Bubble and squeak[1]

“Remember men, we are fighting for this woman’s honor, which is probably more than she ever did”

Groucho Marx

Monday’s “final deadline” for Greece to resolve its debt negotiations with the “group formerly known as the Troika” (i.e. the EU, ECB and the IMF) came and went with a few noises about “constructive discussions” and a further announcement of a “final deadline” 48 hours hence i.e. sometime on Wednesday (24th June) based on my (t)rusty desktop calendar.  The first thing you do after reading a sentence like that is wonder why on earth any author would need to nest so many phrases within double quotation marks; the second thing you start wondering is how any particular situation can have so many final deadlines; and lastly you wonder why anyone still uses a desktop calendar. At least the last bit is easily explained, which is that I am a grumpy old man.

A wise man once told me that the Phoenicians invented money, only for the Greeks to immediately conjure up its disappearance. Jokes aside though, for the past 2000 years or so the Greeks have been merrily jumping from one crisis to the next, defaulting to one creditor and then the next. This whole idea of not repaying one’s debts almost seems like a national pastime around there, from what we can gather looking at a few history books.

To recap, the current crisis emanates from 2009 when the first default by the Greek sovereign was mooted over the country’s inability to secure refinancing for its maturing debts. Since most of its maturing debts were in the form of sovereign bonds held by wealthy European savers (these people are popularly referred to as “Germans”), other willing parties needed to buy the bonds off pesky creditors and agree for restructuring efforts.

I have written multiple articles on the evolution of the Greek bailout drama over this period; some articles; some of which are referred to here –

  1. February 2, 2010 “Oedipus Wrecks”
  2. July 23, 2011 “Beggars and choosers”
  3.  Feb 11, 2012 “Debt, cash and bonfires”

After that date when the problem was apparently “finally” solved, I didn’t write further on the subject but was biding my time until the inevitable denouement of this year which has now come to pass.

The crescendo of deadlines this week will probably come to naught, and quite frankly today’s headlines about what the Germans want versus what the Greeks are willing to concede all just represent a boring rehash of discussions conducted in haste with unlimited posturing from all sides albeit without the benefits of logic or common sense. I am not going to bother summarizing any of these, or indeed even debating them for the simple reasons that:

  1. None of the concessions by the Greeks or the reform requirements of the group formerly known as the Troika matter in reality
  2. There is no sustainable solution to the crisis
  3. All it has done is to extend the misery of poor people while allowing the rich and the not so rich to take their money out of the country
  4. Everything will be back to square one soon enough i.e. another payment default and another round of negotiations

In any classic sovereign default or indeed any credit default situation, creditors and debtors create the following compromise position

  1. They agree on a debt load that is seen as sustainable at a sensible (but not low) interest rate
  2. Debts over this amount are cancelled or exchanged for equity (dubbed “haircuts”, presumably instead of or ahead of “heads rolling” in the credit departments). In the case of sovereigns, equity comes in the form of shares of nationalized institutions or proceeds of asset sales or eventually, even just a share of tax revenues arising from an improved GDP (the so-called GDP growth linked bonds)

None of this happened in the case of Greece because:

  1. Germany, France, Italy and Spain whose banks had the biggest exposures to Greece, simply couldn’t countenance a haircut back in 2009 when a lot of investments around the world were simply blowing up
  2. There was a non-trivial risk that kicking Greece into default and out of the euro would have resulted in the dismantling of the euro project itself
  3. No one in Europe really understood the concept of betting on a turnaround
  4. The whole World War II thing put Germany off the idea of asking for a stake in asset sales and so on; you know it all starts sounding quite imperial at some point rather than a more polite “may I have my money back, please”
  5. While every government knew that Greece couldn’t really bear the tough economic reforms that were demanded in exchange for their acquiescence, Greece was a  plutocracy rather than a real democracy so all that mattered was to get the approval of the elites

The results certainly helped to achieve these objectives:

  1. Funding restored to Greek banks was quickly withdrawn by Greek citizens and deposited in safer European banks elsewhere on the continent
  2. The Greek economy meanwhile cratered by over 20% and youth unemployment reached comically high levels
  • Cuts in pensions and other entitlements reduced more middle class and marginal Greeks to penury even as the elite shrugged off their misery

Having failed to restore even a semblance of normalcy to the Greek economy, the group formerly known as the Troika have now resorted to vague threats and bizarre statements some of which include:

  1. The Russians are coming! Apparently the Greeks are going to be bailed out by the Russians (logic be damned, the Greeks need $180bn or so, which is a good 50% of Russian foreign exchange reserves of $360bn. Maybe its just me, but Putin wouldn’t pay away half of his country’s national reserves to buy a bunch of islands, now would he?)
  2. We need the Greeks to counter the Turks!  What, the same Turks whose economy is in the shredder now and is seeing even more capital flight than even Greece?
  3. The Euro is in Peril! Yes, quite –and a good thing that is too. Could make Italy competitive one of these days as it has done for Ireland and Portugal, no?
  4. Contagion risk! Not really. The markets seem to have drawn comfort on Ireland and Portugal after both those countries embarked on austerity drives since 2010 that have succeeded in cutting debts while allowing economies to rebound. Spain is still hobbled by its property sector but has shown improvement. The real risk and indeed only possible candidate for contagion is France, but event that is acknowledged as too far away to consider for now
  5. We have to support the Greeks on principle! No, sadly you only support people who actually want to save themselves which doesn’t seem to be case here (see below)

Take a look at how the Greeks have themselves made the crisis worse by destroying their own banking system, as the Financial Times recounted on Tuesday, 23rd June:

But unfashionable as it is to assert, the banks are also deserving of sympathy. For, unlike so many of the crises that have taken hold across Europe, from Spain to Cyprus, Greece’s banks have not been the cause of the country’s problems. They are the pawns caught in the middle of a deadly board game.  While a year ago they might have looked like the transmission mechanism for recovery, now they risk becoming the trigger for Greece’s chaotic exit from the eurozone. Last week, Greek companies and individuals grew more nervous about the country’s increasingly hostile relations with the rest of the eurozone, accelerating their withdrawal of cash from bank accounts.

This is nothing like the sudden bank runs that afflicted other countries — the UK’s Northern Rock in 2007, or the Icelandic lenders a year later. But the long slow flight of cash from Greek bank accounts has turned from a stroll to a rapid jog.  During the previous period of extended stress in Greece, between 2010 and 2012, the tally of deposits in the country’s banks shrank from about €235bn to €160bn — an average daily withdrawal rate of about €100m. By the end of last week, the rate of withdrawals had jumped to nearly €1.5bn a day — more than 1 per cent of the total — according to bank bosses. Deposits in the system are reckoned now to have fallen below €130bn, a quarter below where they were when the Syriza party was preparing to take charge of the country six months ago.

So for the entire period of the “reforms”, all that Greek citizens were actually doing was to hollow out their own banks.  Even that’s only on the deposit side of things – things are worse on the asset side. As the same newspaper recounts on the same day:

For Greek banks, mortgage loans left unserviced by strategic defaulters have become a particular headache, especially since the Syriza-led government says it is committed to protecting low-income homeowners from foreclosures on their properties

“There’s a real issue of moral hazard . . . Around 70% of restructured mortgage loans aren’t being serviced because people think foreclosures will only be applied to big villa owners,” one banker said.

So there you have it. There is no grand principle at stake here. No particular economic theory that’s being tested other than an illusory belief that Western Europeans behave better than other peoples around the world. Of course, their own history defies that belief but even leaving that aside, all we are left with here is a series of hollow vessels banging at each other.

As for the Greeks, it is only a mild exaggeration to state that they really haven’t done anything useful for the rest of the world since Thermopylae; so why should anyone mourn or even moan over their coming irrelevance?

[1] ‘Bubble and squeak’ is an English dish typically served at breakfast; made entirely of leftover vegetables and cold meats; so named because of the noises made during the cooking process. It is also the cockney rhyming slang for ‘Greek’

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