[Home] [Headlines] [Latest Articles] [Latest Comments] [Post] [Sign-in] [Mail] [Setup] [Help]
Status: Not Logged In; Sign In
|
Business/Finance See other Business/Finance Articles Title: Today’s Financial Thermopylae Beckons—–But Don’t Count On The Greeks The global financial system desperately needs a big, bloody sovereign default—-a profoundly disruptive financial event capable of shattering the current rotten regime of bank bailouts and central bank financial repression. Needless to say, Greece is just the ticket: A default on its crushing debt and exit from the Euro would stick a fork in it like no other. But don’t count on the Greeks. Yes, their new government does have a strong mandate to throw off the yoke of its Brussels imposed bailout and associated debt servitude. Were the Syriza government to remain faithful to the raison d’etre of its wholly accidental rise to power, the task of busting the misbegotten euro project would be its own special form of god’s work. But notwithstanding Tsipras’ resolute speeches (“We will not accept psychological blackmail”) and Varoufakis’ elaborate game theory maneuvering and hair-splitting word games, the odds are against a regime-shattering “grexit” event in the immediate future. If it does happen, it will be the result of political miscalculation among the parties, not the policy agenda and will of the new Greek government. The problem is that to the extent that Syriza has a coherent program—-and that’s debatable—-it amounts to a left-wing Keynesian smorgasbord that will eventually drive the Greeks to clutch at any fig leaf of compromise which enables them to stay in the Euro. Unlike the Germans, Varoufakis & Co have no scruples whatsoever about central bank financing of state debts, and see the ECB as the ready-made agent of just that form of financial salvation—-for themselves and the rest of Europe, too. So notwithstanding the current fevered tensions between Greece and its paymasters, nearly every issue of difference between them can be finessed—that is, given enough double talk, weasel words and kick-the-can windage. Certainly wordsmiths in the wee hours of the morning can find phraseology that bridges the difference between an “extension of the current program“, as insisted upon by the Germans, and the Greeks’ most recent proposal to “proceed jointly to a successful conclusion of the present arrangements”. Even on core substantive issues like the size of the required primary budget surplus, the target number of state employees, minimum pensions for citizens with minimum incomes, the precise slate and schedule of the state properties to be privatized —–all can be worked out during showdown negotiations. After all, these issues are all about splitting numbers and fudging timelines——the very thing that politicians were created to accomplish. But what can’t be compromised is the one thing that ultimately counts. Namely, a substantial default on the nominal level of Greece’s staggering debts. On that score, the EU politicians and bailout apparatchiks have taken themselves hostage. Not a single government outside of Greece could tolerate a capital call to make good on their bailout fund guarantees. That would fatally embarrass Mrs. Merkel, cause the fall of the French and Italian governments, leave financial cripples like Spain, Portugal and Ireland rampaging for relief and bring populist radicals out of the political woodwork from one end of Europe to the other. In short, to save the euro from the purported “contagion” effects of sovereign defaults, the geniuses in Brussels have effectively strapped political time bombs to their collective chest. The Greek debt guarantees are promises that dare not be activated. Yet…..yet——Herr Schaeuble need not frown so much. Syriza’s chief financial brain trust, Yanis Varoufakis, takes his lead from Professor James Galbraith—–a second generation, unreconstructed Keynesian statist who never saw an economy that couldn’t be inflated to the pink of health through prodigious monetary and fiscal injections. Accordingly, the last thing the Greek government wants to do is stage a jail break from the Euro and/or welch on its debts to the EU, ECB and IMF. Varoufakis made all this clear more than a week ago at the get-go of his European grand tour: Attempting to sound an emollient note, Mr. Varoufakis told the Financial Times the government would no longer call for a headline write-off of Greece’s €315bn foreign debt. Rather it would request a “menu of debt swaps” to ease the burden, including two types of new bonds. The first type, indexed to nominal economic growth, would replace European rescue loans, and the second, which he termed “perpetual bonds”, would replace European Central Bank-owned Greek bonds. He said his proposal for a debt swap would be a form of “smart debt engineering” that would avoid the need to use a term such as a debt “haircut”, politically unacceptable in Germany and other creditor countries because it sounds to taxpayers like an outright loss. Smart debt engineering! Why that sounds like he’s channeling Barrack Obama—-and doing so in a manner that is too clever by half. Varoufakis’ debt relief schemes boil down to nothing more than a prosaic exercise in present value economics—-something you learn about in Economics 101. So, yes, give Greece a five-year grace period on payments of principal and interest on the approximate $270 billion it owes the EFSF, ECB and IMF; cut the weighted average interest rate on this debt from an already negligible 1.8% even further toward the zero bound or swap some of the principal for variable rate GDP performance bonds; and go back to the Versailles precedent on maturities and stretch them for 50 years until 2065. Do all that—-and you will have whacked the NPV of the debt by half or more. But that wouldn’t solve the problem and, in fact, would amount to the ultimate betrayal of the Greek people.The latter can never, ever regain their democratic sovereignty or sustainably rebuild their domestic economy and international credit unless a vast amount of the contractual principle owed to the European superstate and IMF is flat-out extinguished, cancelled, repudiated. Here’s why. The world will not remain enthrall to the ZIRP deformation of Keynesian central banking much longer; and certainly not for the decades over which the Varoufakis’ NPV game would stretch the Greek maturities. Instead, interest rates on sovereign debt will presently normalize, and violently so in the case of states which cannot govern themselves fiscally. There are demons that dwell in the terra incognito beyond ZIRP, and they will eventually reveal themselves to be nothing more than the bond vigilantes of yore. That means the “roll-over” risk embedded in the Greek state’s crushing debt load is insuperable. If Greece doesn’t default now on debts which extract 3.0% of GDP in interest costs, it will surely default later when interest expense rolls-over at double, triple, or event quintuple the current tab. And whether the default comes sooner or later, an economy perpetually on the edge of state bankruptcy will not escape the grinding austerity and deprivation now afflicting the Greek people. The only way around that arithmetic certainty is via delusional resort to the Keynesian version of Art Laffer’s napkin. That is, the notion that Greece can grow out from under its crushing debt via decades of robust GDP expansion. But at least Laffer was directionally correct: Lower taxes alone will not balance the budget, but they can at least remove some of the state’s tax barrier to growth and entrepreneurial wealth creation. By contrast, the Syriza program amounts to the opposite of supply side. Namely, a vast expansion of the state through large scale public investment and the preservation of inefficient public monopolies and underpriced public services. This statist core is then augmented politically by clobbering the oligarchs with their fair share of the taxes and fiscal sacrifices. Good on them for the latter, yet putting the oligarchs in the public stocks will only help with equity and justice, not economic growth and productive investment. In fact, the Syriza variant of Keynesian statism is virtually guaranteed to keep Greece in state debt bondage as far as the eye can see. The reason is that the core Syriza program of massive public investment in infrastructure, housing, schools and social services flat-out precludes a primary fiscal surplus. Any paper commitments it may make as part of a compromise “re- set” of the Brussels program are sure to be window dressing—gist for the Troika’s rechristened successor to importune Athens about “compliance” with any new deal. To be sure, the Germans are being utterly predatory in their insistence that Greece should carry the full cost of bailing out the German and French banks. But at least they’ve got the math right. Without large primary surpluses for decades to come, Greece will never escape the “debt trap” in which it is currently impaled. Post Comment Private Reply Ignore Thread
|
||
|
[Home]
[Headlines]
[Latest Articles]
[Latest Comments]
[Post]
[Sign-in]
[Mail]
[Setup]
[Help]
|
||