The Grexit now reasonably assured, the Greeks will now get a very different sort of austerity.
It will be called reality, and paying back $356 billion dollars (€323 bn) by hook or crook — on in Greek drachmas that will now become inevitably more worthless to investors according to the NYTimes:
To some, the vote was virtually a point of no return. Germany’s economy minister, Sigmar Gabriel, who is also the leader of the Social Democrats, said it was now hard to see how talks could resume on a bailout deal.
“Tsipras and his government are leading the Greek people on a path of bitter abandonment and hopelessness,” he told the daily Tagesspiegel, adding that they have “torn down the last bridges on which Greece and Europe could have moved toward a compromise.”
Of course, this isn’t hard to fathom. Those loans are paid back with interest — interests that helps fuels other loans to businesses large and small, pensions, investment portfolios, 401ks, and all sorts of other things people have worked hard for.
When those loans fail — or when Greece doesn’t pay them — it imperils other banks still recovering from the Great Recession.
Moreover, the old adage of “owe a million, the bank owns you; owe a billion, you own the bank” rings true. Should the Greeks repudiate their debt in any form, the signal to Ireland and Portugal and Spain and Italy — who at the height of the banking crisis owed the UK, France, and Germany over $2 trillion — would be temptation indeed.
Greek drachmas floating the market would make Greek debt worth less. That devaluation would impact the rest of the Keynesian-based market in real and tangible ways, and likely will have an impact across the pond.
Making matters slightly worse is this week’s activity in the People’s Republic of China, which looks none too promising to the good folks over at CNBC:
The Shanghai Composite Index was last at 4,500 on June 25, and is now trading 22 percent lower.
China stocks had more than doubled in just 12 months even as the economy cooled and company earnings weakened, resulting in a market that even China’s inherently bullish securities regulators eventually admitted had become too frothy.
But the slide that began in mid-June, which the CSRC initially tried to downplay as a “healthy” correction after the fast run-up, has quickly shown signs of getting out of hand.
A surprise interest-rate cut by the central bank last week, relaxations in margin trading and other “stability measures” did little to calm investors, who sent shares down another 12 percent in the last week alone.
Ouch — though whether that is in reaction to the Trans-Pacific Partnership (TPP) remains to be seen.
YTY differentials matter, though. The Nikkei is up 38% from last year. Hang Seng? Almost 11%. Shanghai Composite? A blistering 78% after it was opened up to domestic investment.
The rest of the world isn’t doing so bad YTY either. Germany’s DAX is up 10%. Frances CAC 40 is up 7%. Tel Aviv is up 11%. Dow Jones is up 5.4%; the broader based S&P 500 is up over 6%.
Of course, there’s such a thing as capital flight too… and it’s what saved our bacon in 2008/9.
Still, it’s a dangerous game of chicken that Greece is playing, all in the hopes that European governments can be more flexible while staring down pensions, health care demands, and a social welfare net with too many folks in the hammock and not enough people maintaining the system.
Either way, is it such a bad thing for Greece to pay the full freight of its poor fiscal mismanagement? Probably not, and a little shock therapy over the weekend — even though it resulted in a “oxi!” vote — will have the intended effect pro-austerity forces would prefer, only without the messy preservation of the very same fiscal weakness that brought Greece and the EU to this point.
After all, a little Schumpeterian “creative destruction” isn’t a bad thing every now and then.
