The Catastrophic Costs Of Extend-And-Pretend Are About To Crush Europe

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Like a star which has expanded and now cannot maintain its grand state, Europe's extend-and-pretend economy is now poised to experience a supernova implosion.

The costs of ill-conceived policies are always paid by someone--usually those with the least political power. In ill-conceived wars, the costs are paid by the soldiers on the ground and their families, and the civilians who suffer collateral damage.
 
The costs of ill-conceived financial policies end up being paid by taxpayers, savers, borrowers and those who lose their jobs in the inevitable bust. Those who conjured up the disastrous policies slink away to plush villas or defend their stubborn addiction to failed ideologies in the media (see Keynesian Cargo Cult and Paul Krugman).
 
The most ill-conceived financial policy of all is extend-and-pretend: extend-and-pretend means if a debtor is bankrupt, then extend him more loans to maintain the illusion of solvency.
 
Here's how extend-and-pretend works in the real world:
 
-- If a homebuyer has defaulted, give him new loans, or shift his loan off the books into zombie mortgage status.
 
-- If a student defaults on student loans, shift the loans into forbearance, i.e. mask the default by putting the defaulted debt into zombie mode.
 
-- If a bank is insolvent, give it unlimited access to unlimited lines of central bank credit and lower interest rates to zero so the bank doesn't have to pay interest on deposits.
 
-- If a nation is bankrupt, extend it new loans.
 
The official reason for extend-and-pretend is the belief that time will heal all-- that given enough time, all problems solve themselves via some sort of pixie dust. In essence, this faith that time will heal all is a delusional state of magical thinking, for extending and pretending only enables the kleptocrats and the elites benefiting from the failed Status Quo to continue holding power.
 
As painful as it would have been, Greece should have been refused loans in 2010 and 2011, and been ejected from the euro. The situation was visibly hopeless to everyone then, and extend-and-pretend was never going to solve the structural imbalances in the Greek economy that had been furthered or enabled by the euro and easy credit.
 
What did Europe buy with its $245 billion bailouts of Greece? Nothing. The $245 billion-- equal to the entire GDP of Greece--squeezed the citizens of Greece while leaving the kleptocracy in charge--the worst possible outcome.
 
If policymakers had rejected extend-and-pretend and grasped the nettle in 2010/2011, Greece would be through the painful period of adjustment to its own currency. Deprived of the euro gravy train, its ruling kleptocracy would have collapsed or been ejected by the people as a failed regime.
 
Thanks to extend-and-pretend bailouts, the pain of adjusting to reality is now being dumped not just on the people of Greece but on the people of every nation in the EU. Frequent contributor Mark G. explains why: most of the debt owed by Greece doesn't just vanish when Greece defaults--it must be paid by the other EU nations that guaranteed the debt.
 
 
Here's Mark's explanation:
 

The issue is not whether Greece's European Financial Stability Facility (EFSF) backed debts will be repaid. The question is who will repay them.  European Financial Stability Facility (Wikipedia) 

The structure of the EFSF and related packages means that if Greece will not/can not pay then every single guarantor country has to come up with fiscal appropriations to backstop any deficiency left by Greece in a default. This means going back to their national parliaments in most if not all cases for fiscal appropriations to do this. At this point what the Germans demonize as The Transfer Union will emerge stripped of all camouflage in all its hideousness. 

This is going to be politically explosive in itself for every one of these Eurozone governments. Nor is this confined to so-called "creditor" states, except in the sense that every non-defaulting state will be a creditor. 

So-called debtors and crisis states like Italy, Spain, Portugal and Ireland are all liable in large varying amounts as well as Finland, Holland, France and Germany. The first four, generally classed as being 'debt crisis' states themselves, are liable for a total of 240 billion euros as their end of the EFSF. Since Greece accounts for about 1/3 of the EFSF this works out to 80 billion euros for four weakened sates already experiencing their own Austerity. 

I cannot imagine that at this moment any of these cabinet politicians could tolerate a second budgetary line item that decodes as Additional New Money & Guarantees For Greece Under Tsipras/Varoufakis/Syriza. 

Greece can indeed initiate that process. And having done so, no one will have any further tolerance for Greece at the table. Their leverage begins and ends with default. 

The seeds of disaster were planted when Greece was first admitted to the ECB and euro under false pretenses.

Extending imprudently massive loans to marginal borrowers always plants the seeds of disaster, and extending and pretending turns a potentially containable disaster into an uncontainable financial calamity. Yet this is the game plan of policymakers everywhere, from Europe to the U.S. to China--extend enormous loans to marginal borrowers and then mask the inevitable defaults with extend-and-pretend policies that vastly increase the size of the debt.
 
By the time extend-and-pretend finally reaches its maximum limits, the resulting implosion is so large that the shock waves topple regimes, banks, currencies and entire nations.
 
Like a star which has expanded and now cannot maintain its grand state, Europe's extend-and-pretend economy is now poised to experience a supernova implosion.
 
 

 

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lincis's picture

known knowns, cmon smth new pls

Supernova Born's picture

Thank goodness the extend and pretend cretinism was confined to Europe.

Manthong's picture

The real issue in 2010 and 2011 was that ISDA was not willing to start the derivatives cascade that declaring default would produce. The “haircuts” were not declared to be defaults and the can was kicked down the road.

It's probably the same issue today.

There has been nothing even close to an honest bet in the market since then.

 

TruthInSunshine's picture

Save the banks.

Kill whales & Greeks.

Thirst Mutilator's picture

nuke the gay whales, save the baklava!

GetZeeGold's picture

 

 

The Catastrophic Costs Of Extend-And-Pretend Are About To Crush Europe

 

Which explains why no one is actually doing anything...

max2205's picture

Aapl mkt cap is 3x Greece Gdp

They should have given Greece some aapl stawks instead 

lordylord's picture

Just had dinner with a couple of co-workers visiting from Germany.  They like Obama and are excited and hopeful for Hillary.  That tells you all you need to know about the EU.

Mr. Ed's picture

@ lincis: I think the core of the post was context... and the wider purpose to enlighten more people about a process they should understand.

But, I can see that you're reeeeally brilliant, and that it's just boring... but your're brilliant.  Okay.  Got it!

luckylongshot's picture

I am also in Germany and in the circles I am in the talk is about cutting ties with the US and moving closer to Russia. Obama is viewed as a fascist.

August's picture

Good to hear your perspective. Please broaden your circles!

Calmyourself's picture

"The seeds of disaster were planted when Greece was first admitted to the ECB and euro under false pretenses."

Yet the organization which facilitated this lie and at the root is responsible remains above the fray, when does GS get charged with fraud and people go to jail?

The implosion of banks and regimes CHS talks about strangely never seems to effect the real power centers Rothschilds etal...

HopefulCynical's picture
Yet the organization which facilitated this lie and at the root is responsible remains above the fray, when does GS get charged with fraud and people go to jail? The implosion of banks and regimes CHS talks about strangely never seems to effect the real power centers Rothschilds etal...

  Pay no attention to those men behind the curtain. There's nothing to see here, people, move along...
Nussi34's picture

The Greeks will soon have their toilet paper ooop I mean Drachma back!

Brazen Heist's picture

QE starting in March to start absorbing the Greek losses...great timing.

Bangin7GramRocks's picture

Or they can start the inevitable process of erasing the debt altogether. Just erase the number from the "books". Tell me please what would happen if tomorrow the U.S. Fed stated that all the debt was gone. What would happen?

Brazen Heist's picture

Balance sheet hell.....but the sky would still be blue and the grass still green. I think we need to start that process off as soon as possible for the sake of future generations.

WonderDawg's picture

If it were only so simple. You know, the people who own the debt aren't just going to take the loss like a champ, right? If someone owes you a million bucks and couldn't pay, would you just say, no problem, we're cool, just forget about it? Doubtful. And not only that, the debt has been used as collateral and leveraged many times over, so when the collateral becomes worthless, so do the derivatives. It's a ripple effect, dominoes toppling. Look at the actual debt and then multiply it by at least 10, probably closer to 50, and then you start to get an idea of what the actual cost of "erasing the debt" would be. Not so simple.

ANestIOS's picture

Do you mean QE money not real money ? - or maybe (just saying) it's all about who gets first in the line for the EE QE non-money

SDShack's picture

So the bankers and 0.1 percent are upset they won't get paid. Put them in a room with a guillotine and "make them an offer they can't refuse". When the SHTF, the only thing that will stop this scenario from happening with the bankers and 0.1 percent is the police state. Rest assured that when the masses are starving in the streets, not even the security forces, or more importantly, their families will be safe. Then you will see where the allegiance of the security forces truly are. History has proven time after time, that it must get infinitely worse in order to get rid of the sociopaths that are destroying the world. But the sociopathic way guarantees that it will eventually happen.

venturen's picture

the day before the debt was erased....wall street hedgefunds would borrow $99999 quintillion dollars

Thirst Mutilator's picture

"I want a hamburger. No, cheeseburger. I want a hot dog. I want a milkshake. I want potato chips"

Brazen Heist's picture

Would you like fries with that?

ThisIsBob's picture

Can I super-size that for you?

Hohum's picture

Let's watch Caddyshack instead of following this Greek stuff.

redux2redux's picture

Yeah!

Though I think the following clip might be appropriate for Greece.

https://www.youtube.com/watch?v=t3lshY4PwI4

NoDebt's picture

"Marginal borrowers" = US Govt.

Bossman1967's picture

So 6 mos will go along with the collapse I read about here in the Us in he fixed income markets exploding here sttarting on march 16 thru october hmm so the world war needs to hurry so the bankers can accuse Russia for it all. Just wonder how they get Putin to throw the first punch cause we never will. This is better than a movie

yogibear's picture

Round-robin QE.

The Fed, ECB and BOJ can now enlarge the infinite QE relay scheme and buy more of each others debt with printed money.

What's the big deal anyway if there's defaults. The money was created from thin air anyways.

Money backed by nothing but BS.

And that home loan money you have was created the same way.

 

 

TrumpXVI's picture

Good analogy....debt "going Nova".

highly debtful's picture

If this thing goes supernova, the least they can do is ask Krugman to return his Nobel prize. O, and maybe make him publicly apologize for "any annoyance he might have caused in the pursuance of an economic policy which apparently hasn't led to the expected results". 

And then dump him in a blind alley of a particularly nasty suburb in Tokio, with some gold and silver kilo bars strapped around his naked chest with transparant scotch tape. 

Chupacabra-322's picture

If a Criminal Fraud UNITED STATES, CORP. INC. is bankrupt, ie.. Pack a Gun and pay No Taxes. Then watch said Fraud entity dissolve / crumble into its own footprint as did Building 7.

Revert back into a Constitutional Republic and, Viola! Problem solved. That is, after mass arrests of the Pure Evil Crimimal Psychopath / Sociopathic Complicent Fraud Judges, Attornies & Politicians.

Arrest, Tri, Convict & Execute.

22winmag's picture

When the closing scene of the movie Boiler Room happens in real life on a mass scale, the human race will be freed.

 

Until then... stack and prep for fun and profit.

farmboy's picture

Simple 10 mln inhabitants in Greece. 1 in 3 will work and 35% of that is government means roughly 200.000 $ debt per worker. Talking about unsustainable lending.

venturen's picture

if you are in the US your debt/unfunded lliability is $800k so don't laugh

Last of the Middle Class's picture

All your collateral are belong to us. Next time no do predatory banking.

Batman11's picture

BUT bankers only have one product, loans/debt, we must keep pushing it whether people can pay the loans backs or not.

 

 

all-priced-in's picture

282 billion (is that dollars as indicated in the pie chart or Euros?)

 

92% went to banks - say 260 billion to bail them out for prior loans they made.

 

But where did the prior loan go?

 

Looks like the banks are just middlemen - they may have gotten paid back what they lent (with interest) but who got the original loan proceeds?

 

Just saying that "the Greek & European financial institutions" got 92% and the people only got 8% is a crock of shit - unless we know who got paid in the first place.

 

 Didn't the Greek GOVERNMENT take out the original loans? WTF did they do will this money?

 

I bet they spent it trying to give people jobs, do infrastructure projects, improve health care, gave pay increases to government workers, bumped pension payments and a whole bunch of bridges to nowhere and maybe even a few 10K shower curtains.

 

 

Alberich's picture

Betelgeuse could go supernova tonight. Betelgeuse could go supernova in a million years. Is the timing in Europe any more certain?

bluskyes's picture

It wouldn't matter to any of us if it went supernova. We wouldn't see the effects for at least 640 years.

PhiBetaZappa's picture

They can still fall back on 'lie and deny'. It never failed the Bernake.

A_latvian's picture

Chant it with me now:

 

Dee-Fault!  Dee-Fault!  Dee-Fault!  Dee-Fault!

Anglo Hondo's picture

" .. most of the debt owed by Greece doesn't just vanish when Greece defaults--it must be paid by the other EU nations that guaranteed the debt."

 

Bullshit!  The *debt* was produced from nothing (thin air?), and is only held as a book-keeping entry in the EFSF.  No EU countries actually put hard cash into the *fund*, so it can just be written off on Grexit.  If the central banks want to invent debt into existence, they can invent it back out of existence.

 

Like my mother used to say, "I brought you into this world, and if you don't behave, I can take you back out of this world".

flyonmywall's picture

I'm sure I read some article here on ZH a few years ago while the 2008 "crisis" was unfolding, that first you will have homeowners default, then companies that used leverage on mortgage backed securities (Bear Sterns, AIG etc), then insurers of those bonds, and finally you will have whole countries default (Iceland), then whole continents default (soon, Greece and the rest of Europe).

The progression is pretty clear. If Greece defaults, then the clauses in EFSF will activate, and the domino effect will topple Spain, Ireland and Italy, with France soon to follow. After that, you will have war in Europe.

It is what has happend for hundreds of years in Europe, and it will happen again. The end result of all financial manipulation is war, pure and simple.

 

killieboy's picture

'The end result of all financial manipulation is war, pure and simple.' Now with added Islam to spice things up-yikes!