macroandcheese.org [11]
Greece is surrounded by the banker Barbarians at the Gate. Not the apostate free market investment bankers, mind you, that ship sailed years ago. No, these are the “independent” central bankers and their backers, the various heads of state who are trying to protect the Euro and their own national treasures. Greece should file Chapter 11 and send them packing. Every single airline on the planet can’t be wrong.
It’s plain to see that Greece is in the grips of a hostile takeover. The creditors are gathered around the table, often without Greece’s participation, deciding how to best protect their own interests, and what Greece should do to make them all whole. They’ve gone so far as to insist on a seat on Greece’s board, installing a czar who would monitor Greece’s compliance and notify the gendarmes of any violations. They’ve promised to pump more money into the country (though virtually all of it goes to Greece’s bondholders), but only if Greece cedes control.
The creditors are merely putting money in so they can take it out. Greece’s Eurozone patrons want to keep Greece afloat long enough for the citizens of the country to pay them back over the next generation or three. Their latest scheme is to attach warrants to the newly restructured Greek bonds they’re working on, so that if Greek GDP recovers, bondholders receive a bigger payout. This would be the first sovereign convertible bond in the history of civilization.
The whole situation is absurd: When Greece upped to join the Eurozone a dozen years ago, it opened its doors to investors. Banks were fighting over themselves to invest in Greek sovereign paper at libor plus a few bp, because Greece is sovereign and not subject to capital provisioning under BIS. But those investments have gone sour, and rather than accepting their losses, the Too Big to Fail banks went to their governments and insisted on a bailout. Those governments are in turn protecting their interests by invoicing the citizens of Greece.
This has all of the makings of a Greek tragedy. A country in distress has three tools at its disposal to right itself: monetary easing, fiscal stimulus, and currency devaluation. Rates are already effectively zero and cannot be cut further. The Eurozone is preventing use of the two remaining levers by imposing fiscal austerity and insisting that Greece keep its membership and retain the Euro as its currency.
The inevitable outcome is a dramatic deterioration in the Greek standard of living, one we’re already starting to see. Only by a drastic reduction in after-tax wages can an economic equilibrium be restored, since this is the only means to reduce the deficit while improving the competitive position of Greece’s exports through lower unit labor costs. As long as Greece stays in the Eurozone, it is doomed to economic depression.
But Greece has an option, one that is much better than the status quo conditions that are being hammered out. Greece can do what every major airline has done: Default on its bonds, and file Chapter 11. It can return to the Drachma, and with a cheaper currency at hand, boost exports, grow the economy, and wipe the slate clean for the millions of Greeks who had nothing to do with the mess. If the other members of the Eurozone want to bail out their banks, by all means, have at it. It’s time to move on.