As a final
bailout framework for Greece continues to elude negotiators from France and
Germany, the situation on the ground in Athens continues to deteriorate
alarmingly. Protests have turned increasingly violent and riots have occurred
in the most sensitive portions of the Greek capital.
demonstrations have taken a political toll on the ruling socialists who
recently passed the latest austerity measures with the slimmest parliamentary
majority. Indeed, Louka Katseli,
a former labor minister of the present government was expelled from the party
as a result of her opposition to the latest austerity deal that paved the way
for an immediate infusion of 110 billion euros of EU and IMF bailout funds.
popular unrest and political wrangling portend an election defeat for the
government of prime minister George Papandreou. Many have speculated that the
growing dissatisfaction will force an election much earlier than the
currently scheduled election of 2013. This begs the question: "What
policies would be pursued by a new Greek government with respect to their
suggest that the next leadership coalition would likely look to similar
choices made by the government of Iceland, when a similar crisis struck the
tiny Nordic island in 2008 and 2009.
bubble years earlier in the last decade, the Icelandic economy was one of the
world's leaders in debt issuance per capita, and a highly leveraged financial
sector helped make Iceland an economic superstar for many years. However, it
also exposed the tiny country to the first tremors of the global financial
crisis. When creditors panicked and started pulling money out of Iceland's
bank, the tiny economy was soon overwhelmed, and plunged quickly towards
with the insurmountable and reckless debts, a cascading recession, and the
demands of the international political elite for more debt and austerity, the
government of Iceland put it to their citizens. In early 2009, with a vote of
90 percent, Icelanders chose to default, leaving foreign investors, bankers
and governments, holding much of the losses. The event stands as a stark
reminder to the dangers of lending to overly indebted borrowers.
As a result
of the default, the Icelandic Krona fell sharply, at one point dropping more
than 70 per cent against the euro. A recession of some 5 percent followed.
However, as a result of its debt repudiation, the Icelandic economy did not
die. In fact, in the ensuing two years, the Icelandic economy has shown signs
of improvement. Indeed, Bloomberg has reported that, "Iceland is doing
better than anyone could have hoped."
Iceland did not adopt a costless solution. Their economy now is still a
shadow of what it was back in the boom days of 2005 and 2006. However, their
default may prove to be far less burdensome socially and politically than the
increased debt and austerity that had been encouraged by central banking
in Greece indicates that there may be massive voter enthusiasm for a solution
along the lines of what occurred in Iceland. The difference between Iceland
and Greece is their size (Greece is much larger), and the degree to which they
are integrated into a larger political establishment (Greece is a member of
the EU). As a result, Iceland was able to pursue its own agenda with fewer
France and Germany, the two countries that dominate the European Union, hold
a great deal of the sovereign debt issued by periphery EU countries with less
sophisticated economies. As a result France and Germany are using their
considerable political clout to prevent Greece from becoming another Iceland.
Instead, they are forcing Greece to take on even more debt (and to make
painful austerity cuts).
debt reduces the ability to service even the current debt. Indeed, it
increases the cost and difficulty of future borrowing. In the end living
standards have to fall.
But, in the
Internet age, voters are far more aware. For how long will voters accept
increasing austerity and greater poverty in order to keep afloat governments
they see as corrupt and banks they perceive as greedy?
citizens of Greece follow the Icelandic lead, a larger sovereign debt crisis
will likely follow. In such a scenario all fiat currencies will likely
suffer. However, those considerations will merit little concern from those
throwing Molotov cocktails on the streets of Athens. In the end, Greek
politicians will cater to their constituencies rather than their creditors.
We should all prepare for that.
Euro Pacific Capital, Inc.
John Browne is a former member of the UK
Parliament and a current senior market strategist for Euro Pacific Capital. Click here to learn more about Euro
Pacific's gold & silver investment options. For a great primer on economics,
be sure to pick up a copy of Peter Schiff's hit economic parable, How an Economy Grows and Why It Crashes