century. Hooray !
From the Greek side of things, this is a very plausible explanation. To us, they are not trying to solve something, they are trying to consolidate something, and it is not about minimizing losses, it is about maximizing something else. Control is a possibility. Recovery or development are 100% out of the question. One also has the impression that the crisis, throughout Southern Europe is fostered, cultivated, encouraged. Never mind the euro…
The Germans were rattled when Austria was touched, and when they had a wee difficult time raising money last November. Then they allowed the ECB to roll the presses. But even that leads to eurosud, not to any “european” objective.
Only wondering what will happen when bankers go into bunkers -
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A major factor in all this, if not the major factor is demography. It isn’t just Greece; it is practically the whole of the developed world which for decades has been reducing its birth rate by contraception and abortion at a horrendous rate. A birth rate of 2.1 children per woman is required for a country just to maintain population at the same level. Every country in the developed world is below that figure. In other words they are getting older and their populations are declining. Young people are the entreprenuers and spenders; old people save their money by not spending. Governments have been hiding the consequences for decades by encouraging married women into the workforce and by priniting money. You can only do this for so long and now as production and consumption in the developed economies decline we are reaping the whirlwind. China and to a lesser degree India are what’s keeping us here in Australia going, but that wont last forever. China is currently playing catch up but its one child policy will see its growth soon slow considerably. The only country with a healthy birthrate in our region is India; but how much do they need us?
Japan’s demographic decline is probably irreversable and its population is headed for catastrophic decline in the coming decades. Those remaining will be older and far less consumer oriented.
This began in the sixties and even if we all had a collective brain snap and changed behaviour now, it would take decades for the benefits of that behaviour change to reverse what’s coming. Quite frankly I cant see that coming.
Critics of this view will shout overpopulation. It is nonsense. The world is not overpopulated. Every instance of problems from supposed over population can be traced to causes such as internal conflict, incompetent government, tribal ethnic or religious tensions making national collaboration impossible.
We are now reaping the whirlwind.
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