Germany protects German banks but other countries cannot do the same thus quickly provoking multiple sovereign defaults and or bank failures, all of which may easily lead to a payments crisis in the global banking system. Derivatives are particularly at risk in terms of operation and execution.
The Euro falls in value especially against the US dollar
The Germans announce they are re-introducing the Deutschmark. They have already ordered the new currency and asked that the printers hurry up.
The Euro falls even more on any news that Germany is withdrawing from the Euro.
Legal wrangling begins as to the legality of Germany’s decision. Resolution takes years.
Germany insists that the Euro continues to exist even they do not use it any longer. They emphasize that European unification will continue and suggest new legal instruments to strengthen European Unification including new EU Treaties."
Every moment I wake up I realize I know nothing, and then I smile...
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This is a favourite subject of British and American subjects. The above posts are not very serious.
Southern European countries historically never have kept their budgets under control, but have spent more than they could afford. Also Greek governments have in the past shown a high degree of incompetence and corruption. Greece is a country that
- has had a sovereign debt of 143 % of its GDP by the end of 2010
- has run a budget deficit of 15.4 % of GDP in 2009 and of about 10.4 % of GDP in 2010
If I use the terms of Hyman Minsky, Greece is now a Ponzi borrower. For those who are interested, here are the definitions by Minsky :
- Hedged borrowers, who can meet all debt payments – interest and principal repayment – from their cash flows.
- Speculative borrowers, who can meet their interest payments, but can only repay principal when the asset is sold.
- Ponzi borrowers , who cannot pay the interest, let alone the original debt, and rely entirely on rising asset prices to allow them continually to refinance their debt
The traditional way of Southern European countries of dealing with Ponzi borrowing was a currency devaluation and the increased use of the printing press, both leading to high inflationm which in the end may solve the debt problem.
Being part of the Eurozone, Greece can neither access the printing press nor devalue their currency. This means that they need to cut back their expenses and reduce their salaries. Both is not compatible with their Southern European heritage. That is why they are crying.
Although they have spent more than they can afford, they are now blaming each other, Germans and whosoever may serve as a scapegoat to explain their misery.
Solution 1: Greece defaults on its debt and declares bankruptcy. Creditors will heavily bleed.
Solution 2: Greece leaves the EuroZone and reintroduces the drachma. This will also lead to bankruptcy, as their debt is in Euros and not in drachma.
Solution 3: Greece is bailed out by other European countries to avoid the bankruptcy.
Looking at the different solutions, they need ot be judged against the outcome. Any outcome that maintains the current Ponzio scheme is not sustainable, but will just postpone the solution and lead to a greater problem in a few years. In its current state of finance, Greece cannot survive, so it is necessary
-> to cut back the sovereign debt to a sustainable level
-> let the holders of Greek bonds bleed to let them know that high interest Ponzi schemes are not sustainable
-> agree with Greece on a way to cut back expenses to match revenues
Now let us judge the three solutions against the potential outcome.
1. Possibly the best solution. It is a clean cut, allowing Greece to breathe afterwards. The problem is that there is no agreed procedure for the bankruptcy of a sovereign state. It would require an international chapter 11. After the bankruptcy, it would be easiest for Greece to install spending discipline and leave the ponzi scheme for the next years to come.
2. The drachma is no solution at all. It will lead to bankruptcy in any case and will make it near impossible for Greece to finance their debt. Greek investors will have all their assets in Euros, and who will purchase Greek bonds denominated in drachma?
3. The bail out will not work due to incompetence of politicians. A real bail out would have to include a restructuring of Greece's € 120 to 150 billion debt. Somebody else would need to pay - not to guarantee - for the losses, and in Europe nobody will be willing to do that. The problem will be postponed again and again. The Ponzi scheme will thus be maintained alive, just because nobody wants to make the necessary decisions.
The Euro makes it impossible to reduce national expenses and expropriate investors in Greek bonds via inflation. Therefore national expenses need to be cut back nominally and the investors need to be exproriated in a more explicit way. As usual, nobody likes to announce the truth. That is called politics.
By the way: My favourite restaurant round the corner is a Greek restaurant. I am friends with the owner and love their food. Don't let incompetent politicians and bankers have an impact on your personal relations or on judgement of another culture.
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unfortunately it's not that simple. that picture I posted is not from politicians or bankers, it's from normal people. it's a fact that there's still so much hate against germany in europe. not just in greece.
it's really sad. I just wish it would stop, we're facing enough "real" problems.
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