The EU: What’s My Line?

I have it from reliable sources that the comedy show that was so popular in the United States in the late 80’s and 90’s has been revived in Europe.  The format is the same, contestants or comedians, as we may like to call them, are given a classic situation such as possible Greek government bond default and tole to improvise their lines.  Of course the points mean nothing and there is no money to no one’s surprise, except what the ECB chooses to quantitatively ease into the bankers’ collective pockets.  So with no further ado, let us introduce the Greek comedy team of  Alex Tsipras and Yanis Varoufakis.  For the EU we will see Martin Schulz and Wolfgang Schaeuble as the tag team twins attempting to snatch defeat from the jaws of victory.

First up is Alex Tsipras.  “Greece wants to pay its debts in full but the current state of the economy has left no possibility for such action.  The actions of the Troika in pushing severe austerity while removing 4.6% of the money supply from the Greek economy has raised the debt to GDP level from 140% to 170% since 2010.  The Greek economy is completely broken.

Martin Schulz: “Greece risks national bankruptcy if continues down the path of non-agreement.”

Yanis Varoufakis:  “I am finance minister of a bankrupt country.”

Schulz: “Then no more money will go to Greece and the state won’t be able to finance itself.”

Varoufakis “I am finance minister of a bankrupt country.”

  • SCHAEUBLE SAYS HAD INTENSIVE TALKS WITH VAROUFAKIS
  • SCHAEUBLE SAYS NO AGREEMENT YET WITH VAROUFAKIS ON WAY AHEAD
  • VAROUFAKIS SAYS HAS NOT REACHED AGREEMENT WITH SCHAEUBLE
  • SCHAEUBLE: GERMANY MUST HAVE UNDERSTANDING FOR GREEK WOES
  • SCHAEUBLE: GREECE MUST WORK WITH TROIKA AS PER PRIOR AGREEMENTS
  • VAROUFAKIS SAYS OUTLINED GREEK GOVT PRIORITIES TO SCHAEUBLE
  • VAROUFAKIS SAYS AGREED WITH SCHAEUBLE TO ENTER A CONSULTATION
  • SCHAEUBLE: SAYS SOME GREEK POLICY MEASURES GO IN WRONG DIRECTION
  • SCHAEUBLE: DEBT CUT FOR GREECE IS NOT ON THE TABLE
  • SCHAEUBLE: HAVE GONE TO THE LEGAL LIMITS IN PROVIDING AID
  • VAROUFAKIS SAYS IT IS TIME TO PUT AN END TO GREECE’S ECONOMIC WOES, SURE PEOPLE OF GERMANY WANT TO GET OVER GREEK SAGA
  • VAROUFAKIS SAYS WE DIDN’T DISCUSS GREECE’S DEBT REPAYMENT SCHEDULE OR DEBT HAIRCUT
  • Finally, the punchline.

VAROUFAKIS SAYS “WE DIDN’T EVEN AGREE TO DISAGREE” 

Back in 2008 there was speculation that Greece would have problems with the recession that had just hit Europe.  Back in 2001 the Telecom boom had burst and Europe, along with America, was hit with a recession.  This coincided with the formation of the European Monetary Union.  Before that, all of the member countries to the European Union, a trade union and a sort of standards union, if you like, had their own central banks and issued their own currencies.  These currencies floated against one another and it was thought that one currency, the euro, would make life so much easier for all countries.  This would eliminate the problem of currency exchange and valuations.  What happened over the years is that those countries whose currencies reflected their own weaker economic growth benefited from having a stronger currency but only temporarily.  Germany had a strong economy thanks to agreements with the various unions to limit their wage demands and through the export of manufacture to the rest of the EU and the world.  In the EU germany became a creditor nation while those such as Portugal, Italy, Ireland, Greece, and Spain remained debtor nations.  That is, they never had the manufacturing base for export to other nations in or out of the EU.  They also suffered from corrupt governments that siphoned off a fair amount of GDP into the coffers of cronies and political allies.  And to make matters worse, those with wealth avoided taxes by offshoring their funds in the banks of other countries.  But the worse part of a monetary union is that it is not cohesive, there is no central government.  And Germany has been against giving up its sovereignty to a central government without assurances for its own economic development.  France has always seconded that motion, Vive Le Republic!

Normally current accounts, that is, the import and export balances would be readily apparent if nations were using their own currencies.  But with a common currency there really is no penalty, per se, and that is just the problem.  With different currencies, the one nation that imported too much and exported too little (except in the case of America where we are the world’s trade currency and thus extended liberal and obscene credit limits) its currency would be devalued against other currencies and thus there would be a limitation against how much that country could import.  Her imports would cost a great deal more and thus, to a degree, be self limiting.  On the other hand her exports in the world market would become cheaper and more readily desired in the global market.  But a currency union stops this natural supply and demand allocation.  Hence, a weaker currency initially gains strength temporarily and then becomes a liability later on.  If you have to buy your vehicles from another country and import them in a common currency the artificial credit that is extended because of the common currency increases your debt far too rapidly. This is what has happened in the PIIGS and it is what will kill the EMU.  And if a country within a monetary union can issue its own government bonds with the common currency value, then so much the worse.  For the monetary union must make them good, no matter what.  It is assumed that each country carries the highest rating, AAA.  But we see this is not true and never was.  Normally a bank established in one country and wishing to buy the government bonds of another would be prohibited, both by law and good banking practice, if those bonds were denominated in a different currency.  This is why banks in all the EU countries have bought the Greek government bonds.  But if the Greek government has a problem collecting its due taxes and is over paying its welfare, then it may not be able to service its bond coupons (pay the interest due) and certainly is in no position to pay the par value upon the maturity of said bonds.

Hence, the Greek bond crisis of 2012.  I have talked about the problem of financial engineered products, namely that common term derivatives.  A derivative is like an insurance policy with one exception, the insurer rarely holds the funds back in reserve for the possible future claim of the derivative.  If I buy government bonds but I foresee a possibility that said government might default, that is, fail to pay interest and matured principle, then I may go to a bank or investment firm and for a modest fee purchase a derivative against said default.  Now if I were an insurer and offered policies against the destruction of a house by way of fire I would be required by law to have a set amount of reserves to satisfy any possible destruction by fire of your house.  Because I insure a great number of houses in different areas of locations it may be assumed that only a small percentage of the houses I insure against loss will be destroyed and that is the reserve requirement.  But there are no such requirements for derivatives.  And the language of the contract that is written is far from standard.  And while I may obtain a derivative against you going bankrupt, a third part may obtain a derivative for the same contract.  I buy the bond, insure it against loss and you don’t buy the bond but insure it against loss, and then when the bond defaults two different claims are made against the one loss.  And someone else made have obtained a derivative against that claim being paid.  The complications are enormous while the reserves against loss are miniscule.  And yet there are at least $100 trillion in derivatives in existence today.  And yes, there are quite a few against any loss when it comes to Greek bonds.  If the coupon (interest) cannot be paid it triggers a credit event.  If the matured principle cannot be paid it triggers a credit event.  And if there is a renegotiation in the interest and or principle, that triggers a credit event.  Now there was such an event in 2012 but the IMF and the ECB stepped in and declared no credit event while they did a bit of principle and interest rearrangement.  They were able to to this because they forced Greece to accede to their demands.  They would essentially collect what ever taxes they could, decide who would stay on the government payrolls, what the pension payments would be (and they were greatly reduced), and make sure that the bailout loans (we take from Peter to pay Paul) are promptly sent to those banks in the other EU countries who held Greek bonds (so no we take from Paul, well, actually we just bypassed Paul, to give to Luke).

So for a bit of economic theory.  We can think of GDP as the amount of money that circulates in an economy (let us not get into monetary theory at the money, that complicates matter far too much).  If individuals save a part of their income that reduces the total GDP for the year.  If individuals buy on credit that boost GDP far beyond what it would normally be.  It is a bit simplistic but it illustrates the point.  If individuals have run up their credit cards and not need to pay off the balances, that reduces the amount of total GDP income.  Yes, there is a balance in the form of someone’s debt turned into someone’s equity.  But we did not add any more money into the system than there was to begin with.  Issuance of credit adds money from the future to the present.  Repayment of credit extended reduces money paid in the past to money available in the future.  Debt repayment does reduce the money in the GDP, particularly when it is sent out of the economy.  In other words, the credit was extended from without and not within the economy.  With me so far.  It’s like one big spread sheet.  Money always comes from somewhere and always goes somewhere.  So, when the Troika takes 4.6 % out of the GDP (money in this case) and sends it to all the Lukes in other countries (remember that the Greek central bank and private banks were required to buy Greek government bonds as well but they aren’t getting their holdings reduced) that is money that will not be spent in Greece.  This is the Greek problem, the economy is failing.  Yes, some smart ass says that it is suppose to be improving but look at the statistics.  Private Consumption Expenditure in the US increased fourth quarter last year but that increase was mostly accounted for through large increased in healthcare, hardly a leading indicator of a recovering economy.  The retail sales still sucked bit time.  Do you get the picture now?

Greece is fast becoming a third world country at the hands of the Troika banksters and its population has had enough poverty.  Varoudakis is correct to say that he is the finance minister of a bankrupt country.  And no, it is not a matter of they won’t pay the debt but one of they can’t under the present arrangements.  The Irony was that in 2011, just before the bond crisis, Germany force the sale of a warship to the Greek Navy at Nato’s insistence even though Greece had no way to pay for the ship.  That is like the loan shark forcing you to buy his pinky ring when you can’t pay back the money you owe him.  Now Germany, as I have written earlier is on the hook for Greek bonds for quite a multiple of Billions of euros.  The total Greek government bond debt is some 240 billion euros.  But Germany has the economy that can withstand that large a loss, the French not so much, and both the Spanish and the Italians, no way.  So we have the problem of economic losses to the private banking system.  We also have the problem that if Greece gets to negotiate its debts the the other PIIGS will demand that same right.  Now we’re talking real money.  But as Mr Osborne in the UK has said we have the world problem of derivatives, that once Greece starts to trigger the initial credit events the rest of the derivatives will fall lie a house of cards.  And the fact that almost no one will be the richer but the accounts will be is such disarray as to trigger criminal investigations is nothing to be sneered at.  Greece is the tipping point for the fall of the international financial house of cards.

Is there a way out?  Not without triggering credit events.  There should be haircuts, enough to leave at lease white side walls, but the international  syndication of derivative rules and judgments will have to either rule no credit event, as they did last time with Greece in 2012, or the whole structure becomes suspect.  In which case the derivatives will crumble because Paul Krugman’s Fairy of Confidence, who carries a cat and a magic wand with him, will fail to restore confidence in the financial world.  While we have the various EU players trying to play hardball, the game is really out of their hands.  Default comes when you don’t have any money regardless of the consequences predicted by the creditors.  I think it a fair assumption that Greece will be forced out of the EU and into contention between the US and Russia.  Meanwhile this affair will drag out into the summer, so get out the Feta and the olive oil.

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