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For Greece, it's Deja Vu All Over Again

CrownThomas's picture




 

In 1865, four European countries decided to form a monetary union. France, Belgium, Italy, and Switzerland formed what is known as the Latin Monetary Union.

This union was to be a bimetallic monetary system. Although it had no common currency, the French Franc was the international store of value, and the Banc of France was the lender of last resort. All national silver & gold coins were allowed in settling domestic transactions. Incidentally, the fixed parity of silver to gold was 1:15.5.

Great, a monetary system set up to promote stability and commonality, sounds like a good idea -- Enter Greece. In 1868 Greece joined the LMU, and from the very beginning it couldn't keep its act together. Fresh off a default in 1843, Greece thought it a good idea to join such a union and presumably rebuild its creditworthiness. Sure, they would honor the full convertability of all paper money into gold & silver, keep budget deficits in check, and overall comply with the rules of the union - right?

Not so much. Greece immediately began to issue fiat money, and stopped converting their paper into gold and silver. Then they began to spend, spend, spend. By the mid 1870's, Greece was in political turmoil, and they were seeing deficits skyrocket as revenues declined (sound familiar to anyone?). Since they had defaulted aready, they were shut out of credit markets, so they decided the only way to continue to survive would be to print more paper money and issue it from their own bank.

Here's a visual of what that looked like - as you can see, the gold & silver had left the country as the convertability began to stop, and being that they were shut out of the credit markets, they literally had no choice but to print.

 

And just so you're aware, central banking has been around for a long, long time. Here is a visual of how much Greece's national bank loaned to the government back then, just so they didn't have to control spending, work, or tax anyone (kind of like today).

 

 

Greece was able to settle their previous default by 1878, and Greek bonds were back on the London stock exchange. Lesson learned right? Eh. A short fifteen years later they were in the exact same deficit spending hole with no end in sight. So, they decided to again stop payments servicing external debt... and they again defaulted.

The LMU eventually dissolved ~1925-1926, and Greece went on to peg the Drachma to the British Sterling.

The point of the story is that history will repeat itself, and Greece will always be looking for the next free ride. A way to start again with a clean slate. Wiping away their insane deficits & ignoring the spending habits that got them there. The current situation within the European Union should not be a surprise to anyone.  

So the question is, what's after the Euro?

 

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Wed, 05/16/2012 - 14:06 | 2432317 advill
advill's picture

Why do you necessarily need to dismember EU to solve things?. It seems that the only solution to Europe must be dissolving the most important human achievement in History, why you don't ask for the partition of US ?...California is a mess, ...S.Carolina costs the rest of US citizens around $ 120 each, why not to expel them of the Union?.

The instant solution of the mess is a FX rate of 1:1 of dollar and €....why is not happening?.

Thu, 03/15/2012 - 10:49 | 2257723 The greek
The greek's picture

  Greece in a context : Panic of 1873

Thu, 03/15/2012 - 05:36 | 2257030 lamare
lamare's picture

No one could have expected this. No one:

 

BANK OF GREECE ‘PRINTING ITS OWN EUROS’ SAYS BELGIAN ECONOMIST

http://bit.ly/zwfegN

 

Dimitiriou describes to me his job function at the Bank of Greece. It is just under the directorate of the Bank, a high position let us say. Central to his story, is the ELA program. This stands for Emergency Liquidity Assistance, a kind of emergency program where national banks that are part of the ECB system can fall back on in case of an unexpected emergency. Ireland uses this mechanism a lot, and for the last few months, the Greek use of the ELA facility has grown substantially. By the end of November this amounted to some €43bn. On the 8th of March the Greek parlament voted that this utilization could go up to €90bn, and according to Dimitriou this will be used. Besides this, Greek banks have called on €73bn in liquidity from the ECB through normal channels* [*Klaus Kastner speaks of this at length].
Dimitriou tells his story of the ELA and of the Greek bankruptcy: “The normal way of things is that banks with liquidity problems offer assets to the ECB. In exchange euros are transferred to the bank in question. This so-called collateral could be anything: bonds from the bank’s portfolio, outstanding loan packages, and so on. The ECB investigates the value of this collateral and on the basis of this will take 70% to 90% of the value into account. The problem is that Greek banks have nothing more to offer the ECB. With the €73bn already taken up by the banks, these banks are at the end of the road. Given the continued flight of capital [out of Greece] the banks are having to cough up more of their remaining liquid funds. This is now happening through the ELA mechanism.”
Dimitriou knows that the capital flight from Greece is around €60bn, and this is the puzzling part, around a third of the Greek GDP. [!!] How does this square with the ELA mechanism? Dimitriou looks me straight in the eye and says in a soft voice “Greece is printing its own Euros. The bank of Greece credits the accounts of Greek banks that would have been shutting their doors but for the emergency funds. All Greek banks are effectively bankrupt, it is that simple. These zombie banks can only survive through these ELA injections. Within the ECB system the only collateral for the euros created within the ELA mechanism – is the guarantee of the Greek state. I do not know what you think of this, but my humble opinion is that this guarantee is as good as worthless. You can change all sorts of declarations about the whys and wherefores of these operations, but believe me, the basic fact is simple: only by allowing the Greek central bank to print euros [create euros] can you avoid the implosion of the entire Greek financial system, with all the consequences that this would have for the eurosystem as a whole”.

 


Thu, 03/15/2012 - 10:28 | 2257652 The Reich
The Reich's picture

OMG, is that a bad thing now?

Thu, 03/15/2012 - 02:46 | 2256910 Arthur
Arthur's picture

Those who do not know history are doomed to repeat it.

Thu, 03/15/2012 - 10:58 | 2257759 dontgoforit
dontgoforit's picture

I didn't know this stuff about Greece.  Good article.  I will look deeper.  We know there've been a couple major wars which sprung up from seeds like this....I sure hope that part of history doesn't repeat!

Thu, 03/15/2012 - 02:39 | 2256905 Nobody For President
Nobody For President's picture

Interesting history that I had no clue of.

But I don't feel bad, looks like nobody in the Troika did either...

 

Eventually, I suspect the currency union will disolve and most northern euro countries will peg to the strongest curency (cough Duetchmarks cough) or maybe a *neutral* currency - CHFs; and retain open borders and no tariffs, or very limited, mutually agreed to tariffs on a few goods. The ECB would morph into a 'clearinghouse', and the EU bureacracy would get a lot smaller.

Or maybe just another war...

Thu, 03/15/2012 - 08:44 | 2257205 chubbar
chubbar's picture

Here is the "Agenda", how they get there is going to be interesting. Here in the U.S. this is proceeding quite well. It looks like the plan to separate into regions once the economic collapse hits is all part and parcel of stripping the last of our ability to intervene using state legislators. Looks like they have it all figured out except for the fact we are on to the plan, hope it makes a difference.

http://ppjg.me/2012/03/14/agenda-21-on-steroids/

Thu, 03/15/2012 - 09:53 | 2257484 Money 4 Nothing
Money 4 Nothing's picture

Search: US free trade zones... and don't fall off your chair reading the information. Sickening. There passing this Corporate Chinese initiative right now in Utah and other states. We already have lost our Sovereignty, we just don't see it ... YET!

Thu, 03/15/2012 - 08:06 | 2257118 Ar-Pharazôn
Ar-Pharazôn's picture

maybe a fuck! sorry ;)

 

chf is for Switzerland and nobody else :P

Thu, 03/15/2012 - 06:48 | 2257059 bank guy in Brussels
bank guy in Brussels's picture

War is beginning on the streets of Greece.

Super first-hand article reporting on the populist revolution in its early phases there ... weapons in hand:

http://exiledonline.com/letter-from-athens-inside-the-greek-crisis-with-...

Do NOT follow this link or you will be banned from the site!