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As
we watched the Prime Minister and the Finance Minister of Greece travel
though Europe in a failed attempt to re-negotiate the terms of the “Bailout”
it received, we find ourselves thinking quite differently to the mainstream
commentators. Ours is not a jaundiced view but a realistic one. Pragmatism
demands we do so. The prime underlying factors that will be brought into play
are the interests of each side.
After
all, countries don’t have friends they have interests, even with fellow
members of the Eurozone. These will dictate the result and likely the tactics
on each side. We do not see these as friendly negotiations at all. For Greece
the stakes are higher than they are for the E.U.
Not
Friends, only interests!
Cutting
through the rhetoric and cordiality we have been saw this week, the interests
of each side are very clear.
Ø
Greece, while
seeing the faults of the past since it joined the Eurozone, feels it has
suffered enough punishment with a contraction of its GDP and what is now a
perpetual debt crisis. It now believes the bailout has stripped the nation of
its dignity.
The 25% contraction of GDP together
with 50% of its youth unemployed and its skilled workforce leaving to find
employment in other countries, Greece is bankrupt with no ability to repay
its debt. It has little to lose. The statistics point to growth appearing
again, but this is little more than cosmetic, as the damage already done will
take generations to take Greece back to where it was. It doesn’t blame the
E.U. entirely, which is why the new government will target the graft that has
been a feature of Greek society for decades and enforce taxation on its very
rich and until now, political classes who have ‘ducked’ paying up so far.
Greece has little more to lose as a
default on their debt is imminent. They can’t repay the debt even if they
wanted to, which they don’t. The election has committed the new government to
that position. The question stands, “Is the new Government and the pain it
now has, sufficient to take Greece back to the Drachma?”
With a new government voted in to clean
up this mess and to give it room to recover through either the writing off or
re-scheduling and restructuring of its debt, it has the mandate to do what is
necessary to achieve this. The two leaders have to be determined to achieve
these results for if they aren’t they will commit political suicide and that
of their party. This is what they are discussing this weekend.
We are reminded of 1919 when Germany
itself felt the same when it had un-repayable reparation terms imposed on it
at the end of the First World War and the impact it had on Germans then and
for the next 25 years. Greece can’t follow that road, but if they feel
strongly enough they can exit the euro and potentially the Eurozone!
Ø On the other side, Germany
and the strong northern members of the E.U. need a weak euro. The southern
member states ensure that through their economic weakness they will continue
to enjoy a weak and weakening euro. So they would not be happy to see Greece
leave the euro or the Eurozone.
If Greece did leave it would ensure a major
loss of international trade competitiveness, as the price of a strong euro
would suck out the competitiveness of German and Northern member states
goods, as their prices would jump with the euro. If that were to happen the
euro would likely go much higher than its $1.40 peak of last year. No, the
interests of the E.U. lie in keeping Greece and other southern member states
economically weak, while retaining them in the Eurozone.
If
we were able to measure the financial benefits to the strong member States of
the E.U. we are in no doubt that the €250 billion in loans to Greece are only
a small fraction of the profits gained because the euro has been much weaker
than a Deutschemark would have been. Even at current levels the E.C.B. wants
to see further falls in the euro exchange rate against global currencies, to
stave off imminent deflation.
Spain,
Italy and France are watching the events riveted to the potential outcome,
which could spell the future of the Eurozone, either way. The hoped for
integration of Eurozone member states always was a pipedream and a
distraction from the real intent of the union of member states. As to the
financial union under common rules of behavior the patterns of behavior
differed so much before the formation of the E.U. that integration of such
differing people was at best a vague hope, no more. Greece joined because of
what it could get out of the Eurozone as did Germany and all other members.
Austerity has not worked for Greece. It simply brought the country to today, close
to leaving the Eurozone as a bad, bankrupt, debtor.
If
Greece is successful in renegotiating its debt, or if it leaves the Eurozone
and the euro, we believe that other economically weak member states will
contemplate following it back to their old currencies. Then weighing the new
price of German imports against, say, cheap Chinese alternatives could lead
to a further decimation of exports from Northern Eurozone member states.
The
history of Europe for the last 2,000 years shows that national integration,
as is present in the U.S.A., is nigh on impossible. To think that that was
ever a real intention was naïve. No, Greeks are Greeks, Germans are German.
Never the twain shall meet. So financial realities now come to bear.
No
protection from Creditors for nations!
In
the case of individuals, institutions and municipalities in the developed
world, when an angry creditor chases a bankrupt debtor, credit protection
measures slow down the creditor. The days when a debtor would go to prison
are long passed. But in the Eurozone, at sovereign level, no such protections
exist.
The
realities facing creditor and debtor, in the case of Greece and the E.U. are
that they must slug it out pushing their own interests first. When the
bruising hurts and threatened damage real, then a settlement will be reached,
not before then. The Eurozone can carry the loss of the Greek debt if need be
and could even enjoy a much weaker euro thereafter, but only if they accede
to Greece’s terms to a large extent. Greece has now drawn a line in the sand
that defines its stance and cannot afford to budge.
Writing
off debt becomes the most pragmatic of options, but it seems that the Greek
ministers have already ruled that out weakening their position right at the
start of the negotiations by saying they did not want to write off that debt,
just renegotiate it. As they sit at home this weekend they may well be
contemplating a much more dramatic stance as they face the wall of resistance
they saw in the E.C.B. and in Germany.
No
E.C.B. loans against Greek debt from January 11
The
ECB and Germany have already started the chest beating with fear and
volatility hitting Greece’s financial sector, putting the government on the
back foot.
The
E.C.B. has stated it will not continue to give funding against Greek bonds
from January 11th onwards. This threw pressure onto the Greek
banking system who have put on a brave face so far. But with Greece’s back
now against the wall it appears that this first hostile act is giving a
mandate to the two Greek Ministers to take very strong action at a
potentially greater cost to the country, but an even greater cost to the
Eurozone!
With
E.U. Q.E. beginning in March, it appears that Greece will lose out there too.
If the E.C.B. follows through by not accepting Greek Bonds in this program
too [it seems more than likely that this is the next pressure the E.C.B. will
impose] it could lead to the Greek population accepting a departure from the
Eurozone and the euro.
Will
Greece suffer more if it writes off its debt to the E.U.? After all, the big
attraction to Greece of being a member of the E.U. was the major loans and
finance it was to receive. It has had these and it seems they are now being
cut off, so what more is there in it for Greece? Perhaps a return to a weak
Drachma will lead to a boost to the Greek economy and allow its politicians
to blame the E.U. for its new woes. That way the new government would be
heroes, no matter what the damage a failure to renegotiate its debt brings to
Greece. To fail to achieve an acceptable renegotiated debt package would
discredit the new government and the entire country’s credibility,
irrevocably. It would be political suicide for the new government.
The
way forward for them is clear. They have to be fully prepared to leave the
Eurozone, unless the benefits of staying in it bring huge new benefits to
Greece and its people.
But
that message has not got across to the E.U. or Germany, yet. Our only
question of the Prime and Finance Minister of Greece is, “Do they have the
personal resolve to walk out of the Eurozone or not?”
Global
consequences
A
strong euro will hasten deflation in the Eurozone as well Draghi knows. The
whole thrust of his quantitative easing policy is reliant on a weak euro. If
a strong euro is seen, the entire globe will be affected. China sees the E.U.
as its largest client, so a strong euro will see more Chinese goods flowing
in or will deflation affect these no matter what their price is?
Deflation
in the Eurozone will dampen that and affect the recovery in the U.S. The Fed is worried, as was
seen in its statement of last week. The last time the FOMC statement made a
direct reference to international turbulence was January 2013, when officials
warned that “although strains in global financial markets have eased
somewhat, the committee continues to see downside risks to the economic
outlook.” Translated it means that Eurozone troubles are a danger to the U.S.’
recovery and could delay the raising of U.S. interest rates.
From
now on, we expect growing currency volatility and a turning to gold and then
silver, slowly but surely!
Legal Notice /
Disclaimer
This document is not and should not be
construed as an offer to sell or the solicitation of an offer to purchase or
subscribe for any investment. Julian D. W. Phillips makes no guarantee,
representation or warranty and accepts no responsibility or liability as to
its accuracy or completeness. Expressions of opinion are those of Julian D.
W. Phillips only and are subject to change without notice. Julian D. W.
Phillips assumes no warranty, liability or guarantee for the current
relevance, correctness or completeness of any information provided within
this Report and will not be held liable for the consequence of reliance upon
any opinion or statement contained herein or any omission. Furthermore, we
assume no liability for any direct or indirect loss or damage which you may
incur as a result of the use and existence of the information, provided
within this Report.
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