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Greeks stay In
The Der Spiegel article on Friday kicked up a stir. The magazine
reported that the possibility of Greece abandoning the peg to the Euro
was being seriously considered. Over the weekend we find that there is
little truth to the Spiegel claim.
J.C. Juncker (EU finance minister) had this to say:
“We’re not discussing the exit of Greece from the euro area. This is a stupid idea -- no way.”
The Greek finance minister, Papaconstantinou chimed in with:
Public debt would double, consumer spending power would be “shattered” and the country would sink into a “war-like recession,”
Okay, so no exit for Greece. Panic over for the time being. The conclusion is that once one joins Club Euro you can’t quit. Ever. Ever? That seems like a long time.
There would be a lot of pain for Greeks if the country
decides to step outside the fixed peg of the Euro. Debt would soar in
value as the old Drachma is introduced. Social payments that now are
denominated in Euros would also cost the state much more. As a result
all Euro denominated fixed liabilities by the state or the private
sector would have to be restructured. That would entail big losses for
many EU banks. It would also crunch the local Greek banks and many of
the Greek citizens who hold the bonds.
But hold on a second. Aren’t all those bad things happening already?
The holders of Greek debt are looking at TV screens and everyday they
are reminded that their assets are trading at 50-60 cents on the
dollar. The Greek economy is in the dumpster. It has been for years and
it’s not going anywhere as long as this crisis lasts. Greek citizens
are seeing round after round of cutbacks, but no progress is being
made.
Were it not for the ECB providing short-term support, Greece would have
gone belly up a long time ago. The folks in Brussels know that the
support necessary to keep Greece afloat will have to be in place for at
least another decade. The cost to the big countries in the EU is going
to be a non-stop political headache for years to come. There is
absolutely no possibility that the Greek economy can grow and prosper
given the status quo. So who’s kidding whom when it comes to the pain? Everyone involved is already bleeding pretty badly. How worse could things get?
I think the Greeks should have exited from the Euro a long time ago.
They hitched their future to a strong horse and they simply can’t keep
it up any longer. I think there is no alternative but for Greece get on
with life and move on. To stay stuck in the mud for another ten years
is a dumb plan. When individuals, corporations or countries make
mistakes they have to ultimately suck up to reality and change
direction. Call that a bankruptcy if you like, but that is what is
necessary.
Consider the exchange rate implications of where we sit today. In June
of 2000 Greece formally adopted the Euro and gave up the Drachma. The
official fixing of the rate was at 340.75 GDR per Euro. On the date of
this fixing the EURUSD FX rate was .9500. Where are we on that today?
At 1.43 EURUSD the Euro has appreciated by 50% since 2000. The Greek
economy is tied to this horse, so the result is that the county is no
longer competitive. Its death is assured, but death has been kept at
bay by the life sustaining measures of the ECB. It isn’t going to work
for much longer. And I think that all the parties at the table are
aware of that. Too bad they don’t have the guts to admit to the ‘Euro mistake’ and turn back the calendar.
All the leaders of the world are spouting the language of a market
driven economy. But it seems that all these same leaders spend all of
their time trying devise ways to thwart the same market forces they
claim to uphold. I can’t think of a single Euro ‘decider’ who has not
spoken out against the Chinese and their policy of maintaining an
artificial level for the CHY. But the same folks ignore that same
conclusion when it comes to Greece. Is that hypocrisy or stupidity? I think it is both. What is the future if it is just a perpetuation of the mistakes of the past?
Note:
While looking up some old FX numbers for this piece I happened to check
the USDCHF rate for June of 2000. Does USDCHF at 1.64 sound a bit odd?
That’s 86% higher. As noted above, the Euro is up only 50%. The
difference of 36% is the market’s perception of the Euro’s value as a
store of wealth via the CHF. This difference would not be so dramatic
were it not for the dead weight on the Euro that the weak peripherals
bring.
At some point the weak countries will break the Euro link. It’s a bond
that can’t be sustained much longer. The prevailing wisdom is that the
process of a Euro breakup is bad for the EURUSD fx rate. The price
action late Friday confirmed that (again). I suspect that at some point
the psychology will shift. When the weak sisters are jettisoned (for
their own good) it will leave a stronger core. The currency for that
core has a value much higher than the Euro does today versus the
dollar.
When the FX market trades the EURUSD higher on the news headline, “Emergency EU meeting this weekend re: Greece”
you will know that the endgame is closer. The way the market
knee-jerked traded the EURUSD lower on Friday is just a confirmation
that the ‘extend and pretend’ games for the peripherals is still the
favored outcome. That’s not likely to last much longer. I doubt the
market will wait till the end of the year.
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Pirhananoia, people, masses, had enough... that's a stretch, surely. The masses eat, sleep, work and what..? get on an airplane and eat and sleep somewhere else, or swimming or skiing, that's it... little people don't get to make things, or write laws, or buy land and build stuff that isn't for 'eating, sleeping and working'. Look, the farmers are fucked, the fishers are out of a life - everyone lives in the same system. This is our world, out very own 1984, did it get debated, did the ministers or opposition, or the police, or the judges stand up and ask 'why are we going this way - why are we heading into 1984?" -apart from Tony Benn, no. ..because the Banks have owned us, for decades, (in their quest for multi-dimensional expansion)....so what do you think that the masses even 'know', they're just fodder, they're clueless about what living, with hands and mind and freedom and respect and responsibility -even is
Perhaps the situation is being held hostage to the notion that because all countries in the EU are European, that means they should all be equal, and so should all be able to maintain membership in the Euro. This is proving to be an expensive delusion, for it seems that, despite all the official talk of human equality, the countries do tend to follow an unmistakable pattern. Why should it be that the northern countries are more robust than their mediterranean counterparts? Old Adolf could have explained it with his theories, but since he was defeated none of his ideas can be considered, right? It's a sign of political correctness gone too far.
Differences are real, such as in the gross disparity when it comes to prison inmates and gender, not to mention myriad other comparisons among humans and nations in this world.
Pragmatic Idealist, their wealth goes up if wage inflation is higher than price inflation.
... which, in a competitive world, is only sustainable if their productivity rises sufficiently also. Alas, it did not.
All that talk about the establishment of a "northern" Euro some months back. I really think that it may be in the cards. Let the PIIGS fall where they may.
"I think the Greeks should have exited from the Euro a long time ago. They hitched their future to a strong horse and they simply can’t keep it up any longer. I think there is no alternative but for Greece get on with life and move on. To stay stuck in the mud for another ten years is a dumb plan. When individuals, corporations or countries make mistakes they have to ultimately suck up to reality and change direction. Call that a bankruptcy if you like, but that is what is necessary."
You allude to the thoughts on the street and in the halls of power. Those not benefitting from, or having the perception of the status quo as being beneficial to them, have no reason to maintain it, and may see a clear choice between one or the other very soon. Iceland said no. The people of Eire may have had enough, Spain, Portugal and the fall begins. Everything depends on a status quo known by everyone to be working fantasy. The people you quote are all for continuation at any cost, but it is highly unlikely they represent their people.
Critical mass causes chain reaction. It is ignored in the financial equation. It should be part of the foundation of economics. But there is only one rule in gambling. The house wins.
And if the politicians don't dare to do it, the street has to force this solution....
THE can shall be kicked one more time!
i'm feelin' the pink today. kickin' the can in pink. yup.
http://image.spreadshirt.net/image-server/image/product/10077440/view/1/...
I'm 'conflicted' over this drama.
Extreme left/Extreme right = government.
So I do adore the Greek citizens for what I understand to be a well developed anarchist tendency, my selfish, badself really just wants to make a buck. (or two).
Why don't motherfuckers get it still? (Happy Mothersday!) (Bitches)?
Natural law insist on free markets.
The Zoo will not work.
The motherfuckers who try to steal your shit (time) will always lose (on a long enough timeline)
Long live ZH.
This is all for the sake of Deutsche Bank.
The put buying always tells the truth.
That is of course why germany wants to ban CDS on sovereign debt. CDS have a way of bringing out the truth at the most inconvenient times.
True, dat...
i go back 6 months ago when Germany, Russia and china were meeting in private, many people were speculating that they were talking about forming their own union. I also remember reading an article that made the argument that the interest on debts Germany is receiving from lending to other euro zone countries will be compared to investment incomes outside the euro zone and that will be when Germany cuts the ties. I think its wrong to assume that it matters more if the piigs threaten to pull out or actually do pull out of the union, than to think will germany pull out. there is tremendous pressure inside Germany to say no mas and that effectively means they are pulling out
While you certainly make a logical argument, this is not a situation amenable to logic, but politics--and investors forget this at their peril.
The EU literally cannot afford to let the remora go--it would immediately self-destruct. No, they will all go down together, and the process will seem interminable, another decade, at least: endless beating of breasts, rending of clothes, and gnashing of teeth--forever and ever, amen.
The bear is not just waking up--it is enraged, and will roam the world for years, until it finally collapses from exhaustion.
Until the Greek go to the street, the Tunesian way... because the common man will be clubbered for years... Bosnia and Kosovo are examples of no hope, EU subsidy cases.... As a Greek I wouldn't like this outcome...
The EU is not able to look at reality. Like the FED: Pretend and extend policy prevails. In themeantime the evil will get worse. Already now Greece gets financing in the free market only at over 15% for 10 papers.... A sign of deep mistrust...
No problem.
European savers will subsidize the greeks thru ECB debt monetization and loan subsidies.
The Greeks have a huge 50 something retiree population to support and no one believes in paying taxes in Greece.
This is largely true, and that's why I take exception to Bruce's statement that Greece should have exited the EMU long ago; they should never have entered it to begin with.
The facts are that Greece used Goldman's debt swaps and bogus financial statements to lie and cheat their way into the EMU. If you have to cook the books and perjure yourself to get into the club, you don't belong there.
It's like buying a house--if you have to take on a second mortgage to make the down payment, you're not ready to own a home. Keep renting until you can figure out how to spend a little less than you earn.
Greece wanted in on the EUR monetary union so they could exploit Euro strength without having worked for it. In other words, to freeload off Germany's relative economic strength and competitiveness.
I doubt that German savers will be willing to subsidize early retirements for the Greeks indefinitely.
"At 1.43 EURUSD the Euro has appreciated by 50% since 2000. The Greek economy is tied to this horse, so the result is that the county is no longer competitive."
When a person wins the lottery and no longer has to work as hard for the same wages, we do not say that they have lost competitiveness. So just because Greece's currency of choice appreciated in value, it does not follow that they are no longer competitive. Their wealth (i.e. the value of their currency) grew rapidly, so they no longer had to work for peanuts. They may have failed to transition into a nation with a high-value currency (i.e. greater emphasis on foreign investment and outsourcing labour and other inputs), but being tied to the galloping euro does not in and of itself guarantee the demise of a nation's competitiveness.
Sorry, wrong.
All that happened to the Greek economy was there currency strength no longer reflected their productivity/worth.
They may have failed to transition into a nation with a high-value currency
is the whole point - the currency could no longer decline relative to other currencies to reflect unchanged Greek economic realities.
It's like a person who starts increasing their wage demands relative to their productivity - pretty soon, they'll be unemployed.
Agree. High value currency with low real added value products and services is like trying to sell a cheap product as expensive. You can fool some people sometimes but you can't fool all the people all the time.
Smart post Bruce. I like to consider your views. The graphic is brilliant! Seems to me that the extremes are getting hurt most. We really, truly, do not have free markets in the micro sense, but in the macro?
Yes we can, Yes we do.
Maybe this is the death of manipulation?
Nah,
Just evolution.
So just because the government officials declare that Greece won't leave the Euro everyone has to believe it as a fact? Does that mean we are living in an alternate universe NOW? Because those same government officials declared that Greece would not need bailouts.
http://www.marketwatch.com/story/zero-chance-greece-to-ditch-euro-papade...
It is clear that for europoliticians, A is NOT A.
So if they declare Greece will not leave the euro and will not default, history has taught us to expect that they will.