Doing The Macarena In Europe

From all the various news reports either Greece will play hard ball long enough to extract concessions from Germany and the rest of Europe or they will leave the EU completely or some variation thereof.  Right now the ECB is threatening to cut the Greek banks off come the end of this month if the Greek government doesn’t pay both the interest due and the matured bond amounts by the end of February.  Greece, on the other hand, is tired of having the troka dictate to Greece every budget item while extracting high interest rates on the government bonds.  The major problem is simply this, too much debt encouraged by having joined the EU.  Right now the ports are controlled by that group of overseers installed by the IMF, the ECB, and EMF (European Monetary Fund, a quasi-government institution that was never approved by the EU Parliament but pushed forward by the IMF, the ECB, and the executive group that heads the EU).  Effectively, the Greek government controls little of the country’s infrastructure and government agencies.  Obviously the Greek people in voting Syzira into power (it controls half of the Greek Parliament and thus must enter into power sharing with any group that will support it in the voting of legislation in parliament) are rather tired of the situation where they are ruled by outside moneyed interest.

The question is what should be done and why.  Once before a haircut on government bonds was engineers but strangely enough did not trigger a credit event and thus involve payments on the various CDOs and other financial insurance vehicles.  But this time it is different.  The new government wants some real hair cuts and not just a trim above the ears.  On the other hand the Greek government is not seeking exit from the EU.  I would believe the reason why is that they feel the EU is good for a few welfare payments, as we may call them.  On the other hand, Germany is playing their own brand of hardball, after all, they have a very large chunk of Greek government bonds.  France, on the other hand, simply cannot afford any default on the bonds held by their banks.  Understand that much of the European banking system is over lent, too many loans outstanding and too little deposits to weather any major bind default.  Spain is in even worse shape with their banks about 90% loaned out.  Here in the US we do not permit banks to commit more than some 25 to 40 percent of their funds in the form of loans and it really should be less than 25%.  It does not take much to see that a default by Greece would trigger a great deal of pain all the way around.

One way out of the confrontation has been suggested that the ECB buy more government bonds, including a lot of the Greek government bonds held by the banking system in Europe.  This is like the Fed buying more Mortgage Backed Securities, you know, the ones with all those loan defaults, and thus help our banks avoid the embarrassment of begging for bailouts to keep them solvent.  You see, the major problem in Europe is solvency.  The trouble is, no one really has any money, only more credit and more debt.  When you look at the various government bond debts alone, many EU countries are running a debt to GDP of close to or over 100 percent debt to Gross Domestic Product.  To put that into perspective, Japan is running a debt to GDP ratio or two hundred and forty percent.  That means that for every one yen taken in by the Japanese government it owes 2.40 yen.  While the Modern Monetary Theorists proclaim that all governments can run up the debt to what ever they feel like, it simply is not true.  There is no magic money tree in their back yards.  Government debt crowds out private savings and private productivity.  You can’t have your cake and eat it too.

Iceland chose over the objections of the European banks and governments to default on their own banks insolvent debts rather than saddle its people with taxes to pay off the bankers who wanted such debt messes.  True, they paid for the mess through higher interest and fees when re-establishing banking in their country and they did have a reduced GDP growth for several years, but their economy is still growing, if slightly during the general world slowdown and they are like the Irish who had had to cough up hard earned wages for those who still have jobs and pay the bankers for all the bad debt they were saddled with.  Ireland should quit both the EU and the ECB.  It never really belonged in that group since there was little commercial advantage that could be gained from the EU membership.  It would be better off as a trading partner of the UK.  And yes, the UK should cut all ties to the EU, they have never gotten any real benefit from its membership, either.  The fact is, the EU was the redheaded step child of Charles De Gaul as a method to place a check on both America and Germany when it was still only West Germany and supported by the US.  When the two germanies united as one country it was thought That their membership would drag the other EU countries down with demands for economic support.  But that recession/depression never happened and a united Germany became the strongest economy of all the EU countries.

Understand that as long as the EU and the ECB is only a loose conglomeration of countries who are allowed to rig the game for their own ends, there will always be those who will attempt to ride the backs of other countries.  France does this to a certain extent with its farm produce policies.  Germany does this with its manufacture interests.  And so it continues.  I think it may take upwards of two years before Greece finally exits the EU and I don’t see that exit as a graceful one.  But there are enough concessions that will come from other countries that will help Greece to at least attempt to stand alone or somewhere there abouts.  It should be a great deal of fun watching all the fireworks and heart attacks.

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