Greece - Eurozone or Not? Slavery or Freedom?

Via Peter Tchir of TF Market Advisors


At this moment, the headlines coming out of Greece are confusing and contradictory.  It isn't clear whether or not there will be a referendum or a vote of no confidence.  There may be a new leader, there may not be.  All we can do is wait for the next headline.  In the end I think there will be a referendum.

You can't put the genie back in the bottle.  If a referendum is cancelled now, how will the people of Greece react?  If the country was already "ungovernable", how will it get better once the people see this chance to have their voice count, snatched away by Merkozy?  I suspect that the protest and strikes will escalate to the point that a referendum has to be scheduled.  I may be wrong, but I think the Greek people will react very negatively to being told their chance to vote has been taken away.

Right now, the vote, if there is one, is being framed as Eurozone or No Eurozone, where Eurozone represents "the land of milk and honey" and No Eurozone is "a land of famine and disease".

The markets reacted positively to the fact that this vote would be about being in the Eurozone or not, because who would choose famine and disease over the land of milk and honey.  But is it really so simple?  Is the Eurozone really so appealing?  Is there no credible Non Eurozone plan? Maybe this will become about "debt slavery" versus "freedom"?

The Eurozone as Debt Slavery

What does staying in the EU offer GreeceThe "bailout" has a goal of achieving a debt to GDP ratio of 120% in 2020.  So the plan is for Greece to suffer through austerity and strict foreign control for 9 years just to become a cr*p country?  When the Greek crisis first started, the official debt to GDP ratio was below this.  Is it really so compelling to struggle with the program with the only target being to still suck?  They have no control over the money supply or interest rates - they are at the mercy of the ECB.  Merkozy is happy to push down on Greece and threaten their sovereignty.  Having to listen to Juncker can't be an exciting national pastime.  The EU trade agreements are good, though with no real industry, it mostly benefits Greece on their imports.  Travel without passports is nice, but not crucial.  Greeks won't be able to leave the country to get jobs elsewhere so easily - this may actually be good for a struggling economy. The IIF hasn't even produced details on what the "haircut" will look like. How hard can it be for a bunch of bankers to produce an actual plan.  It is clear that Greece has had almost no say in the bailout and with each new iteration they are losing more control of their own destiny.  This is what you get if you stay in the Eurozone.

No Eurozone as Freedom and Sustainable Economic Growth

The No vote needs a credible plan.  Let's start with repudiating all existing debt.  Merkozy says we are with them or against them, well let's go for it.   Not accepting your horrific bailout means we have to leave the Euro, then we are going to do this right.  Greece will not make another payment on any existing debt.  Debt to GDP is now 0.  There are GREECE bonds and GGB bonds.  The GREECE bonds may have some rights to fight this, as they are under English law, but the GGB bondholders are probably completely out of luck since they were done under Greek law.  Not sure if you have looked, but the documentation on sovereign debt is pretty slim to begin with and very little is devoted to bondholder rights, since they have none.  So step 1 is to stop paying on existing debt and we think it will work.  Not only has our debt to GDP ratio dropped to zero, but our annual budget deficit problem just got a lot smaller.  With an average coupon of 4% on 350 billion of debt, the savings would be 14 billion euro per annum.  That looks to be about 75% of the annual shortfall.

It is true that this will wipe out our banks.  We cannot make special consideration for our banks.  They made mistakes and have to be punished (but "wink wink" the banks have shifted so much risk to the ECB that it is really a problem for the ECB and we have no interest in making the ECB's problems smaller, since they are part of what we are leaving).  Once the losses have gone through the system we will then nationalize the banks.  All depositor accounts will be protected.  Not a single cent held in a bank account will be lost.  Yes this is a cost to the government and we will need some money for this, but rest assured, no bank accounts will experience a loss.

The nationalized banks will function and ensure the economy runs smoothly and will have a much more concentrated focus on Greece.  You may hear some noise from the bankers that they won't work for a nationalized banks, but that is all it is.  The computers will still run, and tellers can be replaced if they really want to quit, and frankly the senior management is what got us into the problem, so they may not be asked to stay anyways.

The pension system will also be hurt.  We will be making a one-time contribution to the pension funds to make some of their losses, but it will be contingent on changes.  Defaulting on our existing debt doesn't solve all the problems.  Some of the austerity programs will have to be implemented and the citizens of Greece will share part of the burden of achieving sustainable economic growth.  The cuts will not be as severe as those demanded by the EU, but more importantly, you, the people of Greece, are making these sacrifices for yourself and for future generations of proud Greek citizens.

So, we will need some money to nationalize the banks, cover all depositors, to reduce the damage to the pension system, and to pay bills until we are able to run without an annual deficit.  To this end, we have our friends from the EU to thank.  In their effort to strip us of our wealth many supported the "Eureca" plan.  We realize that it was an attempt to strip us of our heritage and to enrich themselves at our expense, but not all of the ideas are bad.  We will be auctioning off minority stakes in some of the entities.  The winners will be required to not only pay for the minority stakes, but will participate in our new Drachma bond offering.  We have already been approached by several potential investors.  It seems, that although the EU may be fair weather friends, many other nations are private investors are happy to support the new Greece.  Sovereign wealth funds in particular are excited to be part of the new Greece and are comfortable that with our incredibly small debtload, not only will the new Drachma bonds trade well, there is little expectation of inflation.  We have no need to "print" money like other central banks, because our debt to GDP ratio will only be 20% after the asset sales and new bond issues.  With such low debt, many of the growth countries in the world will find it a valuable addition to their investment portfolio.  We expect to have enhanced trade agreements with many of these countries shortly as well, in an effort to replace what the EU has decided to deny us.

There will be claims that this cannot work, yet look at Korea, Russia, Argentina, Iceland, to see countries that either defaulted or were on the precipice that made tough decisions, played hardball, and went on to unprecedented periods of prosperity.

Say no to the Eurozone and usher in a brand new era where we control our own destiny and have no debt problems, with a real possibility of having surpluses and reserves in the future.  The new Drachma will be a solid currency backed by hard assets, a strong government, dedicated citizens, and little debt.  Do not listen to the alarmists, they have everything to gain from keeping us bound to the eurozone debt shackles and everything to lose by us taking back our freedom.

Letting People Think is a Dangerous Thing

Maybe the No Eurozone plan won't be so compelling, but if people start taking a serious look at how it would work, it might not be so bad, and don't forget, the Eurozone plan isn't that great.  At some point, the citizens of the country need to make the decisions.  Electing politicians that can then be corrupted by Merkozy is not a long term solution.  Maybe the Greeks will decide to stay in the Eurozone, but I don't think it will be as obvious as people currently believe.  Default can help the debtor, particularly when the lenders  have no real rights in event of default.  I am quite confident that at this stage, Merkozy view this little crisis as resolved, because they haven't actually spent more than a second wondering what Greece could really do, and are just assuming that the no Eurozone threat is enough to sway them.  Maybe it is, for now, but like everything else in this crisis, once something gets out there, it seems to take on a life of its own and keep coming back to haunt the "solution makers".


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