papademos

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Will Tsipras Blow Up Europe?

The world’s eyes are on the Greek election, and whether or not Greeks will elect New Democracy’s Samaras (widely-assumed to be pro-bailout, pro-status quo), or SYRIZA’s Tsipras (widely-assumed to be anti-bailout, anti-status quo).

The Eurocrats have very sternly warned Greece against voting against austerity. Merkel said:

It is extremely important for Greeks to elect lawmakers who would respect the terms of the bailout.

In recent days, opinion has swung back toward the status quo, with Intrade rating New Democracy’s chances of winning the largest number of seats at 65%, and SYRIZA at just 33%.

While I cannot rule out New Democracy winning, I think that I’d flip those odds. Greece widely reviles German-imposed austerity, but fears the consequences of leaving the Euro — 85% of Greeks want to stay in. A vote for New Democracy would reflect fear of Drachmatization. Meanwhile, a vote for SYRIZA would seem to reflect the idea that through brinkmanship and the threat of Euro collapse, Greece can negotiate their way to a much more favourable bailout position.

So why do I think SYRIZA are the likelier winner? The election is on a knife-edge, so I think the difference might be football.

Greece — against all odds — managed to bumble through the Euro 2012 group stage, beating Russia 1-0 and likely setting up a poetic quarter final against Germany. I think that that victory against Russia will fire enough Greeks to try their luck and assert themselves against austerity.

For Greece, this is an important election. Inside the euro, their heavily state-dependent economy will continue to suffer scathing austerity. Outside the euro, they can freely debase, and — as Nigel Farage has noted — enjoy the benefits of a cheaper currency like renewed tourism and more competitive industry. If Greeks want growth sooner rather than much later, they should choose life outside the euro (and by voting for Tsipras and trying tough negotiating tactics, they will be asking to be thrown out).

But for the rest of the world, and the rest of Europe, this is all meaningless. As Ron Paul has noted, when the banking institutions need the money, central banks — whether it’s the ECB, or the Fed, or the BoE, or a new global central superbank — will print and print and print. Whether Greece is in or out, when the time comes to save the financial system the central bankers will print. That is the nature of fiat money, as much as the chickenhawks at the ECB might pretend to have hard-money credentials.

Tsipras, though — as a young hard-leftist — would be a good scapegoat for throwing Greece out of the Eurozone (something that — in truth — the core seems to want).

The real consequence throughout Europe as austerity continues to bite into state-dependent, high-unemployment economies will be more political fragmentation and support for political extremes, as the increasingly outlandish and unpopular political and financial solutions pushed by Eurocrats — specifically more and deeper integration, and banker bailouts — continue to help special interests and ignore the wider populations.

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Greece Defaults

From Sky News:

The talking is over; it is finally happening. For the first time since World War Two, a developed nation is going into default.

That’s the significance of the events of the past 24 hours, with Greece’s debt being classified as in “selective default” and the European Central Bank banning it from its cash window. Months of planning by both banks and policymakers have gone into ensuring that Greece’s negotiated default will be a smooth painless process. We are about to find out whether that planning pays off.

Now, we shouldn’t be surprised by Standard & Poor’s decision to cut the rating on Greece’s sovereign debt from CC to SD (which stands for “selective default”). The ratings agencies had always said that, given private investors are about to lose just over half the value of their debt (through a complex bond swap), this downgrade would be a natural consequence.

Nor should we be shocked that the ECB says it will no longer accept Greek debt as collateral: in fact, the only surprise is that it’s taken this long – on the basis of the ECB’s previous policy, the bonds should have become ineligible when were first downgraded from investment status two years ago.

Peter Tchir thinks all the hullabaloo is a lot of sound and fury, signifying nothing:

So far there are no dramatic consequences of the Greek default. The ECB did say they couldn’t accept it as collateral, but national central banks (including Greece’s somehow solvent NCB) can, so no real change. We will likely get a Credit Event prior to March 20th once CAC’s are used to get the deal fully done. Will the market respond much to that? Probably not, though there is a higher risk of unforeseen consequences from that, than there was from the S&P downgrade.

It just strikes me that Europe wasted a year or more, and has created a less stable system than it had before. A year ago, Europe was adamant about no haircuts and no default. I could never understand why. Let Greece default, renegotiate terms, stay in the Euro and move on.

I suppose the magnitude of the problem depends on just which kind of credit event. And that mostly depends on how well-insulated the financial system is, and market psychology. A full-blown Lehmanesque credit shock? Who knows — certainly banks are fearful. Certainly, the problem of default cascades has been out in the open for a while. But most of the attempts to deal with the prospect of such things have mostly been emergency room treatment, and not preventative medicine — throwing liquidity at the problem. Certainly, it is possible the system is in a worse shape than 2008.

  1. The derivatives web is (nearly) as big as ever:
  2. There are still a myriad of European housing bubbles ready to pop.
  3. American banks are massively exposed to Europe.
  4. China’s housing bubble is bursting Surely their reserves will go into bailing out their own problems, and not those of Europe and America?
  5. Rising commodity prices — especially oil — are already squeezing consumers and producers with cost-push inflation.

Meanwhile, the only weapon central bankers have in their arsenal is throwing more money at the problem.

Will throwing more money at the problem work? Yes — in the short term. The danger is that creditor nations will not be prepared to throw enough to shore up balance sheets.

Will throwing money at the problems cause more problems in the long run? Yes — almost certainly.

Ultimately, we must look at preventative medicine — to stop credit bubbles expanding beyond the productive capacity of the economy. We should also look at insulating the economy from the breakdown of any credit bubbles that do form.

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Inflating Away the Debt?

Some commentators believe that the best way for Greece — and by extension, everyone with a debt problem — to deal with debt is introducing some mild-to-moderate inflationary pressure (or least, the expectation of such a thing).

The problem is, the evidence (thanks to regular reader Andrei Canciu) suggests this isn’t in the least bit effective:

The real solution for the terminally indebted is not to get into debt in the first place. Once you are there, the pressure of creditors means that the chosen path will generally be a succession of unsuccessful Keynesian can-kicks (or, in Europe, crushing austerity) up to a slow, painful default.

As Keynes put it:

The boom, not the slump, is the right time for austerity at the Treasury.