Wednesday, 2 November 2011

AEP: Why the Greek decision means a complete unravelling of last week’s deal

Via The God That Failed, I discovered this article by AEP:

GREECE'S astonishing decision to call a referendum – "a supreme act of democracy and of patriotism", in the words of premier George Papandreou – has more or less killed last week’s EU summit deal.

The markets cannot wait three months to find out the result, and nor is China going to lend much money to the EFSF bail-out fund until this is cleared up. The whole edifice is already at risk of crumbling. Société Générale is down 15pc this morning. The FTSE MIB index in Milan has crashed 7pc. Italian bond spreads have jumped to 450 basis points.

Unless the European Central Bank step in very soon and on a massive scale to shore up Italy, the game is up. We will have a spectacular smash-up.

If handled badly, the disorderly insolvency of the world’s third largest debtor with €1.9 trillion in public debt and nearer €3.5 trillion in total debt would be a much greater event than the fall of Credit Anstalt in 1931. (Let me add that Italy is not fundamentally insolvent. It is only in these straits because it does not have a lender of last resort, a sovereign central bank, or a sovereign currency. The euro structure itself has turned a solvent state into an insolvent state. It is reverse alchemy.)

This all sounds true enough, as far as it goes.

Britain is having less trouble with the markets because it can print money to buy government bonds, which is what QE is all about. But this is hardly a cost-free choice.

We might equally say that an accomplished counterfeiter is never 'insolvent', because he can always pay his bills with fresh forgeries.

AEP says "unless the European Central Bank step in very soon and on a massive scale to shore up Italy, the game is up". But for whom is the game up? Italy won't cease to exist, nor will any of the real goods and services within its borders. The game will be up for those who were foolish enough to lend to the Italian government. And following a default, the game will be up for those who rely on the Italian government continuing to live beyond its means (notably those in public sector employment).

On the other hand, if the ECB does 'step in' to shore up every overindebted state in Europe (by printing money to buy their bonds), it will be confiscating purchasing power from everyone who currently holds euros, and sowing the seeds for hyperinflation on a continental scale.

I'm with Detlev Schlichter: the nations of Europe should embrace default.

Let's wipe the slate clean, and give true capitalism a try.


You do have to give AEP credit for this bit, though:

The Greek referendum – if it is not overtaken by a collapse of the government first – has left officials in Paris, Berlin, and Brussels speechless with rage. The ingratitude of them.

The spokesman of French president Nicolas Sarkozy (himself half Greek, from Thessaloniki) said the move was “irrational and dangerous”. Rainer Brüderle, Bundestag leader of the Free Democrats, said the Greeks appear to be “wriggling out” of a solemn commitment. They face outright bankruptcy, he blustered.

Well yes, but at least the Greeks are stripping away the self-serving claims of the creditor states that their “rescue” loan packages are to “save Greece”.


The debt has exploded under the EU-IMF Troika programme. It is heading for 180pc of GDP by next year. Even under the haircut deal, Greek debt will be 120pc of GDP in 2020 after nine years of depression. That is not cure, it is a punitive sentence.

Andy Duncan summed up the article nicely:

In his usual curate’s egg way of writing – with a mixture of the partly good and the partly bad – if you filter out the bad parts, AEP sums up the priceless situation in Greece, as the people there head inexorably towards Iceland-style default, regardless of what the Troika want.

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