Sunday, 18 September 2011

A European Divorce and A Stressed Banking System

Babs and Clean Willie were in love they said
So in love the preacher's face turned red
Soon everybody knew the thing was dead
He shouts, she bites, they wrangle through the night
She go crazy
Got to make a getaway
Papa say,
Oh – no hesitation
No tears and no hearts breakin'
No remorse
Oh – congratulations
This is your European divorce

(slightly adapted from 'Haitian Divorce' by Steely Dan, a great song by the way, ed.)

A Divorce Is On Its Way


Mrs. Merkel and Mr. Sarkozy let it be known that the 'future of Greece is in the euro-zone' after talking with Greek prime minister Papandreou over the phone. Perhaps it is. A default does not necessarily mean that Greece must abandon the euro, although it may be seen as an 'easy way out' for Greece's politicians in order to regain the ability to devalue, and more importantly, have its own central bank finance the government. This would of course risk an eventual hyper-inflationary collapse, but one should never put anything past a desperate government.

Interestingly, the markets have taken to ignoring such affirmations of support. Greece's bond yields and CDS spreads have kept rising, with the latter reaching an incredible 5,702 basis points (see our chart section below).

It seems however that the markets are perhaps taking a less negative view of a Greek default otherwise. It is not knowable at this point how it would play out in terms of financial contagion, but it is known that the rest of the euro-area is preparing for the eventuality. Looking at Germany's internal debate, one can see the political will to support Greece waning by the day. Preparations to handle an eventual default are well underway. As the news magazine 'Der Spiegel' writes (this report is by the way well worth reading in its entirety):
“Even if the Greek government were to take this ultimate step, the consequences would be manageable, government experts believe. This was not the prevailing view in early May, however, when the finance ministers of the large euro-zone countries assembled in Luxembourg for a secret meeting with their Greek counterpart and Euro Group President Juncker. One of the items on the agenda was the possibility of Greece withdrawing from the monetary union. 
While experts were still warning against the consequences of such a step in May, today those consequences seem more acceptable to the euro-rescuers. They have even found a solution for a problem that had Schäuble's officials worried at the time. Contrary to earlier assumptions, restrictions on the movement of capital, which could be used to prevent Greek citizens from moving their money abroad (something that would endanger the country's banks), are now seen as being compatible with EU law. Article 143 of the Treaty on the Functioning of the European Union offers a loophole, in that it permits certain countries to "take protective measures."

The new line is not entirely uncontroversial, however. This became apparent at a meeting of the euro zone's deputy finance ministers last Monday, when the so-called troika of the European Commission, European Central Bank and IMF gave its report on the situation in Greece.

The group was divided in the end. For the first time, there was a majority, led by the Germans, Dutch and Finns, that advocated pulling the ripcord on Greece. The southern countries, including France, were considerably more reserved. They feared that if funds were cut off for Greece, they could be next in line.”
(emphasis added)
We would note to this that any Greek saver who hasn't yet bought gold or transferred his money to Germany or some other safe destination should do so at the earliest opportunity after reading these words. It is obvious that it will be Greece's savers that will be sacrificed when the default comes. It is always the innocent bystanders, those who have prudently provided for the future, that get shafted in the end when corruption and fiscal mismanagement take their toll and the State faces an economic emergency. Argentina's citizens can vouch for this. Bank deposits in Greece of course continue to decline as can be seen in this chart.

It is noteworthy in this context that the Germans are thinking of continuing to support the Greek banks even in the event of a Greek default and Greece leaving the euro zone. Recall that when Argentina's default occurred, the government enacted a 'confiscatory deflation' that relieved the banks of a large portion of their deposit liabilities, while stiffing the country's citizens. As Joseph Salerno described the process at the time:
“Confiscatory deflation is a particular category of deflation. It is inflicted on the economy by the political authorities as a means of obstructing an ongoing bank credit deflation that threatens to liquidate an unsound financial system built on fractional reserve banking. Its essence is an abrogation of bank depositors' property titles to their cash stored in immediately redeemable checking and savings deposits.”
One of the major reasons why cutting off aid to Greece is now on the agenda is that there is a widespread belief that the financial contagion may actually be manageable. This notion stems from the fact that the economic performance and the ability to hew to fiscal targets has been markedly better in the other euro area countries that are at risk.

Click Here to read the full article.


by: Pater Tenebrarum

Source: http://www.acting-man.com/?p=10303

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