The Greek Crisis
Jun. 27th, 2015 07:32 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peterbirksIs the euro crisis finally coming to a head?
It is beginning to look as if this is the case.
And, although the final cause might be one of personalities rather than policies, the underlying reasons are fundamental. In simple terms, there is only a finite period that you can continue pretending that fiction is fact, pretending, as Angela Merkel said "where there's a will, there's a way".
Because the sad thing is, Greece has really been insolvent for quite a long time. Unfortunately the European Union functions in such a way that many of its institutions are forced to act as if falsity is truth. One has to feel sorry for the European Central Bank, which has been lending short-stop funds to Greek banks (via the Greek Central Bank) under the fiction that the banks are suffering liquidity problems. The ECB is specifically barred from lending to insolvent institutions, so (and here we see how the road to hell is paved with good intentions) it started lending "a little bit" to the Greek Central Bank under the pretence that it was a bit of a payday loan to cover a short-term liquidity shortage.
Unfortunately, once this had started, there was no going back until it was way too late. It was like giving a payday loan to someone without the cash even to cover the interest rate payments.
This means that when the "emergency liquidity funds" are cut off, the chaos that will ensue will be far greater than if they had never been provided in the first place. The only way to put off the chaos is to lend even more. And, since the EU is addicted to kicking cans down the road, that is what the ECB has been doing – to the turn of more than 100 billion euros, a sum that, when those loans are not repaid, will hit the eurozone taxpayer.
As I have said before, the people who should have taken the hit on the money lent to Greece since 2000 were the German commercial banks, the institutions that lent the money in the first place. Lending at interest is a commercial decision. If you lend to borrowers who have no obvious means of paying the money back, you are stupid and you deserve to suffer for it. The German commercial banks were stupid, but they have made sure that it is the euro taxpayer who will suffer for it.
So now we have reached an impasse where the eurozone finance ministers are saying that they do not want a Greek exit, but where the only way they can avoid it is for the Greek government to capitulate. Rather than rescue funds being there "to rescue", it has become a bargaining game.
The Greeks should be enacting economic reforms in order to facilitate a recovery (that is what Ireland did). Instead it has reached a stage where the Greeks are using reforms as a bargaining counter. "We will only institute this reform if you lend us more money", the Greek negotiators say. Even if the Greeks know that a reform is a good thing in the long term, it is now in their interest not to implement it unless such a move obtains more cash from the IMF, the ECB, or any other euro lender that happens to be in town. That, clearly, is an insane situation.
June 30th always looked like being the fateful day, ever since earlier this month when a repayment to the IMF was put off for just a few weeks – the first time this had happened since the 1990s. Complete carnage often develops over weekends (it was that fateful weekend in October 2008 when the UK banking system nearly collapsed and RBS quite possibly would not have had functioning ATMs on the Monday morning) and Greece will not be a good place to be in on Monday morning, I suspect.
Will a last-minute "rescue" (i.e., another can-kick down the road) be found? Perhaps, although it's getting hard to see where it can come from. The ECB is between a rock and a hard place. It doesn't want to be the agency that makes the final decision to push Greece into a full-blown financial collapse, but it is getting close to the stage whereby it cannot throw any good money after bad.
Jeroen Dijsselbloem, an awful choice for the head of the Eurogroup finance ministers (as I said at the time), has said that finance ministers would be meeting over the weekend to "prepare what is needed to ensure the stability of the eurozone at the highest level", which is clear code for "we are prepared to see Greece go". But, politician that he is, he also emphasized that it would be up to the ECB to decide whether to supply "emergency liquidity funding" (yes, he actually called it that) to the Greek banking system. As Athens burns, European politicians are still seeking to cover their arses and not be the group that finally pulls the trigger.
How will it pan out in the next few weeks? My hunch is that Greece will run out of euros but will not, in the short term, leave the euro. This is a final can-kick and it depends on the co-operation of ordinary Greek people (not something that is guaranteed) to accept Greek bank-issued IOUs denominated in euros. There is a significant risk that this will cause a "parallel euro" to develop, with these IOUs being exchanged (illegally, obviously) at a discount for "real" euros. The fiction will be that they are of equal value, while the fact will be that Greece has its own currency. Foreign exchange players (such as travel companies) won't accept these IOUs, but will insist on "hard" currency. But the "soft" currency might work as an internal monetary system, not least because the alternative is even worse.
There is a history of such "soft" and "hard" currencies working in parallel, sometimes successfully and for many years (the communist states of eastern Europe pre 1989, for example), but the capital controls that come with such a system will not be easy to impose in the exceedingly permeable Greek borders.
The effect of this will ultimately be the same as a Greek exit from the euro, but, as has been the case for the past six years, it will be a death by a thousand cuts, rather than an overnight move to the new drachma.
That's one possible scenario. There are others. Somehow a deal might be cobbled together to kick the can down the road again, but I think that most of the euro politicians realize that the game is up. They believed that Greece would capitulate because Greece desperately wants to stay in the euro. Unfortunately Greece's Syriza leadership doesn't have the strength to impose the cuts that the Eurogroup wants. it was, after all, elected to reverse earlier cuts. Both sides believed that the other side would back down. But Greece is no longer as vital to the eurozone as Syriza believed it was (or, rather, the principles behind the formation of the euro are no longer as sacrosanct as Syriza believed) while the Greek political leaders are not as powerful with their own people as the Eurogroup imagined.
There's a collection of complete economic incompetents in charge in Europe, from the 17 finance ministers of the eurozone, through the 17 prime ministers of the eurozone, through the politically-controlled IMF. Draghi at the ECB (who knows what he is talking about) has been caught in the crossfire here and might end up being the fall guy for the politicians, the poor man who has to explain why the ECB's decision to abide by its own rules was the cause of the collapse of the Greek banking system. In fact, Greece's banks have been insolvent since before the days of the Cyprus crisis in 2012. It was just that Greece at the time was too big to be allowed to go the same way.
There's one final possibility – Russian financial aid. A few years ago this would have been a distinct possibility, but Russia has problems of its own. Much though it would like Greece as an ally (Greece, you might recall, was where the UK and the US "drew the line" on communist takeovers) Putin's foreign policy strategy is more focused on places with significant Russian ethnic minorities (particularly the Baltic states). And Putin would know that any "bail-out" of Greece would be throwing money down the drain.
And would the Greek people want to see their nation depicted as a Russian whore? Is that a price they would be willing to pay? Perhaps it is.
It is beginning to look as if this is the case.
And, although the final cause might be one of personalities rather than policies, the underlying reasons are fundamental. In simple terms, there is only a finite period that you can continue pretending that fiction is fact, pretending, as Angela Merkel said "where there's a will, there's a way".
Because the sad thing is, Greece has really been insolvent for quite a long time. Unfortunately the European Union functions in such a way that many of its institutions are forced to act as if falsity is truth. One has to feel sorry for the European Central Bank, which has been lending short-stop funds to Greek banks (via the Greek Central Bank) under the fiction that the banks are suffering liquidity problems. The ECB is specifically barred from lending to insolvent institutions, so (and here we see how the road to hell is paved with good intentions) it started lending "a little bit" to the Greek Central Bank under the pretence that it was a bit of a payday loan to cover a short-term liquidity shortage.
Unfortunately, once this had started, there was no going back until it was way too late. It was like giving a payday loan to someone without the cash even to cover the interest rate payments.
This means that when the "emergency liquidity funds" are cut off, the chaos that will ensue will be far greater than if they had never been provided in the first place. The only way to put off the chaos is to lend even more. And, since the EU is addicted to kicking cans down the road, that is what the ECB has been doing – to the turn of more than 100 billion euros, a sum that, when those loans are not repaid, will hit the eurozone taxpayer.
As I have said before, the people who should have taken the hit on the money lent to Greece since 2000 were the German commercial banks, the institutions that lent the money in the first place. Lending at interest is a commercial decision. If you lend to borrowers who have no obvious means of paying the money back, you are stupid and you deserve to suffer for it. The German commercial banks were stupid, but they have made sure that it is the euro taxpayer who will suffer for it.
So now we have reached an impasse where the eurozone finance ministers are saying that they do not want a Greek exit, but where the only way they can avoid it is for the Greek government to capitulate. Rather than rescue funds being there "to rescue", it has become a bargaining game.
The Greeks should be enacting economic reforms in order to facilitate a recovery (that is what Ireland did). Instead it has reached a stage where the Greeks are using reforms as a bargaining counter. "We will only institute this reform if you lend us more money", the Greek negotiators say. Even if the Greeks know that a reform is a good thing in the long term, it is now in their interest not to implement it unless such a move obtains more cash from the IMF, the ECB, or any other euro lender that happens to be in town. That, clearly, is an insane situation.
June 30th always looked like being the fateful day, ever since earlier this month when a repayment to the IMF was put off for just a few weeks – the first time this had happened since the 1990s. Complete carnage often develops over weekends (it was that fateful weekend in October 2008 when the UK banking system nearly collapsed and RBS quite possibly would not have had functioning ATMs on the Monday morning) and Greece will not be a good place to be in on Monday morning, I suspect.
Will a last-minute "rescue" (i.e., another can-kick down the road) be found? Perhaps, although it's getting hard to see where it can come from. The ECB is between a rock and a hard place. It doesn't want to be the agency that makes the final decision to push Greece into a full-blown financial collapse, but it is getting close to the stage whereby it cannot throw any good money after bad.
Jeroen Dijsselbloem, an awful choice for the head of the Eurogroup finance ministers (as I said at the time), has said that finance ministers would be meeting over the weekend to "prepare what is needed to ensure the stability of the eurozone at the highest level", which is clear code for "we are prepared to see Greece go". But, politician that he is, he also emphasized that it would be up to the ECB to decide whether to supply "emergency liquidity funding" (yes, he actually called it that) to the Greek banking system. As Athens burns, European politicians are still seeking to cover their arses and not be the group that finally pulls the trigger.
How will it pan out in the next few weeks? My hunch is that Greece will run out of euros but will not, in the short term, leave the euro. This is a final can-kick and it depends on the co-operation of ordinary Greek people (not something that is guaranteed) to accept Greek bank-issued IOUs denominated in euros. There is a significant risk that this will cause a "parallel euro" to develop, with these IOUs being exchanged (illegally, obviously) at a discount for "real" euros. The fiction will be that they are of equal value, while the fact will be that Greece has its own currency. Foreign exchange players (such as travel companies) won't accept these IOUs, but will insist on "hard" currency. But the "soft" currency might work as an internal monetary system, not least because the alternative is even worse.
There is a history of such "soft" and "hard" currencies working in parallel, sometimes successfully and for many years (the communist states of eastern Europe pre 1989, for example), but the capital controls that come with such a system will not be easy to impose in the exceedingly permeable Greek borders.
The effect of this will ultimately be the same as a Greek exit from the euro, but, as has been the case for the past six years, it will be a death by a thousand cuts, rather than an overnight move to the new drachma.
That's one possible scenario. There are others. Somehow a deal might be cobbled together to kick the can down the road again, but I think that most of the euro politicians realize that the game is up. They believed that Greece would capitulate because Greece desperately wants to stay in the euro. Unfortunately Greece's Syriza leadership doesn't have the strength to impose the cuts that the Eurogroup wants. it was, after all, elected to reverse earlier cuts. Both sides believed that the other side would back down. But Greece is no longer as vital to the eurozone as Syriza believed it was (or, rather, the principles behind the formation of the euro are no longer as sacrosanct as Syriza believed) while the Greek political leaders are not as powerful with their own people as the Eurogroup imagined.
There's a collection of complete economic incompetents in charge in Europe, from the 17 finance ministers of the eurozone, through the 17 prime ministers of the eurozone, through the politically-controlled IMF. Draghi at the ECB (who knows what he is talking about) has been caught in the crossfire here and might end up being the fall guy for the politicians, the poor man who has to explain why the ECB's decision to abide by its own rules was the cause of the collapse of the Greek banking system. In fact, Greece's banks have been insolvent since before the days of the Cyprus crisis in 2012. It was just that Greece at the time was too big to be allowed to go the same way.
There's one final possibility – Russian financial aid. A few years ago this would have been a distinct possibility, but Russia has problems of its own. Much though it would like Greece as an ally (Greece, you might recall, was where the UK and the US "drew the line" on communist takeovers) Putin's foreign policy strategy is more focused on places with significant Russian ethnic minorities (particularly the Baltic states). And Putin would know that any "bail-out" of Greece would be throwing money down the drain.
And would the Greek people want to see their nation depicted as a Russian whore? Is that a price they would be willing to pay? Perhaps it is.
