Greece, Germany, And Beppe Grillo

As the world waits with baited breath, I suppose I should look up the etymology of that phrase, the actors on the EU stage strut and walk about issuing their lines with near perfection.  The Germans and the Slovaks are the thorn to pluck from the lion’s paw of agreement if anything is to be done to extend the ELA funds to the central bank of Greece.  The Germans and the Slovaks fear that Greece will want far more in funds, loan forgiveness, and repayment schedules.  They see Greece as reneging on their agreement from the 2010/2012 agreements.  Greece is obligated since the ISDA did not the original haircuts on Greek government bonds to trigger credit events and the mass of financial destruction that would have followed.  Perhaps the Greeks already know what mass of financial destruction will come if they do not bend, give in, follow Germany’s orders.  The Greeks are really in that spot everyone talks about, that place between a rock and a hard place.  Pain for the Greek people is a reality either way, but the one way, though intense in its pain is much shorter a time to suffer.  Sort of a choice between open heart surgery and cancer surgery and chemotherapy.  I’ve had the former but not the latter.  I think I would prefer that short but very intense pain more than the long and drawn out suffering.  Broken bones are a bitch for a few weeks and then the pain just sort of numbs itself until it eventually goes away.  Half a year, a year, maybe two years, that is a chilling thought.  But I digress.

Beppe Grillo has an interesting take on the problem.  He lists the three scenarios of international debt.  The first is that it is paid back in a different currency and that currency suffers a devaluation, costing you, the creditor, loss.  The second is the inflation risk, the funds you receive buy less and less due to inflation.  And the third is that neither the first two are a consideration because the debtor can’t or won’t pay, meaning total loss.  As to the first problem Germany has reservations about Greece’s ability to repay in Euros.  After all, shouse Greece be forced out of the Euro then she must coin her own money, the Drachma.  And no matter how devalued the Drachma may become, when it is exchanged for Euros someone will lose on that transaction.  In fact, Greece will never take possession of the Euro amount to give to all the creditors.  Just throw however many Drachmas the exchange rate is for that day and let the devil take the hindmost.  But I believe Germany has overplayed its hand, the bluff will be called.  Beppe Grillo feels that it is a bluff on Germany’s part.  By the way, if you have not been following political events in Italy, Grillo is the politician who started the Five Star Party, a progressive and populist movement that has helped to inspire the likes of Greece’s Syzira and Spain’s Podemos.  Both Five Star and Podemos are calling for their countries exits from the EMU and a renegotiation of National debt.  These are not splinter parties but very real and effective efforts to mobilize voters into rejecting the usual political parties for one purpose, to free themselves of the Euro and Germany’s control of trade, money, and debt.

The real problem is that the European Monetary Union is a confederation of equals.  There is a central bank of central banks but there is no federal power to impose any order on the countries.  Just like our individual states, they can spend themselves silly without federal intervention except for bankruptcy court.  The EMU doesn’t even have that luxury.  A state can be forced into bankruptcy by its creditors, an EU country, not so much.  The EMU worked well when the ponzi scheme of overspending socialist governments were stoking the fires of the economy.  But the issuance of excessive credit is like placing too much fuel on the fire to the point of smothering it.  That is the real problem in Europe and around the world, just so many government officials and economists are too tied to their false assumptions to notice.  But back to Grillo.  His words:

Germany is the Eurozone’s only big creditor with about 600 billion Euro loaned to various countries, most of which are on the periphery of the Eurozone, including Italy. The Euro has given it this enviable status. If you produce lots and you consume and invest very little and you keep domestic wages and prices low, then you’ll always have cheap unconsumed goods to sell to your neighbours. And you might also be able to make money by providing credit that they will probably ask you for so that they can buy your goods that are so cheap and so good. This is Germany’s situation. It has always had this approach to the market economy in European affairs ever since 1870 with its roots in Calvinism. Thus to sell and lend to the countries on the periphery of Europe was always Germany’s preferred economic activity when everything was going well, before the crisis in 2008. Since then its only objective has been to get that credit returned and to protect its purchasing power.

Germany’s checkmate

Basically, QE will give Germany the time needed to achieve the final objective needed to get checkmate:to get rid of the national jurisdiction over as much of the debt as possible and thus to reduce its own capital risk as much as possible. Only the debt issued under Italian jurisdiction can be redefined in a new currency and thus could impose losses on foreign creditors, mainly German, via devaluation of the new currency. Today that proportion stands at about 93%. So only 7%, not more than 150 billion of public debt, cannot be redefined and has to be paid by in Euro, in accordance with the contract. Assuming that there’ll be devaluation of 30%, implies that the cost of a Euroexit for Italy in relation to its public debt, would have been no greater than about 50 billion euro before QE. With the de facto QE, this number has gone up to about 80 billion given that if there’s a collapse, the cost of a “haircut” of let’s say 30% on 100 billion government bonds (BTP) that would be bought by the Bank of Italy, would be a cost borne by all of us. In the eyes of a German creditor, restructuring our debt or an exit with the devaluation of the new currency, in fact present the same capital risk.

Well, this is the old Lucent Technologies business plan.  In order to sell more digital telephone switches, lend the buyers the money to purchase them.  It works great, sales go up and the customer gets what he wants.  Suddenly there are CLECs all over the place, more than you can shake a stick at.  A CLEC, by the way, is a competitive local exchange company that competes with the regional Bell operating companies.  I would explain it further but that would take far too long and with at least half the population using cell phones, well you can see that those LECs were a landline only business and things just went bust in 2001.  German industry has been doing this for many years.  They export to other countries and even finance the purchase of their equipment.  They didn’t learn this from the Japanese, they were doing this before the war when those countries who were peripheral to them were in a depression.  Lend the buyers of German made furniture, arms, industrial equipment, and then you own them and take over is so much easier.  Japan simply made it a national business practice that eventually backfired on them.  That is what broke Japan in the early nineties and they haven’t woken up ever since.

This time Germany, according the Beppe Grillo sees the problem and wants the ECB through the use of quantitative easing buy all those government debts, particularly held by German banks, and thus own the individual EU nations through debt.  Germany benefits and everyone else pays.  Of course like Lucent found out, this plan works great until it doesn’t.  And unfortunately for Germany, China is a major buyer of German industrial goods and China is about to hit the wall.  Seems no good business deal ever goes unpunished.  The bubbles are bursting all over China but our news agencies take little notice.  If there is an agreement to extend the liquidity funds to the Greek central bank and enter into negotiations over the rescheduling of debt payments and a reduction of percentage of GDP as a basis for the amounts, then the question of the EMU is merely kicked down the road a few more years.  That will put the EU in the cancer ward.

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