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Another week, another crisis
Sep. 18th, 2011 07:43 pmThis past week has been one where it's been hard to focus on a particular event in the euro crisis. Lots has been going on, but none of it seems part of an overall pattern. One article that caught my eye was on Bloomberg last Monday, when an ex-Argentine Finance Minister said that Greexe should default, and default big. By which he meant, a half-hearted default was worse than no default at all.
Later in the week there was a joint press conference with the Greek PM Papandreou, plus Merkel and Sarkozy. I have a small conspiracy theory here, that a crisis meeting among the three was "hidden in plain sight". If Papandreou flew quietly to a meeting with Sarkozy and Merkel and someone noticed, the phrase "crisis talks, default imminent?" would have been all over the papers. So, hold your crisis talks under the guise of a public joint meeting.
And what happened at the "secret" talks within talks? I reckon that Merkel and Sarkozy begged Papandreaou not to default. It looks plain that the Greek government is coming to think the unthinkable, and this view was reinforced when Papandreaou cancelled a trip abroad this weekend. The question relating to default in Greek government circles is not so much if, not so much when, but how. What are the mechanisms? How could they do it? Are the printing presses already whirring away somewhere in deep secret, ready to flood the Greek banks with the New Drachma within 48 hours over next weekend or the weekend after that? Because of course, for a default to work, something like that needs to be done over a single weekend to stop Greek banks becoming insolvent overnight. Friday, euro. Monday morning, New Drachma.
Greece will default, but when it does default, it will be a surprise. That's the only way it can work, and those of us who remember fixed exchange rates know that you could never announce a devaluation in advance. The big difference this time round is that you basically need a new currency available at the same time as you default big. In other words, Greece has to default and leave the euro simultaneously. Anything else is to "default small".
The farce here is, as we've heard before, that Greece is only about 3% of the eurozone. The euro can cope, fiscally. It's the politics that are getting in the way. And the fear of 'contagion'. It was this point that Tim Geithner -- not a man of whom I am a big fan, as you know -- was trying to drum into some thick Euro-poltical heads earlier this week. If you could just get your act together, you can cope. But the fact that you can't get your act together is making it bad for everyone.
To this point the Austrian finance minister answered in a standard German way, so to speak. She said that Europe didn't need economic lectures from a country whose finances were in a worse mess than Europe. Which was somewhat to miss the point. Because the point is that the US hasn't been frozen into inactivity by bickering politicians. It looked over the precipice a few weeks ago, and Obama backed down. Europe's leaders are facing two choices -- the end of the euro or far greater fiscal integration, and it can't agree on doing either, so it's taking the option that is worse than either -- to do nothing. It's a bit like when the right decision is either to raise or fold, and its marginal between the two, so you end up calling, which is far worse than either.
But Geithner just doesn't understand the political subtleties of the EU. he thinks that it's a question of leadership. In fact it's a question of "the art of the possible". The EU can't take action as decisive as the US because the political structure is so very different. Geithner, like many of us, understands what needs to be done. But he misses the point (and I suspect Merkel does not) that what needs to be done just can't be done. Where she goes wrong is to take the standard political line of "So let's pretend that something else needs to be done, something that we can do".
The one positive move for the fans of non-default this week was the news that five major central banks stated that they would offer short-term loans to commercial banks to keep liquidity going. Going back three years, this is the old argument. Just because there is a liquidity crisis does not mean that there isn't a solvency crisis as well. Indeed, one could argue that, if Greece was about to default, this action by the five central banks was vital to keep interbank lending going when the crisis comes to a head. In other words, the central bank action is more likely to be laying the ground for Greek default than trying to prevent it.
Given the small size of Greece, and notwithstanding the imagination of Sarkozy and Merkel that Greece's default would bring down the French banking system, it seems to me that globally the impact should actually be smaller than the collapse of Lehman Bros in 2008. With this added liquidity, courtesy of your friendly neighbourhood central bank, and given the fact that there are some known "usual suspects" whose solvency might be in doubt (Dexia, for one), I really don't see the global interbank lending system coming to a halt when Greece says "that's it boys; the party's over". Maybe one or two French banks will fail; but, hey, Fortis went under, RBS would have gone under. And in both cases a government bailout was enough.
In other words, a Greek default would not be the Armageddon that the politicians seem to imagine. If the banknotes are being printed at the moment, and if the nuts and bolts of a process where previously there was no process in place (following the logic of, "if we don't build a fire exit, that will make it less likely that there will be a fire") are being put together, then the Greek default, maybe next weekend, maybe the weekend after, maybe whenever, but not too long now, will not be the end of the euro as we know it.
Of course, none of this eliminates the deeper structural problems of the euro -- the problems of Spain and Portugal and Italy and Ireland. But it shoudl be possible to get Greece out without causing an immediate collapse of everything else. Those problems might reappear a few months down the line as a bigger crisis. But they won't be a result of "contagion" or a "domino effect". They would be problems in their own right. By that time Greece will have halved its real debts and might well be on an Argentine-style road to recovery. Alternatively, it will have collapsed into anarchy.
The non-default plan is that Greece tries to carry on. That only works if somehow eurobonds are issued (although politics mean that they won't be called that). That is definitely the preferred Sarkozy-Merkel solution. The problem is, it looks increasingly as if the private sector doesn't want to play any more. They've seen that the number is up for Greece, and a fudge answer won't cut it. Either declare full eurobonds (something which appears politically impossible in Germany, Finland and, amazingly, Slovakia) or get Greece out.
____________
Later in the week there was a joint press conference with the Greek PM Papandreou, plus Merkel and Sarkozy. I have a small conspiracy theory here, that a crisis meeting among the three was "hidden in plain sight". If Papandreou flew quietly to a meeting with Sarkozy and Merkel and someone noticed, the phrase "crisis talks, default imminent?" would have been all over the papers. So, hold your crisis talks under the guise of a public joint meeting.
And what happened at the "secret" talks within talks? I reckon that Merkel and Sarkozy begged Papandreaou not to default. It looks plain that the Greek government is coming to think the unthinkable, and this view was reinforced when Papandreaou cancelled a trip abroad this weekend. The question relating to default in Greek government circles is not so much if, not so much when, but how. What are the mechanisms? How could they do it? Are the printing presses already whirring away somewhere in deep secret, ready to flood the Greek banks with the New Drachma within 48 hours over next weekend or the weekend after that? Because of course, for a default to work, something like that needs to be done over a single weekend to stop Greek banks becoming insolvent overnight. Friday, euro. Monday morning, New Drachma.
Greece will default, but when it does default, it will be a surprise. That's the only way it can work, and those of us who remember fixed exchange rates know that you could never announce a devaluation in advance. The big difference this time round is that you basically need a new currency available at the same time as you default big. In other words, Greece has to default and leave the euro simultaneously. Anything else is to "default small".
The farce here is, as we've heard before, that Greece is only about 3% of the eurozone. The euro can cope, fiscally. It's the politics that are getting in the way. And the fear of 'contagion'. It was this point that Tim Geithner -- not a man of whom I am a big fan, as you know -- was trying to drum into some thick Euro-poltical heads earlier this week. If you could just get your act together, you can cope. But the fact that you can't get your act together is making it bad for everyone.
To this point the Austrian finance minister answered in a standard German way, so to speak. She said that Europe didn't need economic lectures from a country whose finances were in a worse mess than Europe. Which was somewhat to miss the point. Because the point is that the US hasn't been frozen into inactivity by bickering politicians. It looked over the precipice a few weeks ago, and Obama backed down. Europe's leaders are facing two choices -- the end of the euro or far greater fiscal integration, and it can't agree on doing either, so it's taking the option that is worse than either -- to do nothing. It's a bit like when the right decision is either to raise or fold, and its marginal between the two, so you end up calling, which is far worse than either.
But Geithner just doesn't understand the political subtleties of the EU. he thinks that it's a question of leadership. In fact it's a question of "the art of the possible". The EU can't take action as decisive as the US because the political structure is so very different. Geithner, like many of us, understands what needs to be done. But he misses the point (and I suspect Merkel does not) that what needs to be done just can't be done. Where she goes wrong is to take the standard political line of "So let's pretend that something else needs to be done, something that we can do".
The one positive move for the fans of non-default this week was the news that five major central banks stated that they would offer short-term loans to commercial banks to keep liquidity going. Going back three years, this is the old argument. Just because there is a liquidity crisis does not mean that there isn't a solvency crisis as well. Indeed, one could argue that, if Greece was about to default, this action by the five central banks was vital to keep interbank lending going when the crisis comes to a head. In other words, the central bank action is more likely to be laying the ground for Greek default than trying to prevent it.
Given the small size of Greece, and notwithstanding the imagination of Sarkozy and Merkel that Greece's default would bring down the French banking system, it seems to me that globally the impact should actually be smaller than the collapse of Lehman Bros in 2008. With this added liquidity, courtesy of your friendly neighbourhood central bank, and given the fact that there are some known "usual suspects" whose solvency might be in doubt (Dexia, for one), I really don't see the global interbank lending system coming to a halt when Greece says "that's it boys; the party's over". Maybe one or two French banks will fail; but, hey, Fortis went under, RBS would have gone under. And in both cases a government bailout was enough.
In other words, a Greek default would not be the Armageddon that the politicians seem to imagine. If the banknotes are being printed at the moment, and if the nuts and bolts of a process where previously there was no process in place (following the logic of, "if we don't build a fire exit, that will make it less likely that there will be a fire") are being put together, then the Greek default, maybe next weekend, maybe the weekend after, maybe whenever, but not too long now, will not be the end of the euro as we know it.
Of course, none of this eliminates the deeper structural problems of the euro -- the problems of Spain and Portugal and Italy and Ireland. But it shoudl be possible to get Greece out without causing an immediate collapse of everything else. Those problems might reappear a few months down the line as a bigger crisis. But they won't be a result of "contagion" or a "domino effect". They would be problems in their own right. By that time Greece will have halved its real debts and might well be on an Argentine-style road to recovery. Alternatively, it will have collapsed into anarchy.
The non-default plan is that Greece tries to carry on. That only works if somehow eurobonds are issued (although politics mean that they won't be called that). That is definitely the preferred Sarkozy-Merkel solution. The problem is, it looks increasingly as if the private sector doesn't want to play any more. They've seen that the number is up for Greece, and a fudge answer won't cut it. Either declare full eurobonds (something which appears politically impossible in Germany, Finland and, amazingly, Slovakia) or get Greece out.
____________
