The Greek Countdown

William (Bill) Buckler
Captain of The Privateer
Posted Feb 6, 2012

Ever since the US government got its own debt and budget deficit debacle out of the headlines last August, Treasury Secretary Tim Geithner has been telling Europe that it needs more “firepower” to address its own version of the same. The US-based ratings agencies have been unrelenting. On January 13, Standard and Poor’s reduced its list of European AAA rated nations to four, with only Germany retaining its “stable” status at that level. Christine Lagarde, the IMF’s managing director, has been warning of a “1930s moment” if Europe in general and Germany in particular do not come “on board” with more money for the Greek rescue effort. Ms Lagarde does not refer to this as a larger yoke hung on the neck of German taxpayers. She prefers to describe it as a “strong leadership role” from Germany.

The IMF’s “sister organization”, the World Bank, has come on board in warning of a potential global financial crisis with the focus squarely on Europe. On February 3, the Organization for Economic Co-operation and Development (OECD) warned that the latest tranche of bailout funds aimed at Greece is not big enough. The pressure is still on for Germany to “do more”, for the European Central Bank (ECB) to be allowed to “lend” Euros to the IMF, and of course for the introduction of “Euro bonds” so that Europe can join the US, UK and Japan in papering the whole mess over with their own version of QE.

To understand the urgency in all this, all that is necessary is to compare the methods used in the “1930s moment” of late 2008 and the potential “1930s moment” of today.

Keeping It Off The Books:

When the global credit system froze up in late 2008, it had to be “thawed”. There were two alternatives. Either the financial entities all over the world which stood with bank-issued paper and derivatives of all descriptions could sell these for whatever they could get on the markets and attempt to “re-liquify” themselves. Or the paper could be taken into the “safekeeping” of the central banks and the myth of “face value” maintained. The second alternative was, of course, the one chosen. With the exception of Bear Stearns and Lehman, the financial entities concerned did NOT have to face what is called a “haircut”.

The lenders were kept “whole” - at least on paper - at the expense of the borrowers. This was true on both sides of the Atlantic - in the US as well as in Europe - and indeed right around the world. But the cost was very heavy, leading as it did straight to the onset of Quantitative Easing in both the US and the UK and a huge blowout in government debt and deficits across the entire world.

From Bank To Sovereign:

The global 2008 crisis was a banking crisis. The crisis today - universally known as the EUROPEAN debt crisis, is a sovereign debt crisis. Its primary focus - from the beginning more than two years ago - has been Greece, the most profligate of the nations which adopted the Euro as its currency. For more than two years, the fear that the Greek government could not “repay” its sovereign debt has been continually fanned into an ever more devouring flame. This flame has now spread right across Europe. It is not a question of yelling “fire” in a crowded theatre. The Greek government certainly cannot repay its debt. Nor can the government of any other developed nation in the world.

Last July, the European governments got together and came up with a plan to “bail out” Greece. Part of that plan was to impose a “haircut” of 20 percent on holders of Greek sovereign debt. In October, the size of the haircut was raised to 50 percent. The talks underway as this is being written have further increased that potential haircut to “at least” 70 percent. So far, an actual deal has not been finalized. The reason it has not been finalized is simple. The precedent of “haircuts” of any magnitude on sovereign debt is potentially deadly to the entire global financial system - underpinned as it is by sovereign debt.

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William (Bill) Buckler
Captain of The Privateer
email: capt@the-privateer.com

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