Now
and again history reaches an inflection point. Statesman and mere
politicians, as the case may be, find themselves confronted with fraught
circumstances and stark choices. February 2015 is one such moment.
For
its part, Greece stands at a fork in the road. Syriza can move
aggressively to recover Greece’s democratic sovereignty or it can
desperately cling to the faltering currency and financial machinery of
the Euro zone. But it can’t do both.
So
by the time the current onerous bailout agreement expires at month
end, Greece must have repudiated its “bailout debt” and be on the
off-ramp from the euro. Otherwise, it will have no hope of economic
recovery or restoration of self-governance, and Syriza will have
betrayed its mandate.
Moreover, the
stakes extend far beyond its own borders. If the Greeks do not take a
stand for their own dignity and independence at what amounts to
a financial Thermopylae, neither will the rest of Europe ever escape
from the dysfunctional, autocratic, impoverishing superstate regime that
has metastasized in Brussels and Frankfurt under cover of the “European
Project”.
Indeed,
the crony capitalist corruption and craven appeasement of the banks and
financial markets that have become the modus operandi there
are inexorably destroying the EU and single currency. By fleeing the
euro and ECB with all deliberate speed, therefore, the Greeks will
give-up nothing except the opportunity to be lashed to the greatest
monetary train wreck ever recorded.
So
Greek Finance Minister Yanis Varoufakis has the weight of history on
his shoulders as he makes the rounds of European capitals this week.
His task in not merely to renounce the ham-handed “austerity” dictated
by the Troika. Apparently even the French are prepared to acknowledge
that the hideous suffering that has been imposed on Greece’s less
fortunate citizens must be alleviated. Yet the latter is only a symptom
of what’s wrong and what stands in the way of a real solution.
The
true evil started with the bailouts themselves and the
resulting usurpation by the EU politicians and apparatchiks of
both financial market price discovery and discipline and sovereign
democratic prerogatives. Accordingly, the terms of Greece’s current
servitude can’t be tweaked, “restructured” or “swapped” within the
Brussels bailout framework.
Instead,
Varoufakis must firmly brace his interlocutors on the true history and
the condition precedent that stands before them. Namely, that the Greek
state was effectively bankrupt even before the 2010 bailout, and that
the massive amounts of debt piled upon it thereafter was essentially a
fraudulent conveyance by the EU.
Accordingly,
Greece’s legitimate debt is perhaps $175 billion based on the
pre-crisis euro debt outstanding at today’s exchange rate and the
haircut that would have occurred in bankruptcy. Greece’s new government
has every right to repudiate the vast amount beyond that because
it arose not from the actions of the Greek people, but from the
treachery of EU politicians and the Troika apparatchiks—-along with
the unfaithful stooges in the Greek parliament and ministries which
executed their fraudulent conveyance.
Indeed,
the purpose of the massive EU, ECB and IMF loans to Greece was just
plain ignoble and corrupt. The European superstate deployed its
vast fiscal and monetary powers to make whole the German, French,
and Italian banks and other financial institutions which had gorged
on Greece’s sovereign debt. For more than a decade, heedless gamblers
and lazy money managers and bankers had loaded up on Greek debt bearing
yields that superficially bore a premium relative to the German and US
treasury benchmarks, but in fact did not remotely compensate for the
self-evident credit risk embedded in Greece’s budgetary profligacy.
All
of this was plainly evident. During the years before the crisis and
especially under the oligarchy dominated Karamanlis government, Greece’s
spending relative to GDP soared. Yet Athens didn’t bother to impose the
taxes necessary to pay for its public spectacles, such as the 2004
Olympics, or its vast expansion of the state bureaucracy, its wasteful
gorging on German defense equipment or the ever-rising subventions to
special interest groups.
Moreover,
it was also plainly evident at the time that even as Greece was sinking
into public insolvency, its overall economy was on a fast track to
crisis, as measured by a soaring current account deficit. In effect,
northern European banks were flooding it with radically mis-priced debt,
causing a orgy of unsustainable domestic borrowing and spending.
Indeed,
during the 10-year run-up to the crisis, loans to private households
and businesses soared by 5X. But in the standard Keynesian fashion, the
booming investment and consumption spending financed by this debt
eruption was not real or sustainable. It just temporarily flattered the
GDP figures, making Greece’s actual public debt burden even more onerous
than the reported figures—especially after Goldman and other bankers
bearing illicit accounting schemes and predatory derivative deals had
perfumed the fiscal pig.
The
resulting untoward impact of this entire, phony EU financial regime
could not be more starkly evident than in the two graphs below. They
contrast what was happening to Greece’s true, permanent public debt
burden—-with the ability of its profligate politicians to access
international debt markets at super-cheap rates.
In
fact, Greece had been on a steady path toward bankruptcy for 25 years,
but as the EU monetary boom accelerated after the turn of the century
and the false yields on its euro denominated debt continued to fall, the
nation’s public debt to GDP ratio was soon in terminal territory. The
jig was up on its mad-cap leap into phony euro prosperity.
Greek 10-Year Bond Yield
But when
the crisis came, it was all about saving the rotten regime that had
enabled imprudent risk-taking and gross missing pricing of sovereign
debt throughout the European financial system. EU apparatchiks never
cared a wit about the plight of the Greek people. Their desperate
machinations were only for the purpose of appeasing the financial market
speculators who would have otherwise caused debt service to soar
throughout the EU, thereby generating an existential crisis that would
have brought down the failing machinery of the euro and the
EU’s superstate rulers in Brussels.
So
five years of false history needs to be aired and purged. The baleful
truth is that widows and children, among others, are starving in Athens
today in order that financial speculators would not have a hissy fit and
that the apparatchiks of the EU could hang on to their power,
privileges and cushy sinecures.
Varoufakis himself recently made this crystal clear:
Europe
in its infinite wisdom decided to deal with this bankruptcy by loading
the largest loan in human history on the weakest of shoulders, the Greek
taxpayer. What we’ve been having ever since is a kind of fiscal
waterboarding that has turned this nation into a debt colony.”
The
real assault on Greece and the common people of every other European
country stems from central bank corruption of the sovereign debt market;
and from the associated crony capitalist regime of bank bailouts. By
effectively eliminating credit risk and by artificially driving the
yield on public debt to essentially zero, the European superstate
has supplanted old fashioned price discovery, accountability and honesty
in the entire multi-trillion market in sovereign European debt with the
destructive “whatever it takes” writ of its financial apparatchiks.
Consequently,
and as exemplified by today yields of 160 bps, 54 bps and 26 bps,
respectively, on the Italian, French and German 10-year bonds, the
European government debt market has become a financial freak show.
These insane prices have nothing to do with “deflation”; they are pure
gifts to front running speculators, who, after five-years of bailouts
and ZIRP, have every reason to believe that the craven fools running the
European superstate will never permit a dime of losses.
Needless
to say, exempting bankers and investors from the consequence of
their own folly and greed is fatally inimical to democratic
self-governance. As is now so evident in Europe’s mounting economic
stupor and gathering political fractures, it inexorably leads to
unaccountable, centralized rule of fiscal life and financial markets,
alike; it is the reason why the Greek people have been stripped of their
sovereignty and turned into debt slaves of the EU apparatchiks.
So
the status quo ante must be restored, and it is not hard to imagine how
it would have played out. Had the actual parties to Greece’s prior
spree of fiscal profligacy been allowed to step up to the plate and
to shoulder the unpleasant consequences of their previous feckless
actions, the outcome would have been a painful bankruptcy—but one which
would have cleared the decks of the real culprits and paved the way for a
constructive revival of the Greek economy.
First
and foremost, the foolish European banks and bond speculators who
ignored the self-evident risks of Greece’s runaway finances would have
taken the deep haircuts needed to put Greece’s debt back on a
sustainable basis. There would have been no new debt to bailout the
culpable financial operators who lured Greece’s government into
unsustainable borrowing at artificially cheap yields in the first
place; and no fraudulent conveyance of losses from these financial
institutions to the common folk of Greece. Rather than soaring to its
present crushing total of $350 billion, Greece’s debt would have
actually been rolled back sharply from the $230 billion level it was
approaching in 2010.
Moreover,
had the crisis been allowed to run its course to bankruptcy when
it came to a head in 2010, the resulting massive losses to banks and
speculators would have conveyed two essential messages— without which
neither political democracy nor honest financial markets can survive.
The
first message would have been to mind the financial condition, policies
and politics of each and every sovereign issuer within the EU; there
was never any mutualization of debt anywhere in the documents and
treaties of the EU and no reason to believe that markets could simply
command it when it became convenient.
The second,
even more crucial message, would have been that there is an inherent,
huge risk factor embedded in euro denominated sovereign debt because
unless the German army is to occupy Europe, there is no basis,
ultimately, for compelling any member country to abide by the fiscal
limits of the treaty or even to stay in the EU.
Would
that the punters in London and Zurich and the complacent bankers in
Munich and Paris have suddenly found that they had been issued new bonds
denominated in drachma at 20 cents on the dollar. The current crop of
self-serving crony capitalist who run these institutions would have been
forced to find a new line of work long ago.
And
let us not mince words. Governments will always be tempted to issue way
too much debt. The only way to restrain them is to allow the bankers
and investors who buy their paper to face the risk of ruinous
losses—both in their financial statements and their career prospects.
Let
me tell you something else. Had Greece been allowed to go bust in 2010,
then and there real “price discovery” would have commenced in the
European sovereign debt markets. And there would have been a two-way
therapy as a result. The bankers and investors who bought Greece’s junk
would have been flushed, and Greece’s politicians would have faced their
own day of reckoning.
In
fact, in the wake of a bankruptcy, it would have been the Greek people
and their government—- not the officious bureaucrats of the Troika—-who
would have been obliged to formulate and impose the requisite measures
of austerity. Needless to say, the calamity and embarrassment of a
national bankruptcy five years ago would have caused the Greek
electorate to throw-out the corrupt, incumbent politicians and the crony
capitalist oligarchs that brought the nation to ruin in the first
place.
And
notwithstanding the tough choices that would have confronted a new
post-bankruptcy government, the resulting period of austerity and fiscal
self-discipline would have had a therapeutic purpose.
That is, to enable the Greek state to function without new borrowings
and to eventually restore its credit in the international capital
markets.
Had
Greece been forced into bankruptcy and the drachma, it would have been
required to endure a brutal regime of “austerity” as it cut its primary
deficit to zero; and it would not have had the easy escape option to run
the drachma printing presses red hot and monetize its fiscal debt. That
would have caused a plunging exchange rate and massive flight of
domestic capital and savings.
Stated
differently, Greek democracy would have been forced to make tough
choices, including deep cuts to pensions, curtailment of subsidies to
domestic industries and interest groups, wholesale firings
at its bloated public bureaucracies, and painful tax increases on
millions of citizens. But the “memorandum” laying out this plan of
austerity would not have been written in Brussels and delivered by
officious bureaucrats speaking in French, German and English tongues.
Instead,
the sacrifices and pain would have been hammered out in the halls of
Greece’s parliament and its government ministries. Had the politicians
and officials who run these institutions attempted to cheat,
kick-the-can and otherwise indulge in budgetary self-delusion,
they would have been quickly cut short for lack of cash.
Likewise, any
attempt to make ends meet by monetizing the debt would have
instantly imposed pain on the Greek citizenry in the form of a
plummeting Drachma and prohibitive cost of imports. In short, the
public’s ire would have been directed where it belongs—-at its own
politicians in nearby Athens, not Frau Merkel and the faceless
bureaucrats who had been sent to Greece to do her bidding.
So
if the task at hand is to turn the clock back to 2009, what is the math
involved in repudiating the $175 billion fraudulent conveyance by the
EU and how can the new Greek government get it done?
The
first part is straight forward. Based on the widely circulated Bruegel
numbers, Greece purportedly owes the IMF $35 billion. It should
repudiate all of its IMF debt because never again should any Greek
government go hat-in-hand to the IMF. The latter is a loathsome
institution—-a gigantic fount of moral hazard and hand-maiden of the
world’s crony capitalist bankers. During the last four decades it has
done little except rescue the soured bets of bankers and bond managers
and impose destructive shock therapies on fiscally impaired supplicants,
thereby stripping these sovereign nations of the obligation to rectify
their own excesses and formulate their own plans of austerity and
recovery.
Indeed,
the Greeks could do the world an immense favor by not only defaulting
on the debts fraudulently conveyed by the IMF, but perhaps it could also
threaten to arrest any IMF bureaucrat who crosses its border. Clueless
mountebanks like Ms. Lagarde need to understand they are not doing gods
work after all; and legislators in Washington, London and Tokyo who keep
sending multi-hundred billion blank checks to the IMF need to explain
to their constituents why their tax dollars are being squandered bailing
out the bad bets of international bankers.
Likewise,
if a 50% haircut was good enough for Germany in 1953, it ought to
suffice for the settlement of Greece’s obligations to the EU
institutions today. According to Bruegel’s estimates, the combined
amount owed to the Eurozone countries and the ECB is about $230 billion,
meaning that $115 billion could be sliced off that total.
Finally,
the $25 billion balance of the $175 billion haircut needed to repudiate
Greece “bailout debt” would have to come from the approximate $70
billion owed to private banks and bond investors outside of Greece. In
practice that would amount to no hair cut at all from the current
blown-out market value of these obligations. Indeed, the hedge fund
speculators and other punters which scooped up this paper during the
illusionary Draghi recovery of the past year would be more than lucky to
recover 67 cents on the dollar.
So
the issue is not the math—its how to get the job done. The answer is
that it needs to be done by way of announcement, not negotiations. The
debt involved here is not legitimate; it is a fraudulent conveyance
foisted upon the Greek people by the bureaucracy and politicians of the
European superstate.
In
announcing that it is leaving the Euro, therefore, Greece only needs to
enumerate how much it intends to pay on its EU/ECB outstandings and
over what period of time. About a century ago even the vengeful French
were willing to give an impoverished Germany 50 years to make it
reparations. Today’s prosperous statesman in Berlin should be happy to
receive the same.
So
history is at an inflection point. Hopefully the disparate coalition of
leftist politicians and anti-establishment rebels that the Greek people
have turned to in sheer desperation will not be bamboozled by the
present chorus of Keynesian apologists for the EU’s rogue regime of
banker bailouts and printing press monetarism.
Greece
does not need to borrow new money from any one, and by announcing that
it will refuse the next installment of the bailout it has already
embraced that cardinal principle. Moreover, after a 2-3 year debt
service suspension needed to stabilize its economy and public finances,
it can live with a modest primary budget surplus for years to come in
order to devote perhaps 4% of GDP to servicing its $175 billion of
legitimate external debt. Except this time the required fiscal surpluses
would be thrashed out in the democratic forum where the very idea of
rule by the people first arose.
Likewise,
Greece can re-establish its own central bank, currency and
international credit if it is willing to abide by a second cardinal
rule. Namely, its reconstituted central bank must be constitutionally
prohibited from monetizing the debt of the Greek state or
receiving government subsidies after its initial capitalization to
create a Drachma based monetary system.
Let
its central bank own RMB, USD and gold. Under that central
banking arrangement, domestic interest rates would be set by market
forces. Reckless printing of Drachma to buy any of these global assets
would be self-evidently futile—even to central bankers. And a financial
system and currency which strictly shackled its central bankers would in
no time become a haven for domestic savers and capital inflows, alike.
Finally,
if Greece’s new leftist regime actually believes that it can restore
economic growth and prosperity through public investment—a belief that
does not remotely hold up under the evidence—- it need only adhere to
a third cardinal rule. That is, it must find an efficient, equitable and
politically sustainable way to raise the money through current
taxation.
Greece has been borrowing its way to disaster long enough.
David Stockman, davidstockmanscontracorner.com
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