Home » Euro » Yet Another Make-Or-Break Week For Europe

Yet Another Make-Or-Break Week For Europe

by John Rubino on February 5, 2012 · 19 comments

Nobody really expects Greece to default on its debt and leave the eurozone. But Greek leaders do seem to be squeezing as much drama as possible from the bailout process:

Euro zone loses patience with Greece
(Reuters) – Euro zone finance ministers told Greece on Saturday it could not go ahead with an agreed deal to restructure privately-held debt until it guaranteed it would implement reforms needed to secure a second financing package from the euro zone and the IMF.

Euro zone ministers had hoped to meet on Monday to finalize the second Greek bailout, which has to be in place by mid-March if Athens is to avoid a chaotic default. But the meeting was postponed because of Greek reluctance to commit to reforms.

Instead, the ministers held a conference call on Saturday to take stock of progress on the second financing package, which euro zone leaders set at 130 billion euros back in October.

“There was a very clear message that was conveyed from all participants of the teleconference … to the Greeks that enough is enough,” one euro zone official said. “There is a great sense of frustration that they are dragging their feet.

“They should get their act together and start talking honestly, decisively and speedily with the Troika on the aspects of the programme that remain to be finalized – on fiscal and labor market reforms,” the official said.

The Troika are the representatives of the European Commission, the European Central Bank and the International Monetary Fund, who have prepared a Greek debt sustainability analysis on which the second financing programme will be based. “The main issue is the lack of reform, or prior action, in Greece,” a second euro zone official said.

Euro zone ministers were also dissatisfied with Greek Finance Minister Evangelos Venizelos because they believed the minister was paying more attention to his position within his party ahead of the April elections, than to talks about reforms.

“There is a great sense of frustration with Minister Venizelos, who is very hard to get hold of because he is very busy campaigning for the leadership of (the Greek party) PASOK, so he is not available to meet with Troika members,” the first official said.

“He is preparing his own political future, rather than the future of his country. People are seriously disgruntled about that and have conveyed this very clearly to him this afternoon,” the official said.

Recordings of these conference calls would be instant YouTube hits.

And with all the threats flying around you’d think that Greece would have long since been cowed into submission and forced to accept German control over its budget in return for credit it needs to cover its short-term debts. That they’re holding out implies that they’re really not that worried and believe they can get better terms, which in this case means smaller cuts in domestic spending, less of a decline in local wages, and more cash from the ECB. They’re probably right.

Over the past few months major brokerage houses have been churning out reports on what would happen if Greece or another eurozone country leaves the currency union and reverts to its old money. And without exception the predictions are apocalyptic. Here’s a general scenario:

Greece can’t come to terms with the IMF, ECB, Germany, et al, and announces that it’s leaving the euro and returning to the drachma. Instantly, everyone with a Greek bank account empties it and moves the proceeds out of the country. Greek banks close, oil imports stop, the national health ministry runs out of pharmaceuticals, etc., etc. Chaos leads to depression and, probably, to some sort of authoritarian government.

So far, this sounds like Greece’s problem, and a damn good reason to accept a bailout on pretty much any terms. But what happens next changes everything. The minute Greece announces that it’s leaving, investors instantly start looking around for the next domino, decide that pretty much all the PIIGS countries qualify, and pull money out of their banks, causing them to collapse and sending those economies into free-fall.

Then, since French and German banks have lent hundreds of billions of euros to those now-bankrupt countries, and are on the hook for untold trillions of credit default and currency swaps, they fail as well. The entire continent is plunged into chaos, with no obvious exit. The eurozone dissolves, all because one tiny country decides to leave.

Greece, of course, has read these reports and understands its own power — and knows that Europe’s leaders understand it too. So the Greek finance minister spending his time campaigning rather than waiting by the phone for yet another conference call should be seen as a classic bargaining tactic. Like George Bush Sr. going on vacation as the first Gulf War ramped up, he’s saying that he’s not worried, that this is the other guy’s problem and that by the time he gets back to the office the other guy should have some nice answers waiting.

Given the stakes, expect a deal more to Greece’s liking next week.

Enter Portugal
But of course a Greek deal is the beginning, not the end. Before the signatures dry, Portugal will demand the same bailout, using the same end-of-the-world scenario as its bargaining chip. It will get what it wants, and then Ireland will step up to the table.

In the end, so runs the analyst consensus, the only alternative will be a “fiscal union” where Germany and a handful of other core countries assume the debts of the periphery, in the same way that Washington absorbed Fannie Mae and Freddie Mac’s $5 trillion of mortgage paper. The ECB meanwhile, will have no choice but to finance the whole mess by buying ten or so trillion euros of low-grade paper with newly-created currency.

The euro will fall versus the dollar, yen and yuan, which will be great for German exports and Greek tourism, but bad for the eurozone’s trading partners. They’ll respond with inflation of their own, and so on, as the currency war really gets going. In this scenario it’s hard to see an upside limit for gold and silver.

  • kopavi

    Talk about a rock and a hard place. Given that the only possible “solution” is a rigorously applied fiscal union with rules that are enforced, which means that all the participating countries can pretty much kiss off 1000+ years of cultural and national identity. When we had a bunch of states that did not want to go along with dictates from DC, we ended up in a rather messy war. So what will happen when you substitute Germany for Washington DC. Merkel doesn’t look anything like Lincoln. The option not mentioned is Germany bailing out of the EU leaving the mess in the rear view.
    Man these are exciting days.

  • John R. Beanham

    Is there any possibility of a united printing/bond buying action by both the ECB and US Fed, to buy 10 trillion of each others Bonds?

    hang on tight boys and girls it is going to be an exciting ride.

  • John G.

    Thanks for laying out how the pieces of the puzzle fit, John. Makes perfect sense, your explanation of what will happen.

  • Rachael

    This is an expected outcome when all money is created by issuing debt. Perhaps somewhere along the line, in the middle of all the lunacy, someone will bring up this fact and openly question whether debt-backed fiat is the only way to go?

  • Pal

    yuk yuk…..and to think we [USA] and the Euroweenies are supposed to be the bright kids in the room. Doesn’t say a whole lot for Earth bound civilizations.

  • W G Thompson

    I like that: Germany going back to the
    Deutchmark and leaving the Med to
    its own madness. Be it noted that none
    of these borrowed funds will ever be
    repaid in cash. Swaps ad infinitum will
    be the proceedure, as the charade that
    is central banking winds down.

  • Robby Rob

    Given that no one member can plausibly be expelled, I have to wonder if perhaps Germany, France, and the Norwegian countries are contemplating a smaller, reconstituted euro zone. Ring fence the stable countries, recapitalize their banks, and let the bankrupt countries go through their apocalypse. It will probably lead to WWIII eventually, but maybe that can’t be helped.

  • Jason Emery

    The obvious solution is throw all the monopoly money back in the box and start over. This is the time tested solution. There are various ways to go about this. The most common approach is to print enough fiat to pay off all the debt. This is referred to as ‘hyper inflation’.

    Obviously, creditors don’t like this, just as the person that is winning at ‘Monopoly’ doesn’t like it when someone that is losing ‘accidentally’ kicks the board and says ‘oh, my bad, we’ll have to start all over’.

    I wonder why the Chinese aren’t bidding up the price of gold/silver/miners. Is it possible that they don’t yet know that they are the pigeon?

    • John R. Beanham


      If I was at the top of the heap in China, looking at US$3 trillion of rapidly depreciating money, I would be buying ALL the tangible assets I could get, and that includes mines with stuff in the ground.

      Gold and Silver bullion of course, and farms and mines and buildings and industrial diamonds and……….

  • Big Dick

    The biggest buyer of China goods is Europe. Deals are being made by them all over to trade in other than dollar currencys both hard and paper. The US Fed will along with the European uber banks will print whatever is needed to keep the Euro alive and China will give lip service to the plans while continually buying everything that is a hard asset in the Eurozone. Where does all this lead? First the US will see interest rates rise and the Fed caught in a liquidity trap. Second the entire European continent and the US continent will go into a deep stagnation inflation while the dollar drops and drops. Old Blowhard will be reelected or the white Old Blowhard will oversee the sapping of American freedom. China will sit back and wait picking up control of all needed minerals and land. Wake up America get rid of the corrupt politicians and the FED!

  • Bruce C.

    Don’t ask me why, but I’ve actually continued to read about this sorry soap opera in Europe and based upon my understanding of things I don’t wholly agree with a number of assertions in this piece. Consider…

    A. “Nobody really expects Greece to default on its debt and leave the eurozone.”

    Not true according to the Germans/A. Merkel. They want Greece to default and leave the eurozone. To them it is the best (and only practical) long-term solution (vs another stopgap: “But of course a Greek deal is the beginning, not the end.”). That is why Germany is demanding conditions that Greece will not accept (surrendering its sovereignty to Germany. “Viva La Greece!”).

    “…without exception the predictions are apocalyptic.”

    Of a Greek default and eurozone exodus, that is. “Bad” maybe, “not good” gets some votes too, but not necessarily apocalyptic. Look, many countries have defaulted on their debts in the past, and this would be Greece’s umpteenth time is recent memory. “Investors” suddenly getting all philosophical and fancy thinking about what would happen next (e.g., Euorpean-wide bank runs) and then growing a spine and acting accordingly is totally without precedent. It’s like expecting everyone to suddenly understand FOFOA’s cryptic “Freegold” concept and then rushing in unison to stand in line to buy and ounce or so with their last few hundred thousand. It sounds reasonable until you remember that those same craven dumb asses piled in to Treasuries when the US credit rating was downgraded.

    “…on the hook for untold trillions of credit default and currency swaps…”

    Like all those CDS’s will be enforced? By the CFTC maybe? Oh… that’s right… it’s international, so it’ll be a group effort. As in the same group. Talk about mutually assured destruction…

    D. “Greece, of course, has read these reports and understands its own power.”

    Greece’s position reminds me of the old adage, ‘If you owe a bank a thousand dollars then you’re in trouble, but if you owe a bank a million dollars then the bank is in trouble’. TBTF works both ways. What everyone involved is finally understanding is that Greece should have defaulted almost 2 years ago (has it really been that long already?) and now the sooner the better. Got squid will cook.

    • Jason Emery

      “It’s like expecting everyone to suddenly understand FOFOA’s cryptic “Freegold” concept…”

      You better get down to poison control, if your drinking that Kool-aid, lol. In the wake of the biggest fiat failure of all time, gold will continue to trade beside unbacked fiat, says FOFOA. The ‘tards that post comments there, regurgitating every word, didn’t even know if FOFOA’s fiat was subject to legal tender rules or not, a crucial distinction.

      I have no idea what the agenda is there, but it’s not pro-gold.

      • Fred Quimby

        “I have no idea what the agenda is there, but it’s not pro-gold.”

        “I have no idea” is the only understandable thing we can take away from that comment!

        Keep stacking the paper Jason!!

        • Jason Emery

          Hi Fred. The only paper I’m stacking is on the counter of the coin store, buying gold and silver. But am I complete moron for not pawning my guns and every other possession (including gold stocks), to buy still more gold, because that crowd says to put 100% of your assets into one asset subclass?

          Those brilliant one asset investors admit to selling most of their silver for $10/oz, at a gold:silver ratio of 80:1. How’s that trade working out, lol?

          What if they’re wrong and it’s silver, not gold? What is the down side risk of owning both? You can only buy 8 islands, instead of 16 of them? You want to drink that Kool-aid, poured out by an anonymous message board guru? Please tell me you’re not that stupid.

    • paper is poverty

      I hear that said pretty often: “Hey, lots of countries have defaulted on their debts in the past.” True, but I don’t know whether “this has happened lots of times before” is relevant, given that at present we have a highly internationalized banking system that is stuffed with sovereign debts and over-leveraged. And the derivatives problem is still a disaster waiting to happen, because if CDS are never triggered then these are not insurance and cannot be used to supposedly hedge risk. Another thing is, we have drastically plunging dry shipping rates and gasoline usage, indicating contraction in the real economy in spite of all their bogus statistics saying otherwise. Things are very fragile… some black swan is going to shove us into the abyss, and Greece might be it. Contagion risk is a real thing… just look at Asia in the late 90s.

      • Bruce C.

        You’re right about the possible consequences of a Greek default to non-Greek parties, but that doesn’t mean Greece won’t default anyway. Such collateral damage is not their problem, at least not directly. Barring some unpredictable blow-back, the consequences and challenges for Greece are the same regardless of all the outstanding hedges. My point was that many countries have defaulted in the past and they’ve managed to survive and even thrive. If the rest of Europe (i.e., Germany) thinks that the consequences of a Greek default will cost more than just assuming Greece’s debts then maybe Germany, et al will do that, which is JR’s point. But Germany, supposedly, thinks that a Greek default and exit from the Euro zone would be the better option so they WANT Greece to default. Both scenarios are messy but Germany believes that trying to maintain the european union at all costs is just not worth it.

        • paper is poverty

          I certainly agree that defaulting is best for Greece itself.

          Personally I don’t feel like I know what Germany thinks. What they say publicly could just be bargaining. If the Eurozone disintegrates (i.e. Greece is just the first domino) they will probably be blamed, and especially given their history they would really want to avoid being scapegoated. And if the Euro falls apart the Deutschmark would presumably be highly valued, hurting German exports and/or forcing the Germans to do what they most hate to do: print money.

          On the other hand, as John says in the post, the analyst consensus is that Europe now needs not just a monetary union but a fiscal union, which to me seems like the surest and swiftest way to create warfare on the European continent. Do none of the European elites look at the US Civil War? Imposing a single economic policy on disparate economies is no way to insure peace; it does exactly the opposite, it creates acrimony. Maybe Germany is smart enough to see that.

  • Doug

    Great analysis John. All roads lead to the printing press. I actually have to give some credit to the US FED. They understood that printing was inevitable, so they just went for it. The Eurozone can’t seem to think more than a week out. I wonder what will happen when oil prices triple or quadruple. Will they keep printing or allow the house of cards to come down?

  • Pingback: Monday Morning Links | Iacono Research()

[Most Recent Quotes from www.kitco.com] [Most Recent USD from www.kitco.com] [Most Recent Quotes from www.kitco.com]