May 232012
 
 May 23, 2012  Posted by at 3:10 pm Finance
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afterthestorm

Washington, D.C. “Storm damage. Between 1913 and 1918.” Somewhere under all this rubble, I suspect, is a narrative waiting to be unearthed by a Shorpy history detective. Harris & Ewing Collection glass negative.

The dialogue between academics, officials, analysts and pundits in Europe has very obviously turned towards ways of spinning a Greek exit as a “good thing” for the system, or, at least, not such a “bad thing”. Last week, we saw analysts at Bank of America and HSBC telling us that a Greek exit would actually cause a large market rally for a bunch of dubious reasons (i.e. the CBs will print to infinity and cause everything to soar, while also making a stark example out of Greece). That’s a common argument, and there is at least some historical precedent in support. Like I said before, though, we can no longer use recent history alone as a reliable guide to the near future.

Deterrence is Dead

 

When the Greek people finally exit the EZ, and if/when they are made to SUFFER at the Cross for their “sins”, the Spaniards, Italians, Portuguese and Irish (and eventually, the French, British, Germans, Americans) will look on and realize that the Cross is not such a bad fate when compared to the tons of flesh that will be demanded by the globalist elites in perpetuity.

 

In the short-term, it is quite possible that the bankster propaganda-and-punishment cycle succeeds in quelling further internal dissent within the Eurozone, but any such success will amount to nothing more than castles made of sand on the shores of a ravaging sea. As the tides of popular resistance continue to turn and grow with force, these castles will eventually crumble.

But now we have entered the stage of the crisis in which people are rushing to claim that the deeply-rooted structural issues facing countries in the EMU can be fundamentally resolved, despite or because of a Greek exit! These claims come from both sides of the divide, too. First, we have an article on BBC by Ann Pettifor, who falls into the “liberal progressive” camp – one that bears a certain fondness for Keynes. To be fair, people like Pettifor have been making the case for a Greek default/exit for quite some time now.

Nevertheless, I’m sure she is fully aware of the fact that, if there was ever a time to make the case for an exit, it is now.

Greece: The upside of default

 

It now seems inevitable that Greece will default on its debts, with all sorts of disastrous scenarios being discussed, particularly if it has to leave the euro.

 

But I know from my experience of working with Jubilee 2000 to “drop the debt” of poor countries in Africa and Latin America that there is life and economic recovery after sovereign debt crises.

 

Countries that defaulted in the 1990s suffered recessions that lasted briefly. Then came the rebound, as Arvind Subramanian of the Petersen Institute shows. Argentina grew by 8% after its default, Russia by more than 7%, and Indonesia by 5% after its crisis.

 

Of course Greece would initially suffer a severe shock and economic contraction. Its elites would intensify the export of their wealth to, for example, the City of London, causing inflation.

 

Greece would have to issue an alternative, parallel currency – at a large discount to the euro – to finance domestic economic activity.

 

But Greek exporters would benefit from a mega-devaluation of this new currency, and increased competitiveness vis-a-vis European partners, especially Germany.

 

There are other upsides for Greece too. To understand why, we need to recognise that the eurozone monetary framework is like a “golden corset”. By defaulting on its debts, Greece can escape the “corset” that resembles the “barbaric relic” that Keynes deemed the Gold Standard of the 1930s.

I think you get the picture – it is pretty clear where Pettifor’s analysis is headed from there (if not, follow the link). There is a good deal of truth to what she says, but it is also contains an obvious spin of optimism about what Greece can accomplish on its own. Next, we have an article in Bloomberg explaining the position of the Bundesbank (Germany’s CB), which falls into the conservative, “fiscally disciplined” camp that has a fondness for Austrian economics. That is obviously the diametric opposite of what Pettifor believes, but they are both attempting to spin the Greek exit as a “manageable” affair.

Bundesbank Suggests Greek Exit From Euro Would Be Manageable

 

Germany’s Bundesbank said the consequences of Greece reneging on the terms of its bailout program would be manageable for the euro area.

 

“The current situation in Greece is extremely worrying,” the Frankfurt-based central bank said in its monthly report today. “Greece is threatening not to implement the reform and consolidation measures it agreed to in return for sizeable rescue programs.”

 

Speculation about a Greek exit from the euro region has increased before new elections next month that could give power to parties opposed to austerity measures.

 

Greece is “jeopardizing the continuation of aid payments,” the Bundesbank said. “Greece would have to bear the consequences of such a decision. The challenges for the euro area and Germany would be significant but manageable with the help of cautious crisis management.”

 

The ECB, in an effort to protect its balance sheet, last week excluded some Greek banks from regular refinancing operations, moving them to an emergency-liquidity program run by the Greek central bank until they are sufficiently recapitalized.

 

“In supplying extensive liquidity to Greece, the Eurosystem believed in the implementation of the programs, and has thus taken on considerable risks,” the Bundesbank said. “In light of the current situation, it shouldn’t increase these significantly any more.”

Please understand that I would be the last person to suggest that Greece defaulting on its external debts and implementing its own national currency will mark the “end of the world”, because it most certainly won’t, and those are really their best options now (they would have been much better options a few years ago – or better yet, before Greece entered the euro). However, a Greek exit is not going to be anything close to a walk in the park, and will be a lot more painful than the analysts above would have you believe. It will be very painful for both the Greek people, and the Eurozone in general.

What Pettifor and the Bundesbank fail to mention is that investors are like herd animals, and these animals have no time for Keynesian or Austrian ideology. The possibility of a Greek exit is weighing heavily on the markets as I write this today, as well as for the past few weeks, but have we really seen the full extent of panic that can result when it actually happens? That sort of panic is not something the Eurozone authorities can manage, no matter how badly they want us to believe that they can. Similarly, it will not be a path to favorable inflation, exporting glory and sustainable economic growth for Greece, as Pettifor argues.

So the liberal idelogues want to spin the crisis and prove to us why they were always so right, and the conservative policymakers want to spin the crisis and explain to us why it doesn’t really hurt to be so wrong. They all want to pretend that the world is governed by a much simpler equation than it really is. What should be abundantly clear by now is that we are sailing in uncharted territory here, and the seas are getting angry. Everyone has an agenda or an ideology to push, and fanciful ideas about what the world will look like a few years from now, but no one really has a clue what will happen tomorrow or the day after.

Home Forums All Hail the Greek Exit

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May 23, 2012 at 3:10 pm #8522

ashvin

Washington, D.C. “Storm damage. Between 1913 and 1918.” Somewhere under all this rubble, I suspect, is a narrative waiting to be unearthed by a Shorpy
[See the full post at: All Hail the Greek Exit]

May 23, 2012 at 10:11 pm #3485

Barbet

John Ward of The Slog doesn’t think the Greeks will opt to leave the union.

May 23, 2012 at 10:59 pm #3486

YesMaybe

The sea was angry that day, my friends–like an old man trying to return soup at a deli.

Setting aside the question of Greece exiting the euro, I’m curious what people’s view here is about likely outcomes of the greek election. If it turns out in line with recent polling, it would seem neither a pro-memorandum nor an anti-memorandum coalition will be possible. And then what, another election? Maybe PASOK taking a U-turn and joining SYRIZA?

May 23, 2012 at 11:44 pm #3487

Alexander Ac

Hello Ash, here is what happens accourding to Financial Times (h/t ZeroHedge):

http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2012/05-2/FT%20breakdown.jpg

May 23, 2012 at 11:53 pm #3488

ashvin

YesMaybe post=3104 wrote: The sea was angry that day, my friends–like an old man trying to return soup at a deli.

The great beast appeared before me… I tell you he was ten stories high if he was a foot! He let out a great bellow, I said “easy, big fella!” :lol:

Setting aside the question of Greece exiting the euro, I’m curious what people’s view here is about likely outcomes of the greek election. If it turns out in line with recent polling, it would seem neither a pro-memorandum nor an anti-memorandum coalition will be possible. And then what, another election? Maybe PASOK taking a U-turn and joining SYRIZA?

I’m pretty confident that they won’t make it to a THIRD election. If no pro-euro coalition is formed, that’s basically the same as forming an anti-euro coalition. They need Greece to reaffirm its “commitment” to the bailout/austerity ponzi, and soon.

(according to me, anti-memorandum is anti-euro, regardless of what the politicians say)

May 24, 2012 at 4:20 am #3493

einhverfr

First, I think a lot of people are trying to figure out how to manage a Greek exit. Greece can possibly manage their exit in a way that minimizes the ramifications for them to some extent, but there are a lot of problems they can’t address.

The big one is that Greece leaving the Eurozone, particularly if they show within a year or two, that they can begin to recover, will put tremendous pressure on other nations to follow suit.

I actually agree that in the abstract, a Greek default would be a good thing for them, just as bankruptcy can be a good thing for those who are too deep in debt. The problem though is that this is would send deep shockwaves through the rest of Europe and this has tremendous implications for Greece as well as everyone else.

Also the BBC piece is interesting because if you read it slowly and carefully, it is a *lot* more doom and gloom than I think even the author was aware. She basically paints a picture of international currency and debt markets already essentially near collapse and a world of financial institutions bordering on insolvency.

May 24, 2012 at 4:38 am #3495

ashvin

Alexander Ac post=3105 wrote: Hello Ash, here is what happens accourding to Financial Times (h/t ZeroHedge):

http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2012/05-2/FT%20breakdown.jpg

Saw that and liked it. Doesn’t try to quantify anything based on isolated history, like Pettifor, and doesn’t resort to meaningless phrases such as “crisis management”, like the Bundesbank.

Of course, the “Exit euro” and “EURO BREAK UP” bubbles are colored in a shade of gray that seems to represent a great void for humanity. Not such horrendous outcomes, IMO.

May 24, 2012 at 6:16 am #3497

jal

Well! well! well!

Everyone is starting to see the light.

… mutually assured destruction…

The Greeks have a bigger gun that the EU

All of those professional financial advisors did was to line their own pockets.

Wake up!

http://www.zerohedge.com/news/german-press-greek-exit-done-deal

German Press: “The Greek Exit Is A Done Deal”

The EU has finally realized that the Greeks have not met any agreements and will not continue not to meet them.
Most debts are now in the public sector – ie the ECB and the IMF. In the case of a state bankruptcy of Greece on the Target 2 system, the German Bundesbank would be taken immediately. Altogether, it is so appreciated, are the Greeks with 200 billion euros at the ECB and the IMF in debt.

May 24, 2012 at 1:05 pm #3501

Reverse Engineer

Subtitled: Greece, the Gift that Keeps on Giving for the Doomer

Grexit: RE Prays to the Porcelain God

Warning for the easily offended: Included in the post are some graphic pics I won’t repost here on TAE to offend the faint of heart.

Excerpt

RE wrote: …For their part, the Krauts blame the whole mess on the Greeks as Profligate Spenders who did not live within their means, but the fact is the Krauts ENABLED the Greeks to do this for their own self-aggrandizement. At ANY time in the last 40 years the Kraut Banksters could have looked at the Greek Balance Sheet and said “Hey, they can’t AFFORD this Loan”, but they never did that. If they did, then they would have lost the Konsumer Base of Greeks buying BMWs…

RE

May 24, 2012 at 8:28 pm #3503

davefairtex

ash – “The possibility of a Greek exit is weighing heavily on the markets as I write this today, as well as for the past few weeks, but have we really seen the full extent of panic that can result when it actually happens?”

First, as best I can tell, the Greeks really don’t want to exit the EU. The Greeks I know all say this, and Greek opinion polls seem to back this up. Perhaps the previous years under the mis-managed Drachma have convinced them their savings are better protected by Germans than by their own corrupt leadership.

Whether they will be allowed to stay in after defaulting on the ECB-owned debt – well that’s another matter entirely. But they don’t seem to WANT to leave.

As for news weighing on the market, I’d agree since May 1 the market (equity, forex, PM) has not been so happy about the situation. Everything was thrown under the bus and US dollar and US long bonds were bought.

But for the past week, it would seem that things have backed off a bit. 10 year rates are off their highs in Italy and Spain, SPX is rallying, PM may have found an interim bottom – and this support is all in the face of some pretty unpleasant headlines coming out of Spain, and a disappointing non-solution coming from the recent EU meeting.

So I guess my point is, when the market rallies on bad news (something seen sometimes at market turning points) I wouldn’t agree that seems like news weighing heavily on the markets.

But I will agree – the full impact of a default is most likely not “priced in.” That can has been kicked so often, traders are most likely expecting it to happen yet again.

Funny thing is, it might actually happen yet again.

May 25, 2012 at 7:14 am #3527

AndrewP

What about the possibility of a slow exit? The Greeks can reintroduce the Drachma and allow it to float against the Euro. If Greece requires its citizens to pay their taxes in Drachma, the Drachma will have some value. Greece can pay its State workers in Drachma and guarantee only its external debts in Drachma. Eventually, they exit completely, but they don’t have to do that immediately unless the ECB pulls the plug.

May 26, 2012 at 3:00 am #3558

Dim

According to the treaties, there is no way for a country to exit the eurozone. It can only leave the EU as a whole.

Even if a way is created, then Greece has a WMD to put in negotiations. Leaving the EU as a whole.

The implications under a geopolitical scope would be huge for Europe. There would be no border continuity to SouthEast Mediterranean and the new discovered Gas Fields which are vital for Europes energy independence. Who always have the Russians, that would give a lot for the passage to the Med too.

I would be very interested in your views on GrExit under the geopolitical scope.

May 26, 2012 at 9:24 pm #3565

AndrewP

Hmmm. The Germans have passed a law that specifies how Germany could leave the Eurozone and stay in the EU. If Germany left, would France, Spain, etc… force Germany out of the EU as well? Things could get interesting.

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