As we approach the deadline at the end of February the Greece government is getting more and more desperate.
A LITTLE BIT OF HISTORY
Allow us to remind you what's going on. Greece's governments in modern history (i.e. post-WWII) were always communism-biased except for the ultra-right-period between 67-74 when Greece "enjoyed" their very own "Junta". During either period for one reason or another Greek governments spent, spent, spent and then they spent some more. Because of this spending habit Greece was perpetually immersed in galloping inflation and constant economic mini-crises… until they received "ascent" to the European Union (by-the-way "ascension" to what??? Walhalla?). And then by this miraculous "achievement" the dismal bond rating that Greece had before magically transformed itself to the new-and-improved EU bond rating. This translated as Greece going from "country non-grata" to banks tripping over each other left, right and centre extending Greece the red tape by offering monstrous loans at ridiculously low interest rates…yes…those very same interest rates given to "real" EU countries. As it could not have been otherwise, Greek governments continued with their predilection for borrowing, borrowing and borrowing and then some more borrowing in order to spend, spend, spend and then spend some more. You see, before the EU, Greece was "founding" their "expenditures" by printing, but now since they could do this no longer (because of the EU Central Bank) they simply switched to borrowing assuming it would be business as usual, right? What's the worst that could happen, right? After all, we have been doing this for decades and nothing happened, right? Well, this time was different because… it so happens that Greece cannot print EUR… ups…
This is what triggered the previous Greek debacle, the fact that Greece could not print its way out of the EUR hole. But that was not it, no sir! The biggest problem was that private banks were on the hook. Private banks loaned money to Greece and private banks are not in the business of losing money. For that we have public banks, damit! And so a "rescue package" was created through a little bit of cloak-and-dagger, backstabbing and a small coupe d'etat performed at the European Cental Bank which "pave" the way for a "new thinking" which was blatantly opposed to the "old" new thinking which gave rise to all the financial "stability" (read bottomless borrowing) that was previously achieved in EU.
Due to this "financial EU re-engineering" and "bailout package" for Greece, this country received a monstrous loan but with so-called strings attached. These "strings" were the same strings that any other third or fourth class country is "convinced" to accept by the IMF when given such loans. Typically these packages include the massive decrease of government size, massive layouts, massive drops in wages, massive anything if this anything depresses government spending (and in the process depresses the entire economy). But, with Greece it was different. These strings came with a… wink…wink "for the show only" label attached. It's not like anybody was expecting Greece to actually go and implement those measures. And they did not, of course. Greek politicians are, after all, politicians. They know full well that the second they stop spending they are out of the job. And so they continued spending happily ever after… until this deadline. And now they are…basically…screwed. The money is gone. The "austerity" package was never implemented. The deadline looms ominous and they don't have enough cash to even pay the interests on the interests on the loan that was taken to pay the interests on the original loans! Hummm… where have we seen this before? If you said Argentina, you are a winner!
THE PLOT THICKENS
Borrowing a page from the Argentine strategy book dealing with borrowing issues, the Greek government went out to borrow in order to cover the interests on the interests on the loans taken to cover the previous loans…etc…etc…etc to the tune of 240 GigaEUR (that would be 240 billion EUR for you yanks). You get the idea. And so away he went Mr Yanis Varoufakis (Yanis for his friends) to make some new friends (with money).
Zee German Finance Leader
The first sucker…target…friend…yeah…that's better; the first friend to be was the all-powerful German minister of finance Mr. Wolfgang Schäuble who said: Nein!
De lastpost Dutch Minister of Finance
The second…you know what… was Mr Jeroen Dijsselbloem who said something along the lines of Ieder dubbeltje omdraaien (make-do with the money) and left.
"QE" Draghi
The third…well…that… was Mr. Draghi, the all-powerful czar of the EU Central Bank who said: well… we don't know what he said because he met behind closed doors but soon after he pulled off the table a possible source of inexpensive loans. Bad, bad Yanis!
THE STRATEGY
What's going on right now between Greece and the Ministers of the EU is an old fashion MAD (Mutual Assured Destruction) game. Greece is saying: give us the money or we will sink EU. The EU is saying we won't give you the money unless you stop your spending binge and if you don't, we will destroy Greece by not lending you anymore.
This is, of course, plain stupid and superficial, albeit the truth is not that far away.
Only recently has the EU Central Bank officially joined the QE "club" because the amount of money that is required to try to revive the dying EU economy is too large to use "other, alternative" means (which is what it was doing so far). QE implies the printing out of thin air of about 68 Giga EUR per month until the grand total of about 1 Tera EUR for the indiscriminate purchase of government and corporate bonds. It is obvious that the lunatics in charge of the EU are willing to do whatever it takes to revive the economy, even killing it. However, should Greece formally default (informally Greece has been in default for the last few decades), this would mean that 240 Giga EUR belonging to the governments of the Europe will go puff! up in smoke. And this would present a problem since 240 Giga EUR is roughly the equivalent of 4 months of QE. Even the EU Central Bank cannot fight two fires of this magnitude at the same time and Greeks know this.
In this case is not a matter of saving private banks any longer because the original "package" for Greece was actually a package for private banks. These loans were destined to perform a complicated swapping act by the end of which most of the Greek debt was passed to EU governments leaving private banks with freshly minted cash. This case is to prevent a disaster that would prevent QE from reviving the economy.
And so it all boils down to a simple equation: what is cheaper, to lend Greece enough money to keep it going for a few months or to let it fall and sabotage the entire QE effort? Well… it is cheaper to lend more money to Greece, just enough so that Greece can keep paying back the interests on the interests on the interests of the loans obtained to pay for the loans obtained to pay the loans… you get the idea. Greece's interests payments are far, far smaller than monthly QE printing. Ergo, the conclusion is forgone: Greece will get its "package". Everything that you are seeing right now is nothing but public relations. A face-saving exercise.
THE FUTURE IS IN DEFAULT
However, and yes, there is always a however dear reader; it will come a time (soon now) when Greece won't be able to make any payments at all. Eventually either idiotic EU politicians will play MAD once too many times and pass the point of no return or something unexpected will happen. Eventually Greece will default. This much is unavoidable. And when that happens we will see a repeat of the Argentine "Tango" called "let's make a deal". Greece will officially default but it is unlikely that it will leave the EU. There are simply too many economic advantages by staying in it. What is going to happen is the same that happened in Argentina time and time again:
- Greece Defaults
- Everybody Panics
- Greece offers a "deal"; buy back old bonds at a deep, deep discount with… new bonds… but this time we will pay… believe us…this time is different…
- Governments "accept" the deal because, after all, it's only funny money they are playing with and the EU Central Bank is printing it because the EUR is indeed going out of style.
- Greece recovers some economic stability
- Greek politicians go on a spending/borrowing binge
- Greece returns to the exact same financial and economic condition it was facing just before the Default.
- Print more EUR. Repeat.
That's it. If you were expecting something different you clearly do not understand how "high finances" work.
CONCLUSION
Greece is indeed the new Argentine. It is at the verge of the endless destructive cycle in which Argentine has been locked-in for a very long time (see Argentine Default - What A Depression Looks Like). But this time is different. This time this is happening in EU and it was not supposed to happen in EU. EU was all about this NOT happening. EU was supposed to be "stable". EU was supposed to have all kinds of mechanisms in place to prevent these kinds of things from happening; Stability Pact, independent Central Bank, Centralized Government and so on. However, all this is basically worth zero now that a real crisis is at hand. Now you understand why we despise governments; not only because they don't fulfill their promises, but because the only thing they deliver in the end is destruction and misery.
Oh, yeah, and FYI, we did warn last year that this would happen (see Greece Siren Call).
Greeks however may have a different opinion. They may want the Greek government to keep spending. They may want the Greek government to keep inflating their artificial standards of living. They may want to keep this illusion of future whatever it takes. Fair enough, that's their right… just one thing… it is not a dream, it is a nightmare. It will never work. Let's not confuse one with the other.
Note: please see the Glossary if you are unfamiliar with certain words.
