Best of the Week
Most Popular
1. Ray Dalio: This Debt Cycle Will End Soon - John_Mauldin
2.Stock Market Dow Plunge Following Fake US - China Trade War Truce - Nadeem_Walayat
3.UK House Prices 2019 No Deal BrExit 30% Crash Warning! - Nadeem_Walayat
4.What the Oil Short-sellers and OPEC Don’t Know about Peak Shale - Andrew_Butter
5.Stock Market Crashed While the Yield Curve Inverted - Troy_Bombardia
6.More Late-cycle Signs for the Stock Market and What’s Next - Troy_Bombardia
7.US Economy Will Deteriorate Over Next Half Year. What this Means for Stocks - Troy_Bombardia
8.TICK TOCK, Counting Down to the Next Recession - James_Quinn
9.How Theresa May Put Britain on the Path Towards BrExit Civil War - Nadeem_Walayat
10.This Is the End of Trump’s Economic Sugar High - Patrick_Watson
Last 7 days
The stock market fails to rally each day. What’s next for stocks - 14th Dec 18
How Low Could the S&P 500 Go? - 14th Dec 18
An Industrial to Stock Trade: Is Boeing a BUY Here? - 14th Dec 18
Will the Arrest of Huawei Executive Derail Trade War Truce? - 14th Dec 18
Trump vs the Fed: Who Wins? - 13th Dec 18
Expect Gold & Silver to Pullback Before the Next Move Higher - 13th Dec 18
Dollar Index Trends, USDJPY Setting Up - 13th Dec 18
While The Stocks Bulls Fiddle With The 'Fundamentals,' Rome Burns - 13th Dec 18
The Historic Role of Silver - 13th Dec 18
Natural Gas Price Setup for a Big Move Lower - 13th Dec 18
How to Get 20% Off Morrisons Weekly Supermarket Shopping - 13th Dec 18
Gold Price Analysis: Closer To A Significant Monetary Event - 13th Dec 18
Where is the Stock Market Santa Claus Rally? - 12th Dec 18
Politics and Economics in Times of Crisis - 12th Dec 18
Owning Precious Metals in an IRA - 12th Dec 18
Ways to Improve the Value of Your Home - 12th Dec 18
Theresa May No Confidence Vote, Next Tory Leader Betting Market Analysis and Forecasts - 12th Dec 18
Gold & Global Financial Crisis Redux - 12th Dec 18
Wow Your Neighbours With the Best Christmas Projector Lights for Holidays 2018! - 12th Dec 18
Stock Market Topping Formation as Risks Rise Around the World - 11th Dec 18
The Amazing Story of Gold to Gold Stocks Ratios - 11th Dec 18
Stock Market Medium term Bullish, But Long Term Risk:Reward is Bearish - 11th Dec 18
Is a Deleveraging Event about to Unfold in the Stock Market? - 11th Dec 18
Making Money through Property Investment - 11th Dec 18
Brexit: What Will it Mean for Exchange Rates? - 11th Dec 18
United States Facing Climate Change Severe Water Stress - 10th Dec 18
Waiting for Gold Price to Erupt - 10th Dec 18
Stock Market Key Support Being Re-Tested - 10th Dec 18
May BrExit Deal Tory MP Votes Forecast, Betting Market Analysis - 10th Dec 18
Listen to What Gold is Telling You - 10th Dec 18
The Stock Market’s Long Term Outlook is Changing - 10th Dec 18
Palladium Shortages Expose Broken Futures Markets for Precious Metals - 9th Dec 18
Is an Inverted Yield Curve Bullish for Gold? - 9th Dec 18
Rising US Home Prices and Falling Sales - 8th Dec 18
Choosing Who the Autonomous Car Should Kill - 8th Dec 18
Stocks Selloff Boosting Gold - 8th Dec 18

Market Oracle FREE Newsletter

How You Could Make £2,850 Per Month

European Monetary System Crisis, Debt Show Down in Athens

Economics / Global Debt Crisis Dec 10, 2009 - 07:55 AM GMT

By: Mike_Whitney

Economics

Best Financial Markets Analysis ArticleGreek Finance Minister George Papaconstantinou has the European Central Bank over a barrel and doesn't even know it. If he had a handle on the situation, he'd thumb his nose at the ECB's austerity measures, and demand a no-strings-attached loan package to help his country get through the current rough patch. Instead, he's carrying on like a faint-hearted schoolboy. 


Papaconstantinou is concerned that Greece's dire economic situation will lead to default and capital flight. But his fears are overblown. The ECB is not going to let Greece default and trigger another Lehman Brothers-type meltdown. That won't happen. The Finance Minister needs pull himself together and realize that he's in  the cat-bird seat.   
 
Greece's problems began to snowball on Monday when Fitch Ratings cut their debt rating from A- to to BBB+ . That means it will cost the government more to refinance its debt in the future, and that the ECB may not accept Greek government bonds as collateral when they return to the pre-crisis rules in 2011. The news put global shares into a tailspin and the volatility has continued through midweek. The ratings flap has rekindled fears of a sovereign default within the EU, which is why the markets are so jittery.

According to Bloomberg: "The European Commission “stands ready to assist the Greek government in setting out the comprehensive consolidation and reform program, in the framework of the treaty provisions for euro-area member states,” said Joaquin Almunia, who is in charge of economic and monetary affairs, in a statement late yesterday. He didn’t say what form any assistance could take.

Almunia’s comments come as investors debate whether EU governments would bail out Greece if it was unable to pay its bills. Former German Finance Minister Peer Steinbrueck said in February that euro members would “in reality” rescue states in difficulty. Almunia said yesterday Greece “is a matter of common concern” for euro nations, echoing language he has used since November. He didn’t elaborate further.

“The situation in Greece is very difficult,” European Central Bank President Jean-Claude Trichet said Dec. 7. “We all know the figures, and we all know the very important, courageous decisions that have to be taken to put the situation back on track.” (Bloomberg)

Greece has been particularly hard-hit by the recession, which is why its budget deficits have ballooned. Unemployment is over 9 percent and rising, and tax revenues are down sharply. Now the ECB wants Athens to show its commitment to "fiscal responsibility" by slashing public spending, ending all subsidies, and laying off government workers. It's the same remedy the IMF imposes on countries throughout the developing world. Unfortunately, the cure is worse than the disease, which is why the patient usually gets sicker.  Papaconstantinou has already agreed in principle with the ECB's demands for "fiscal  consolidation" (the latest variation on "structural adjustment") saying, “We will do all that’s needed to bring the deficit down in the medium-term. We will submit a supplementary budget if needed.” 

The problem is, that budget deficits should expand during an economic downturn, that's how stabilizers work. They keep spending fairly constant which maintains aggregate demand. If Papaconstantinou follows Brussels directive, he will further weaken the economy and deepen the recession. This is the fundamental issue with neoliberal solutions; they only make matters worse. 

Papaconstantinou's Socialist government was elected promising higher spending and wages. They should stick with their programs and let the chips fall where they may. The ECB has no cards to play. If the European Commission doesn't come up with a rescue package fast, global stock markets will tank, the dollar carry trade will reverse, and all the mini-bubbles in commodities, stocks and housing will violently burst. 

There's no excuse for the Finance Minister not knowing what to do. The path has already been cleared by trailblazing investment banks in the US which have used the Too Big To Fail meme to extort trillions of dollars of public funds. No one has imposed "austerity measures"  at Goldman Sachs or Citigroup,  nor will they.  IfPapaconstantinou plays hardball, he'll get the same treatment which will help his people dig out of the current slump. It just takes a bit of political moxie. Here's how economist Bill Mitchell sums it up on Billy Blog:

"Is the Greek government close to default? Answer: not even near it. The ECB will not allow that to happen. It would destabilize the Euromonetary system. The financial crisis has exposed the cracks in the arrangement. But as long as the citizens do not revolt as the real sector is squeezed the ECB will keep funding the Greek government.

The alternative is to leave the EMU and restore currency sovereignty. Even though this would be a difficult transition back to the Drachma it would be a path worth taking in my assessment.

I would also relieve all voluntary constraints which force debt-issuance and restore domestic demand and employment. But that will not be an option the Greek government takes. Their northern neighbours will make it very difficult for them to do that even if it means compromising the rules of the EMU.
They know that if Greece leaves, the next cab on the ranks looks like being Portugal." (Bill Mitchell's Billy Blog)

Greece's problems are just the tip of the iceberg.  Portugal is next in line. All of the so-called Club Med countries (Portugal, Spain, Italy and Greece) have serious debt-overhang problems that could lead to default if the right policies are not put in place.  The magnitude of the crisis has exposed the vulnerability of the eurozone system. Critics have begun to question the  feasibility of the EMU (European Monetary Union) where the needs of the individual members are so dramatically different. Perhaps a "one currency" system is not the best way to go, after all.  

Here's economist William Buiter getting to the heart of the matter in a recent Financial Times article:

"The massive build-up of sovereign debt as a result of the financial crisis and especially as a result of the severe contraction that followed the crisis, makes it all but inevitable that the final chapter of the crisis and its aftermath will involve sovereign default, perhaps dressed up as sovereign debt restructuring or even debt deferral....

From Dubai to Iceland, Ireland, Greece, Hungary, Italy, Portugal, Spain, Japan, France, the UK and the USA, the sovereign debt burdens have been at current levels during peacetime only on the way down from even higher public debt burdens incurred during wars. ("The intrinsic unimportance of Dubai World and the important wider message it conveys", William Buiter , Financial Times) 

Buiter is overly pessimistic. Greece's problems can be fixed and so can the EU's. ButPapaconstantinou is not doing anyone a favor by caving in to the ECB's demands to slash public spending. He'd be better off standing firm and waiting for concessions from Brussels. Sure, Greece can go the way of Ireland and push the country into a full-blown depression to satisfy the EU deficit hawks, but whatever for? If  there's no policy accommodation for the smaller states that don't have mammoth export industries, like Germany, then they'd  be better off leaving the EMU altogether and restoring their former currencies. No country should be shoved into a fiscal straitjacket if  they don't have to be.

EU powerbrokers have big plans for the region, which is why the Lisbon Treaty was recently ratified despite its widespread unpopularity. The bankers and business tycoons are not  going to let Greece wreck their dream of a Corporate Uberstate by defaulting on their debt.  That means Papaconstantinou is in an excellent position to set the agenda and insist on a multi-billion rescue package. If he plays his cards right, he'll get whatever he wants. 

By Mike Whitney

Email: fergiewhitney@msn.com

Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.

Mike Whitney Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules