There is a comic political farce playing out in the E.U. (European Union) that pits the Minister of Finance from, all-powerful, and very conservative Germany, against his counterpart from socialist, and obviously bankrupt Greece. At issue is payment of current amounts owing on the Sovereign Debt of Greece (approximately 246 billion Euros) an amount that is equal to 175% of the country’s GDP (Gross Domestic Product)
The ownership of the debt is split almost equally between E.U. Institutions and others, that likely include hedge funds, that loaded up on Greek debt at a steep discount to par value in the belief that the ECB (European Central Bank) would not allow a country within a Monetary Union to default on its Sovereign Debt) In other words speculators as opposed to long-term investors such as Banks and Insurance companies.
The portion sold to ‘others’ is believed to include that purchased pursuant to a slick misrepresentation of the countries’ financial position all made possible by derivatives designed, and put in place by non other than Goldman Sachs. of New York.
Fair to say the current situation is a mess that has here-to-for been kicked down the road by the E.U. and the E.C.B. to the point where it is now somewhat, but not entirely , imperative that a solution be found.
Past solutions have avoided the obvious that Greece will never be able to retire the full amounts owing and have relied instead on postponement of payments, and impossible austerity schemes. In any other country this would have resulted in default (Bankruptcy) and a haircut for lenders.
This farce has come about by the mistaken belief that a small country such as Greece cannot default on its’ Sovereign Debt and remain in the E.U. and by inference the Monetary Union. Witness the fact that there are currently two countries (Great Britain and Denmark) that are members of the E.U. but are not members of the Monetary Union. These two countries have steadfastly refused, by democratic means, to subject their citizens to the whims of Central Bankers in the form of the E.C.B. So, if there is indeed, an implied guarantee of the Union, toward Greek Debt, it has come about by rote, as opposed to Maastricht Treaty obligations. In support of this thesis neither the E.U. or the E.C.B. has to date controlled the issue of Sovereign bonds by member states of the Union, surely a pre-requisite to any form of guarantee.
So Greece could likely default, without bringing down the whole house of cards. It could also leave the Monetary Union, without leaving the E.U. and revert to its’ former currency, drachmas’. Contrary to current dogma such an event would not cause a catastrophic sell off in the bonds of other struggling E.U. countries. Their situations are nowhere near as impossible as those of Greece. But such an event would be difficult politically because it would fly in the face of the current rallying cry for strength in solidarity. In particular the purchase of bonds (other than Greek) by the E.C.B. in the current round of Quantitative Easing. (Printing Euros) aimed at boosting the E.U. Economy. So it is possible but unlikely to happen. (Round two to the speculators.)
What is more likely is an exchange of bonds into lengthened maturities, a portion of which would carry a quasi guarantee of the E.U in return for a lower interest rates. In other words a trim for bondholders as opposed to a full haircut. If the amount and timing of obligations are eased then it will allow the Greek Socialists to claim victory by ignoring some of the austerity obligations currently in place. As for Germany, a partial victory will be far superior to the alternative, something Angela Merkel should be able to grasp because of the importance of the E.U. to her nation’s wealth.
In the meantime we can expect more saber-rattling and political posturing, as both sides play to their home audience, with the fawning press, following every word.
As a postscript I notice that the Guardian News Paper, as reported by the Huffington Post, made mention of the fact that Allan Greenspan (former Chairman of the Federal Reserve) foretold that Greece would leave the E.U. in order to devalue its currency. In view of this man’s record in forecasting futures economic events, I will stick to my likely scenario.