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Last week,
the Greek parliament voted by a narrow margin to pass an economically
crippling austerity plan of some $40 billion in return for some $159 billon
of fresh liquidity injections. Although many hailed the event as a needed
first step on a long road to recovery, I believe the austerity program will
make a bad situation worse. It is a flawed solution that stems from a false
premise: that Greece should continue to be part of the euro zone, and
continue to use the euro as its currency.
To return to
national economic viability Greece must abandon its use of the euro currency,
which has become a financial straight jacket. Nevertheless, Greek politicians
may have agreed secretly to accept the austerity in name only, in return for
a liquidity bailout that will buy time for European unity to solidify. Once
political unity is restored, we should expect more massive financial
transfers from northern countries, present day Germany and Britain, to the
subsidized southern regions.
As its price
to maintain the status quo, central bank lenders, including the IMF and ECB,
are demanding that Greece sell off some $72 billion of its national assets.
The likely buyers will be international companies based in the EU, U.S. and
possibly even China. Such a fire sale can't restore the Greek economy, but it
gives the appearance that the Greeks are paying something for their loans,
and it provides cover to northern European politicians who are feeling
increasing frustration from voters who have been continually asked to foot
the bill for southern European profligacy.
In contrast,
Greece could have decided instead to abandon the euro and devalue a new Greek
currency unilaterally to pay its debts. This is the typical remedy for
marginal economies that have gotten into debt quicksand. Most certainly,
devaluation would reduce Greece's standard of living by slashing the
purchasing power of Greek citizens. But in recompense it would boost exports
and improve Greece's balance of payments. The Greeks could then begin the
hard work of restoring their economy while maintaining ownership of their
national assets.
However, if
Greece was to abandon the euro, the shaken confidence could lead to a euro
collapse, bringing to an end the idealistic dreams of a unified Europe.
Politicians are desperate to avoid this no matter what it costs their
increasingly subjugated peoples.
In addition,
a Greek debt default would trigger massive losses on the books of EU banks,
many of which had been 'persuaded' by their governments to invest in Greek
debt. Also, major U.S. banks have profited hugely by selling Credit Default
Swaps (CDSs) to insure these loans. Indeed, they have insured some $32.7bn of
Greek debt alone. Furthermore, U.S. banks have invested directly in European
sovereign debt. In other words, the financial pressure to keep Greece from
defaulting is enormous.
The euro is
the world's second largest reserve currency. Its dissolution would cause huge
shockwaves in a currency system that already is causing some investors to
hedge in precious metals. A collapse of the euro could likely send gold,
silver and most food commodities skywards in price. As a result, politicians
and the bankers share a common interest in saving Greece from debt default
and so salvaging the euro, regardless of the effect on the Greek people.
Greece's vote
to accept austerity has yet to be enacted in specific cuts and taxes, but
when they do, expect public resistance that will dwarf what we have seen thus
far. At that point we can expect this debate to be revisited. I believe that
when the pressure becomes too intense, Greece may in fact return to the
Drachma.
I have
consistently argues in these columns that a sovereign debt crisis would
develop into a possible currency collapse. The beginnings of this endgame can
be seen today on the streets of Athens.
John Browne
Senior Market Strategist
Euro Pacific Capital, Inc.
20271 Acacia Street, #200 Newport Beach, CA 92660
Toll-free: 888-377-3722 / Direct: 203-972-9300 Fax:
949-863-7100
www.europac.net
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