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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.
?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!
?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 na?ve. 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!
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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
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