What's going on in Greece

Numerian, one of the most insightful financial bloggers I know, gets to the bottom of the markets' surge in the wake of the Greek passage of the new "austerity" measures:

For now, stock markets are happy because they get their periodic injection of heroin – oops, make that “liquidity” – to keep the game going. The game is the one we have all lived through our whole lives – the one where capitalism continues to grow by taking on more and more debt, until now every country is at the point where only the government is big enough to take on the enormous amounts of new debt necessary to keep paying principal and interest on the old debt. At least some countries are: the United States, the UK, Germany, France. Greece of course lost that privilege several years ago, and now even big borrowers like Italy are allowed into the markets only for very short term maturities.

The game, in short, is about over, choking to death on too much debt, kept on a resuscitator by politicians and central bankers who know the public has no way to stop them from raising trillions of dollars or euros with new bond issues. Only the market can stop an out-of-control debtor. Greece has found that out, Italy and Spain and Portugal are close to finding that out, and the UK and the United States are on the list, being no more virtuous than the Greeks. Once the government can no longer borrow, default in some form is inevitable, and austerity follows. The Greeks have austerity handed to them by the Germans; everyone else will be able to choose their own forms of austerity, as different economic and social forces fight with each other in a country that has run out of borrowing capacity and must live off the taxes it is able to raise.

If the stock market had a long term view, it would think about these things. It would look at Greece as a combination horror story and warning sign. Instead, the stock market lives for the day only, and for now the debt binge continues, and the fix of easy credit is being pumped into the financial system once more. Let the celebrations continue.

The end of the Euro?

Three interesting articles on what now seems to be considered an increasingly likely event -- the end of the Euro (in its current form, although some version might arise from the ashes).

First, Gavyn Davies speculates on several possible scenarios for the collapse of the Euro. It might persist as the new currency of a smaller union including Germany and The Netherlands (in which case the value of the Euro would rise significantly), or it might persist as the new currency of the periphery countries after Germany bolts (in which case the value of the Euro would fall significantly). Or the Europeans might finally find a way through the ongoing nightmare. Not betting on that one.

Second, Satyajit Das goes into a little more detail, and I think rightly sees some cultural issues as ultimately being most important. The three logical possibilities are easy to list:

The latest plan has bought time, though far less than generally assumed. The European debt endgame remains the same: fiscal union (greater integration of finances where Germany and the stronger economies subsidise the weaker economies); debt monetisation (the ECB prints money); or sovereign defaults. 

 Germany may be largely in favour of solution number 1. But the smaller periphery countries, and perhaps France as well, will favour solution number 2. Hence, we may by default find Europe hurtling inexorably into "solution" number 3 -- sovereign defaults:

The accepted view is that, in the final analysis, Germany will embrace fiscal integration or allow printing money. This assumes that a cost-benefit analysis indicate that this would be less costly than a disorderly break-up of the Euro-zone and an integrated European monetary system. This ignores a deep-seated German mistrust of modern finance as well as a strong belief in a hard currency and stable money. Based on their own history, Germans believe that this is essential to economic and social stability. It would be unsurprising to see Germany refuse the type of monetary accommodation and open-ended commitment necessary to resolve the crisis by either fiscal union or debt monetisation.

Unless restructuring of the Euro, fiscal union or debt monetisation can be considered, sovereign defaults may be the only option available.

Perhaps it betrays a little bit of anarchy in my own soul, but I'm rooting quite hard for sovereign defaults. I wish the Greeks had gone ahead with their referendum. For all the complaining about the slack morals of the Greek taxpayer, every debt-creating transaction has two sides -- and the creditors (French and German banks) bear as much responsibility as the debtors.

Then again, the end is likely to bring some severe social misery, not to mention riots (the UK is already advising its European embassies on the likelihood). A third article by Simon Johnson and Peter Boone points ominously in this direction, essentially echoing Davies' analysis in bleaker language:

The path of the euro zone is becoming clear. As conditions in Europe worsen, there will be fewer euro-denominated assets that investors can safely buy. Bank runs and large-scale capital flight out of Europe are likely.

Devaluation can help growth but the associated inflation hurts many people and the debt restructurings, if not handled properly, could be immensely disruptive. Some nations will need to leave the euro zone. There is no painless solution.

Ultimately, an integrated currency area may remain in Europe, albeit with fewer countries and more fiscal centralization. The Germans will force the weaker countries out of the euro area or, more likely, Germany and some others will leave the euro to form their own currency. The euro zone could be expanded again later, but only after much deeper political, economic and fiscal integration.

Tragedy awaits. European politicians are likely to stall until markets force a chaotic end upon them. Let’s hope they are planning quietly to keep disorder from turning into chaos.

The European debt crisis in a picture

From the New York Times (by way of Simon Johnson), a beautiful (and scary) picture of the various debt connections among European nations. (Best to right click and download and then open so you can easily zoom in and out as the picture is mighty big.)

My question is - what happens if the Euro does collapse? Do European nations have well-planned emergency measures to restore the Franc, Deutchmark, Lira and other European currencies quickly? Somehow I'm not feeling reassured.

The Greek crisis made clear...

This is far and away the most clear explanation I've seen of what is happening in Greece and why it poses an existential threat to the European Union. (h/t The Agonist)