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Last week, eurozone finance ministers
postponed, yet again, the most difficult decisions on the Greek debt crisis. The
assembled powers could have forced an orderly Greek default or they could
have taken steps to push Greece out of the union. Instead, they simply bought
time until the next major rollover of Greek debt - which comes due in
November. I don't expect much to come from the brief respite.
Much of the prevarication can be
attributed to political disagreement in Germany, where some see the current
crisis not only as a means to further European unification, but also as an
opportunity to extend German influence throughout the continent.
Other Germans, particularly those in
the south, see the crisis as a means to roll back the flawed structure of the
eurozone. The resulting indecision is allowing
adverse sentiment to set a time-bomb under the euro.
In truth, recovery has no chance of
taking hold without a clear idea of what Europe may look like politically in
a few years. Today, there is a desperate need for a momentous decision by
Germany.
Rest assured these are problems that
can't be swept under the rug. Greece now has a debt-to-GDP ratio of 173
percent. Simply put, it is hopelessly bankrupt. The 'troika' of the EU, ESM,
and IMF are demanding that Greece accept more austerity in return for more
funding. But, already, austerity is reducing Greek GDP and tax revenues while
creating civil unrest and a greater demand for social security payments.
The austerity medicine in Greece is
also creating similar problems for Italy and Spain, whose economies are much,
much larger. Spain has twice the outstanding debt of Greece, Ireland, and
Portugal combined. Italy has five times that amount. The sums needed to
rescue Spain or Italy would stretch even Germany to the limit of solvency.
Already, the euro is falling fast
even against the deeply flawed US dollar. As I see it, there are three
possible conclusions to the crisis:
- The
euro splits into two parts: one for the cash-generating northern
countries and one for the Mediterranean countries, possibly including
France. This two-tiered system would take into account the differences
in economic reality for the two regions and would provide much more
financial flexibility.
- Some
of the Club Med countries are forced to leave the euro, re-issue their
own currencies, and attempt to generate earnings to repay debt.
- The
euro ceases to exist. As the world's second currency, this would result
in a short-term stampede into other fiat currencies such as the yen,
Swiss franc, Norwegian krone, Australian and Canadian dollars, even
sterling, but predominately into the US dollar.
Any one of these outcomes is
preferable to the unsustainable status quo. But an orderly Greek default
combined with an exit from the euro would be the best strategy to move
forward. Unfortunately, this option is unpalatable to internationalist
politicians, who want to maintain the pan-European government, and the
banking system, which is choking on bad sovereign debt. Still, talk is
growing.
If a default does come, the big
question is how much creditors could lose through debt haircuts. Recently it
has become clear that the 21 percent haircuts for private holders of Greek
debt, which had been agreed on in July, may have to be deepened to 40 or even
50 percent. However, calculations will need to me made as to how much losses
can be accepted by the banks before their insolvency threatens the solvency
of their own nations. Very few observers know for sure how much bad debt
lurks on the balance sheets of the big European banks. This question alone
threatens further and more dramatic contagion.
Eurozone governments, in particular
Germany, France, and Belgium, have long 'persuaded' their banks to load up on
PIIGS sovereign debt. Now, unsurprisingly, a PIIGS default threatens German,
French, and Belgian banks. France has some of the largest banks, all carrying
unknown amounts of these toxic assets. BNP, Credit Agricol,
and Societé Géneral
alone have combined assets (of all sorts) of some $7 trillion. This
staggering sum is equal to about half the US Treasury's massive debt.
However, the French economy is less than one fifth the size of the US
economy. If losses related to bad sovereign debt were to push any of these
banks into default, the ramifications could be dire for France.
The world's immediate economic future
rests with a prompt decision by Germany to abandon its dreams of empire and
cut off funding for the PIIGS. Such a move would protect Germans from
unlimited bailout requests, save the people of the PIIGS from unnecessarily
harsh austerity measures, and provide a needed reprieve for the euro and
international fiat currencies. For an even more in depth look at the
prospects of international currencies, download Peter
Schiff and Axel Merk's Five Favorite Currencies for
the Next Five Years.
John
Browne
Euro Pacific Capital, Inc.
John Browne is a former member of the UK
Parliament and a current senior market strategist for Euro Pacific Capital. Click here to learn more about Euro
Pacific's gold & silver investment options. For a great primer on
economics, be sure to pick up a copy of Peter Schiff's hit economic parable, How an Economy Grows and Why It Crashes
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