The Daily Reckoning Presents
What the Greek Rescue is Really About
In today’s Daily Reckoning, we’ll do something we can barely stand to do: we’re going to write one more time about Greece. If you can stand to read it, you may come to the same conclusion we reached.
That conclusion is simple: what’s going on Europe has nothing to do with solving a debt crisis and everything to do with preserving a corrupt system based on limitless debt and growing government power. The sooner you understand that fact, the sooner you’ll be able to prepare for what happens next. There are two options for what happens next, and we’ll get to those shortly.
First, though, doesn’t it strike you as strange that all of Europe can be brought to its knees by tiny little Greece? Greek GDP is just 2.4% of Europe’s GDP. In economic terms, Greece doesn’t matter. Its lack of growth or economic competitiveness shouldn’t be factors that can destroy Europe’s 13-year single currency experiment. Yet, Greece obviously does matter; otherwise the European financial markets wouldn’t be celebrating the latest €130 billion bailout that’s on its way to Athens.
So here’s our question: Why do Greek finances matter to anyone outside of Greece? If you rule out the obvious things that don’t matter, that leaves everything else. Or as Sherlock Holmes was fond of saying, “when you have eliminated the impossible, whatever remains, however improbable, must be the truth.”
First, let’s see why the possible explanations for Greece’s importance to the world are actually impossible. Take the issue of debt reduction. As we wrote last week, the deal before Europe would reduce Greek debt to 120% of GDP by 2020. The IMF says that level is sustainable.
Back in a universe where common sense prevails, you can see that the plan is a joke, at least in terms of debt reduction. A plan to reduce Greek’s debt to 120% of GDP…EIGHT YEARS FROM NOW…is not a serious plan about debt. Therefore, the plan cannot be about debt reduction.
Will the plan make Greece more competitive in the long run? Well, probably not. In order to get more money by March 20th, the Greek Parliament had to agree to certain structural reforms. Some of those reforms might even be a good idea. But cutting the minimum wage isn’t going to be popular. And with Greek GDP shrinking by 7% in the fourth quarter, years of austerity won’t make Greece more competitive. The lifestyle of the Greeks will be destroyed and the debt will remain. Therefore, the plan cannot be about making Greece more competitive.
Does saving Greece save the euro? Not at all. The euro would be better off without Greece and Greece would be better off without the euro. The Germans are even planning for a euro that doesn’t include Greece. With its own currency, Greece could default, devalue, inflate and start over. Argentina did it in the last 10 years. It’s not rocket science. Therefore, saving Greece is not about saving the euro.
If saving Greece is not about saving the euro, and if it’s not about reducing Greek debt, and if it’s not about making Greece a more competitive economy…then just what IS it about? Well, now that we’ve rule out what’s impossible, let’s look at what’s left.
Saving Greece means preventing a technical default…even though Greece has already defaulted in a real-world sense. So why is avoiding a technical default so important to the European Central Bank (ECB) and the International Monetary Fund (IMF)? The current plan certainly looks like a default. Under the plan, €100 billion worth of Greek debt would disappear, thanks to a debt swap agreement with private sector investors. The ECB has twisted enough arms to get creditors to accept a 70% haircut on their current Greek debt without actually calling it a default.
And yet, bizarrely, Greece’s creditors could be forced to accept this not-a-default default losses recourse to the credit default insurance they purchased. That’s right; they might lose 70% of their capital and still be denied a payout on the default insurance they purchased. That would be like an insurance company refusing to honor a fire insurance policy because only 70% of your house burned to the ground.
It gets kind of wonky here. But really, it’s about who gets to make the rules. To you and me and everyone else in the universe where common sense prevails, a non-voluntary 70% loss on your government bonds is a default. But you and I don’t get to decide what constitutes a credit default. That honour belongs to the International Swaps Derivatives Association (ISDA). The important thing to keep in mind here is that the ISDA is a trade group made up of banks and financial firms. Those are the firms that have the most to lose if Greek bonds default. It’s in the interest of the members of the ISDA that a non-voluntary credit event in Greece NOT be called a default.
It gets even murkier here. The ISDA essentially represents the global banking system. In Europe, the banking system is full of government bonds. Those bonds are nominally assets. If Greece defaults, it sets a precedent for how other countries might deal with unsustainable debt levels. This imperils the collateral of Europe’s entire banking system.
If you want to put it in simpler terms, let’s say that Europe’s banking system is full of rotting meat. Some investors bought that meat thinking they were going to get prime rib. But they can smell the stink of the meat from a mile away. They want to be compensated for the bad meat. The ISDA, which owns the freezer in which the meat went bad, says, “Well, we’ve decided the meat isn’t bad after all. And you have less of it than you thought anyway, as of now.”
This is a crude analogy. But this is exactly what happened last week. A “determinations committee” of the ISDA ruled that Greece’s default is not a default. The committee determined that “no credit event has yet occurred” for holders of credit default protection on Greece.
You can see the basic problem: everyone else knows that if Greece defaults (officially), the value of other government bonds in Spain and Italy and Portugal will plummet too. A Greek default wouldn’t be important because of the size of the default (although French and German banks would stand to lose a fair bit). It would be important because it would begin the process of blowing up bank balance sheets all over Europe.
When you realize that the ISDA and the ECB and the EU are in league to save their financial skins, you realize that the Greek rescue plans is about preventing other countries from realizing that default is an option. In fact, it’s not even about preventing the realization. It’s about making it impossible for a country to default on its obligations…even if it means erasing the word “default” from the English language.
If the centralized European Welfare State model is to survive, banks must not take losses on their government bond holdings. Individual and private investors, on the other hand, will be forced to take losses through a “collective action clause.” This clause allows your securities to be revalued without your consent if a majority of other bondholders agree to it.
Now we’re coming to the real nuts and bolts of what’s at stake. The technocrats in Europe are at war with private investors. The members of the ISDA are in league with the technocrats to preserve their system. That part is easy to understand.
The technocrats are employed by government and get to spend your money. This system is good for them. It’s good for the members of the ISDA too. Loaning money to the government is good business. Collecting rent off the expansion of credit is easy money. They want the system to last as well. Who is the system not good for? Everybody else who’s on the outside looking in. Investors who want their capital to be productive are out of luck. And taxpayers who question the value of austerity measures and debt reduction plans that don’t really reduce debt are also out of luck. No wonder they are angry.
We’ve come a long way, then. Greece isn’t about saving Greece. The only reason something so small and insignificant could matter so much is that it matters in a way no one is willing to say. It’s about the subversion of sovereignty and democratic processes by removing decisions from people and giving them to trans-national financial elites. It’s about preserving a global system that’s based on the accumulation of debt and growing government power because there are two groups of people who benefit tremendously from that system, even if most people don’t.
This is simply the latest example of corrupt government operatives colluding with the financial elite to steal money, liberty and big chunks of “the pursuit of happiness” from “we, the people.”
for The Daily Reckoning
Joel’s Note: Dan Denning is the author of 2005’s best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005, Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
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Joel Bowman, with some editorial flotsam and jetsam from the Marlborough Sounds, New Zealand…
We’re spending a few days at a dear friend’s house, nestled away in a little cove here on the northern tip of New Zealand’s rugged South Island. We don’t have Internet here. The television doesn’t work. The radio is crackly.
In other words, it’s perfect.
Instead of suffering the interminable chattering of the witless political class, we are free to let our own thoughts roam and the crisp, fresh air cool our mind; a rare treat in today’s information- saturated world…and one you have to go a little out of your way to enjoy…
The ferry from Wellington was late into Picton Port yesterday afternoon on account of what the papers had dubbed the “Weather Bomb.”
“You couldn’t use that term in the US,” observed fiancée Anya. “Imagine the tizzy the feds would get themselves into at the airports. Someone would announce the ‘Weather Bomb’ over the loudspeaker and the entire Department of Homeland Security would go into complete and utter mental meltdown mode…they’d probably just begin arresting and clubbing citizens at random, the phrase ‘Bomb! Bomb! Bomb!’ issuing forth from their spinning little heads”
Anya is right, of course. (Fiancées always are.) But we weren’t in Dulles International Airport or LAX. We were on a ferry, crossing the channel between what the Maoris call Te Ika-a-M?ui (the fish of M?ui — New Zealand’s North Island) and Te Waka o Aoraki (the canoe of Aoraki — the South Island). The last thing we wanted to think about was the DHS.
Besides, our trip had suffered a few minor setbacks of its own. We had already been delayed a day.
“We don’t sail through anything above 6 meters,” the man at the ticketing booth had told us on Saturday. “And today the swells are topping 8 meters. It’s the weather bomb,” he noted, calmly. “You’ll have to come back first thing tomorrow morning.”
And so, after a day and a night marooned in the nation’s capital city, we eventually left port bright and early on Sunday.
The seas, however, were still rough. Spray from the raging swells below whipped across the windows high up on the seventh and eighth decks. Whitecaps mottled the ocean’s undulating surface, cresting against the fierce winds. Our giant vessel — cars, trucks and even a train loaded into the iron hull — bobbed around like it was an earnest little sailboat in some old war story about Dunkirk. Passengers ambled through the gangways, arms out to the sides, feeling their way along the bannisters like drunks approaching closing time. Over at the bar, even the heartiest of men dared not order more than two or three slowly sipped ales.
Another vessel, just ahead of us, was slow going against the waves. A voice came over the loudspeaker; we’d be delayed another hour, waiting for the ship in front to dock and unload. But despite the delay, only a few people bothered to feign inconvenience. Two grey- haired ladies in front of us simply gave each other a knowing glance, sighed, took an exaggerated, simultaneous sip from their teacups, and returned to their novels. By now, the rocking had stopped. The sun had broken through the clouds, illuminating the sparkling turquoise of the waters below. Crowds gathered on the sky view deck. Our heaving ferry had entered the magnificent Marlborough Sounds.
More, another time…
If you haven’t yet read anything about this topographical orgy of color and sound, don’t bother. Instead, go there. Once on the mainland, you’ll notice immediately a slower, laid back lifestyle. That and the incessant hum of the surrounding wildlife. Bugs…birds…bugs the size of birds and plenty more besides populate the airways while the winding waters of the sounds pulse with a veritable cornucopia of marine life.
There’s still a few hours of sunlight left in the day when we arrive, so we decide to take a drive along the Queen Charlotte Road.
What possesses a person in the middle of their life to pack up and head for the wilderness, we wonder? There are those who have grown up here, of course. They attend sleepy little schools and buy lunch from fish & chip shops owned by friends of their parents. Then, when they turn twelve or thirteen, they help out behind the counter, serving up potato scallops and battered bream to their schoolmates for a bit of weekend pocket money. Or maybe they mow the lawns around the block. Either way, they come to know their neighbors well and, in turn, their neighbors come to animate their own life’s story…
for The Daily Reckoning
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