Will Greece’s default bring down the Euro?
… or will the Euro bring down Greece?
(That second question, which by and large I will equally deny, will be more thoroughly dealt with in a future post.)
In an interview in today’s Frankfurter Allgemeine Zeitung, probably Germany‘s most prestigious daily newspaper, titled “Helping Greece would be against the law“, professor of European Law Dr. Matthias Ruffert states unmistakably that each and every European Union treaty that established the European Currency Union and the European currency called the Euro prohibits any form of bailout of the Greek republic, its government or its bonds, be it via direct subsidies, by co-guaranteeing its debt or in any manner conceivable:
(See more statistical material in our References section!)
“… solche Hilfen sind eindeutig untersagt. Weder die EZB noch die Notenbanken des Euro-Systems dürfen Kredite an die Mitgliedsländer zu Konditionen unter dem Marktniveau vergeben. – … such assistance is definitely prohibited. Neither the ECB nor the Euro system central banks are allowed to extend credit to member states below market conditions.” (Translation & emphasis CrisisMaven)
While he states with much conviction that there is no loophole in the law at all he does concede:
“Der gemeinschaftliche Rechtsbruch kommt vor. – Indeed the Union does at times break the law.”
yet goes on to point out that council members have already firmly stated the opposite so it should be highly improbable (hmm …).
“Kein Land der Währungsunion haftet für die Schulden eines anderen Landes. – No country of the monetary union is liable for another’s debt.” (Translation CrisisMaven)
So let’s assume Trichet is not eventually going to leave his chief economist standing in the rain.
Well, in the long run, all <a title="Kim, Junga. “Domestic Institutions and Sovereign Default: Empirical Study on Debt Rescheduling Negotiations, 1980 to 1999″ Paper presented at the annual meeting of the American Political Science Association, Marriott Wardman Park, Omni Shoreham, Washington Hilton, Washington, DC, Sep 01, 2005 . 2009-05-25 ” href=”http://www.allacademic.com//meta/p_mla_apa_research_citation/0/4/2/1/5/pages42150/p42150-1.php” target=”_blank”>states that don’t have balanced budgets (i.e. no debt, with the exception of the occasional ways and means advance [Kassenkredit], but cancelling out over the course of each fiscal year) are, if history is any guide, likely to default, some earlier some later.
“Der Staat kann nie alle Schulden zurückzahlen … Der Staat in seiner fiskalischen und finanziellen Grundstruktur steht am Abgrund. … Wir wissen aus der Finanzhistorie, dass wenn einmal die Bedienung der Schuldenzinsen über 20 Prozent des Bundeshaushaltes erreicht, der Staatskollaps nur schwer zu vermeiden ist. Wir haben es schon auf über zwölf Prozent gebracht, Tendenz stetig steigend. Und mit Personalkosten und Sozialausgaben landen wir bereits bei 75 Prozent. – The state will never be able to repay all debt … The state as it is structured fiscally and financially is on the abyss. … From financial history we know that if interest has reached 20 percent of the budget a collapse is nearly inevitable. We are already at twelve percent and counting. What with payroll and welfare rolls it stands at 75 percent.” (Translation & emphasis CrisisMaven)
serious thinkers are now aware that Germany, often touted as one of strongest economies may in the not so distant future be on the verge of default too.
So what are Greece’s debt parameters?
Greece’s GDP for 2009, according to the World Bank, was 356.80 US-Dollars, while the Euro area’s total GDP for 2009 was 13,565.48 US-Dollars, a mere 2.63%. Apart from that, as we’ve just seen, Europe, the European Union or the eleven Euro area member states are not responsible for Greece’s sovereign debt.
But not even in the case of case of California or Florida does anyone see a default directly impinge on the US Treasury’s creditworthiness, nasty as the situation may be. If Greece uses a common currency together with, say Germany, France or Spain that is issued by a separate entity’s central bank, so what? So do Zimbabwe and Ecuador. If Zimbabwe failed (and it has failed), would it drag down the USA? (However, there is a danger that not the currency itself will be harmed as much but all government debt denominated in Euros.)
Would the Euro zone break asunder if Greece defaulted on its debt? Would the Euro collapse?
However, there is a slight difference: all the members of the Euro area swore solemn oaths called the Maastricht Stability Pact. And it is this pledge that not only Greece has broken, but, by size of Gross Domestic Product, the vast majority of the (currently 16) Euro member states. It is perjury that doesn’t go down well in the eyes of civil society. It is the trust, and credit comes from Latin “credere” to believe, that has been squandered. Now that the Euro zone has violated its own sacred covenant of fiscal probity it stands before the world unmasked, its insincerity exposed, the delayed insolvency filing of most of its member states making matters even worse than if they came clean.
To state it most clearly: if Greece’s problems are dwarfed by the solvency problems of its virtuous co-members who now cry foul because Greece hadn’t fulfilled the criteria for joining the Euro while most of the other pharisees first joined sanctimoniously and then broke the code immediately afterwards, this hypocrisy makes it even worse; with that frame of mind none of them were allowed to join Alcoholics Anonymous!
And why do Europe’s creditors keep mum about anything but Greece?
It’s the same reason that China holds its breath about US debt. There really are only two reserve currencies in the world today: the US-Dollar and the Euro, which together accounted for over 90% of currency reserves held by other countries in 2008! Between them, the US and the EU have the rest of the world over a barrel. China and all the other creditor nations that hold large Euro and USD reserves, what can they do? They act like banks who extend more credit to an insolvent creditor so as not to have to write down their loans. They are all in the same boat and it’s called world economy.
When you’re in a boat together that’s taking on water, and all feel they’re the captain, who do they push around to bail the floating coffin out? When you’re in a boat together with no one still on shore, who do you expect to throw a lifeline???
P.S.: Or has Greece vanished already?
Forgotten to pay your domain registrar? Hosting fees have been impounded? Couldn’t quite understand the fine print? It can happen to any garage shop, and look what became of some of them! Good luck, Greece, cradle of Westerncivilisation!
Addendum (2011-06-22): Over the past several weeks, after a long break of being ignored almost entirely, this article now has been sought out about a dozen times a day by people hitting on it via search engines. This tells me that Greece’s default may be in its final stages. Does that affect the Euro when it happens? Now, yes, after a year and a half of foot-dragging, after EU politicians telling bare-faced lies and breaking all the EU covenants, after haggling about whether not paying back in time was a default or not (of course it is – any credit contract consists of at least three main elements: total amount owed, interest to be paid and … duration; imagine you go to your bank and ask for a loan, then … just keep paying interest but never pay back the principal – would they call that a technical default or not?). Greece need not even technically default now for the Euro to be a footnote in the history books in one, two or three years’ time. Will it last until 2015? I prophesy it won’t. Do I know what is to replace it? No. When you run out of fuel, then your car stops. That’s a sure thing. But where will it stop? Will you find fuel there? What make or brand? At what price? You would only know that if you knew the exact direction of where that car was headed and how much fuel exactly it still had and how fast the driver would go (which impinges on consumption per mile or km). So CrisisMaven says: no Euro by 2014 at the latest, because he believes he knows the maximum that tank can hold. What you’ll get in the Euro’s stead depends on who you hang on high to prevent being duped once again.