Hello, drachma.
by John Hayward
05/15/2012
I must admit that the Euro held together longer than I thought it would. I predicted it would not survive past March, but one more attempt to deliver the flaming cheese of austerity to Greece’s table was made. The traditional cries of “Opa!” were decidedly muted. Two months later, after refusing to take a single bite, Greece is waving for the waiter to take it back.
Greece had elections a week ago, but they still can’t form a government. Over half of the cops in Greece reportedly voted for the neo-Nazi “Golden Dawn” party, which is not a sign of optimism or good cheer. The two major Greek parties, right-of-left-of-center New Democracy and left-of-left-of-center PASOK, pulled in their lowest share of the vote in nearly forty years, a sobering vote of “no confidence” in the dysfunctional Greek political system… which is now being replaced by something even less functional.
“Shares, oil, and the euro were all sold heavily on Monday in anticipation that anti-austerity parties would garner support in a second Greek election likely to be held next month,” the UK Guardian reports, “bringing the row between Greece and its European creditors to a climax.” Uncertainty over the fate of the Euro has been depressing economic growth across the continent, with economists on the verge of declaring the Eurozone has slipped into a double-dip recession.
There are once again fears that the Greek “contagion” will overwhelm the weak financial immune systems of countries like Spain, Italy, and Portugal. Italy’s banks just got hit with another round of credit downgrades, a fate the banks of Spain are scrambling to avoid. Calls to cut Greece loose before the contagion spreads are growing. Spain, in particular, blames Greek political turbulence for roiling its markets.
Although polls suggest the majority of Greeks want to remain in the European Union, their electoral chaos is widely seen as an attempt to “call the EU’s bluff” on its refusal to extend more bailouts. This obliges the EU to talk even tougher, including open preparations for the departure of Greece from the Euro, in order to convince Greek voters they are not bluffing. Greek voters respond with greater anger and resentment towards Brussels (and, since they know who’s calling the shots on those austerity rules, Berlin.) Knuckles are turning white on the edges of the negotiation tables.
A Polish banker quoted by the Guardian, Zbigniew Jagiello, “predicted Europe was hurtling towards its Lehman moment,” a reference to Lehman Brothers, whose collapse touched off the global financial crisis of 2008. Jagiello elaborated to the Wall Street Journal that open discussion of booting Greece out of the Euro can now be heard at official meetings, while fearful muttering about Portugal has commenced:
“Those are relatively small countries, but two large economies will follow. The scale of real-estate problems in the Spanish economy is as big as in Ireland several years ago. Ireland was saved, but it’s much smaller than Spain, so there’s a risk that Spain may not handle the problem,” he said, adding that Italy is facing stagnation and that France’s recent presidential election adds to the uncertainties.
He said PKO Bank Polski, which made 1 billion zlotys ($302 million) in first-quarter net profit, is preparing for potential market turmoil related to the euro-zone crisis.
As Jagiello mentioned, the disintegration of Greece comes hard on the heels of France ostentatiously renouncing “austerity” and boosting a socialist into power. This is all putting a great deal of pressure on Germany, where Chancellor Angela Merkel has been dealing with her own domestic political headaches. She faces challenges from both socialists who want to scrap all this dreadful “austerity” and ride the insolvency H-bomb down to Ground Zero, and those who believe austerity should be scrapped in favor of growth-oriented policies. Neither group is likely to welcome an intransigent, hopeless Greece draining the EU treasury, which is tightly connected to the German treasury.
For many European bankers, the choice is now between “orderly” and “disorderly” exits for Greece. If the problem is left to fester until a “disorderly” exit results, severe market chaos could result. We might get a taste of that within the next few weeks, because Greece is on the hook for a huge loan payment, and it has no more than 30 days to avoid default. They already suffered a technical default, but their bondholders (ahem) generously decided to write off a big chunk of their debt, and extend new payment terms. About 3 percent of Greece’s creditors chose not to accept this deal, and they’re printing up final notices.
A disorderly exit from the Euro would mean nobody gets paid, except for entities the Greek government wants to keep as financial allies. The Greek banking system would go down in flames, by which I mean banks would physically be burned to the ground. Not much actual money would be burned up, because those bank vaults are pretty much empty. The deputy finance minister, Theodoros Pangalos, warned over the weekend that “we have got until June before we run out of money.”
Pangalos described his countrymen as voting for “a very strange mental construction” in the recent elections, where they declared their desire to remain in the EU, but “don’t want to pay anything for the past.” From the UK Telegraph:
Mr Pangalos warned: "There is a school of thought that says the Germans are bluffing. They need Greece and will never throw us out of the eurozone. But what will happen, which is almost certain, is they will not give us the money to pay our debts.
"We will be in wild bankruptcy, out-of-control bankruptcy. The state will not be able to pay salaries and pensions. This is not recognised by the citizens. We have got until June before we run out of money.
"We have been spending the future for half a century. What [the anti-bailout forces] are really asking from the EU is not just to pay our bills, but also to pay for the deficit which we are still creating.
"I'm sure the Germans don't want Greece to leave the euro. What I don't know is how much they're willing to pay. It depends on the German man on the street. Is he willing to pay his taxes to save Greece? I doubt it."
As always when I write about Greece and the European Union, I conclude by asking my American readers: Does any of that sound familiar?
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