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Market Oracle FREE Newsletter

Urgent Stock Market Message

Greece Blackmailing Euro-Zone Again, 50% Debt Write Off Or Default

Politics / Eurozone Debt Crisis Jan 12, 2015 - 06:44 AM GMT

By: Nadeem_Walayat

Politics

Following 5 years of euro-zone bailouts (loans) that even after hair cuts (50% writedown's of privately held debt) Greece's debt mountain now totals over Euro 320 billion (175% of GDP) and Greece is about to up the anti once more by electing the far left leaning Syriza party that promises to end economic austerity by Greece being in receipt of a perpetual free lunch at euro-zone tax payers expense (mainly Germany) by effectively defaulting on all of its debts despite the impact of the debts having been watered down to the state that effectively annual debt interest payments are being indirectly paid for by the ECB as the Eurozone's central bank loans Greece money to make debt interest payments with.


The most recent Greek opinion polls put Syriza on 27.5%, New Democracy (government) on 24%, with the rest split between other parties and an estimated 12% undecided. Under Greece election rules the winning party receives an extra 50 seats out of a total of 300 so that they are better able to form a majority government.

The starting point for a Syriza Government will be for 50% of Greece's debt to be written off, I say a starting point because it will be a perpetual revolving door of never ending write offs as further Eurozone / ECB loans will every so often be subject to further write offs, just as when Greece had the Drachma and used to print as much money as needed that caused persistently high inflation. So by printing euros for Greece German tax payers will be subsidising Greece in perpetuity through the Inflation it causes. However, this would be just the tip of the Eurozone crisis iceberg for any Greek debt write off will soon trigger similar demands amongst other debt ridden PIIGS nations and thus fracture the euro-zone.

Greece threatening a unilateral debt default that would result in Greece being kicked out of the the Eurozone is set against the fact that opinion polls repeatedly state that 75% of Greeks do not want Greece to exit the Eurozone. So it is not black and white that Syriza will actually deliver on its debt default threats.

The truth of Greece's debt situation is indicative of the fundamental flaw right at the heart of the Eurozone which is that Greece has no choice but to borrow form the Eurozone to pay interest on eurozone debt and the eurozone as long as it is deemed politically expedient to keep Greece within the Eurozone then will continue to loan debt to Greece to pay interest on Eurozone (ECB) debt. This is a perpetual debt infinity loop because of the fundamental flaw for the lack of a proper mechanism for TRANSFER payments within the Eurozone, much as takes place in every member state where the governments make transfer payments (government spending) to SUBSIDISE the less affluent, less economically capable regions.

Furthermore, the truth is that Germany and the ECB is in large part to blame for the current crisis for the Troika's (ECB, IMF and EC) policy has always been one of kicking the can down the road through the mantra of austerity being necessary to to reconstruct the Greek economy into an exporting economy that would deliver economic growth. The flaw here is that as a consequence of being in the Eurozone Greece cannot compete against Germany or any of the other low tax eurozone nations such as Ireland, so is stuck in a downward spiral.

The calculations being made at the ECB is to whether use of more smoke and mirrors to hide further subsidies to Greece that in all but name would amount to a debt write off with more later, or whether now the euro-zone could survive a Greece Exit.

If Syriza Wins Will Greece Leave the Euro-zone?

For the answer to this we need to look at what happened in the past when it seemed that Greece was about to leave the Eurozone, and the answer is Greece NEVER left the eurozone because in the midst of each crisis of which there have been several, the ECB would step in to prevent CONTAGION of what would happen if Greece left the Eurozone for soon would follow Portugal, Spain and Italy and with them the eurozone would be dust.

So, NO, given history it is very probable that Greece will NOT leave the Eurozone for the fundamental reason that no one would lend Greece a penny IF it left the Eurozone and so Greece would instantly be bankrupt, its economy in total collapse. Instead whatever outcome the ECB will do what all central banks do best which is the PRINT MONEY, as much as it takes to water down any crisis as a result of the Greece election result.

Which effectively means Greece partially wins because despite a myriad of smoke and mirrors such as that Greece is currently servicing its debts when the truth is it is not as the ECB is loaning Greece funds to pay interest on the Greek debt. So all that will happen is some further scheme will be implemented that allows for Greece to have a partial debt write off (hair cut) though nowhere near as much as the 50% that Syriza has been stating, coupled with partial relaxation of economic austerity i.e. to once more kick the can down the road, until a year or so from now Greece will once more negotiate another debt write off, then another, and then another. That I am sure will trigger similar write off's amongst other PIIGS nations, which means this euro-zone debt crisis is going to run for several decades not years by which time most, perhaps as much as 90% of Greek debt will have been written off.

Off course no one is mentioning the REAL solution which I first voiced 5 years ago which is for GERMANY to exit the Eurozone for the other eurozone members will never be able to compete against Germany and without competitive currency devaluation they remain doomed!

11 May 2010 - E.U. $1 Trillion Bailout, Detonates Nuclear Option of Printing Money to Monetize PIGS Debt

EURO II ?

This, first of a series of money printing debt monetization bailouts puts the Euro firmly on a trend towards high inflation as are all fiat currencies, i.e. the fundamentals of the Euro block composed of many small weak economies that cannot devalue internally against highly competitive strong economies will still remain. The only possible solution is for a Euro II, i.e. split the Euro into two currency blocks one for the weak that suffer higher inflation and interest rates and the more competitive countries as part of the Euro II block (could just be Germany on its own?) which would act as a safety valve in times of economic crisis that demands internal currency devaluations.

The bottom line is that whatever happens the central banks will print as much money as is needed to diminish the consequences of the crisis that will result in INFLATION. The only problem is that Germany well understands where this money printing trend ends.

Implications for the Stock Market

Find out in my next in-depth analysis due to be completed in the next few days, subscribe to my always free newsletter to get this in your email in box.

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-2015 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.

Housing Markets Forecast 2014-2018The Stocks Stealth Bull Market 2013 and Beyond EbookThe Stocks Stealth Bull Market Update 2011 EbookThe Interest Rate Mega-Trend EbookThe Inflation Mega-trend Ebook

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 1000 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

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


Comments

Yuriy
12 Jan 15, 22:10
long overdue

I support the idea of a 50% haircut.

Because people cannot control any government borrowing habits, including UK, which effectively serve as a low-risk income to elites, private investors should be accountable for lending at such unsustainable levels.

Next time private capital will think twice before committing to any bonds over and above what a government can afford to service.


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