At a time when the Greek GDP is not enough to service the Greek debt load, Papademos has announced that his plan is to further reduce the Greek GDP through an internal devaluation.
In his interview with CNBC, Papademos also stressed the need for wage reforms. “What you have to do is to improve competitiveness, which partly depends on wage moderation, an internal devaluation and a reduction of prices and wages,” the premier said.
A 50% debt haircut is on the cards already but considering that will reduce the Greek government’s current spending by around 5% (currently around 10% of government revenue is used to service the government debt) a 50% haircut on its own does not look like a big enough cut.
Given that the Greek government is unlikely to be able to borrow money without European taxpayers guaranteeing the loan, the borrowing costs look only set to increase. Especially given France’s recent debt downgrade.
Given the outlook of sovereign debts throughout Europe being marked down by the ratings agencies it does not seem logical to say that Papademos is committed to stopping an uncontrolled Greek default.
Greece’s long-term prospects for being able to service the government debt, even with today’s GDP levels, looks unlikely, how can anybody believe that Greece will be able to service the debt in the long-term when the stated aim of Greece’s ex-central banker is to shrink the GDP?
The interview by Papademos to CNBC clarifies the purpose of the Greek bailouts and that is to extend the period until the government does default so the Greek economy can be devalued.
And devaluation is not the correct term of what is happening in Greece, at least not in terms of currencies. The internal devaluation Papademos is referring to has the sole aim of reducing the purchasing power of the Greek people, given that this cannot happen when Greeks have the Euro it must be done through restricting the supply of money into the country. In effect putting the country on a diet, to put it mildly, or to starve the country to be more accurate.
This “devaluation” cannot happen overnight, like it did in Argentina or Russia. Even after a default the currency the Greeks have in their pocket would be worth more or less the same as it did before the default, which is more than can be said for the Ruble.
So the only way the international banks can strip the country’s people of their buying power is to get the Greek people to spend their savings and for the people to be paid less, either due to unemployment or due to less working hours.
Why do the banks want to take money from the Greeks?
The money the Greek have in their pocket actually exists. Whereas the “assets” that banks have on their balance sheets are more than likely worthless.
Going back to Greeks. The Greek people actually have Euros in their pocket, a currency which is accepted throughout the world. The banks want to reclaim this real money in order to make their balance sheets look better, at least in the short-term.
The international banks are lending Greece money in order to delay the default in order for the Greek people to be stripped of their money in order that it can be given back to the banks.
The longer the Greek government can be sustained on life support with fictional computer money from the ECB the more real money can be extracted from the Greek people.
And the haircut, will this not lose the banks more money than they will take from the Greek people?
The Greek debt, like all government debt has been turned over for decades. The interest on the principle has more than paid of the 50% haircut. The fact that a 50% haircut gives the banks more time to extract the money from the people is the cherry on the cake. The trick is to keep the government on life support for as long as possible.
A question arises when thinking about a 50% haircut. Given the amount of derivatives in the world and how mixed up they appear to be, you have to wonder, is it possible that anyone involved in the Greek debt negotiations has any idea of the consequences of a Greek default.
Are the knock on effects really understood by all the parties involved? It is possible that a lot of people who are dependant on the Greek government paying its bills are not even aware it affects them?
And this is ignoring the leverage that may also be tied into the Greek debt, that people don’t know they have.
The only way to eliminate the possibility of the 50% haircut having unintended consequences for the banks is for there to be no haircut at all.
Instead of Greece literally reducing the amount of debt reaching maturity in the next 10 years by 50% or more, with a 50% haircut, the deal could simply be that 50% of the debt that is maturing in the next 10 years will have the maturtiy extended for another 20 years, that way keeping alive all the derivatives that are connected to it.
Giving how these derivatives were created by mathematicians and physicist, quants, who did not think about the practicalities of the monsters they were creating, I do not thing a 20 year extension is too far-fetched.
These derivatives are already extremely complicated. I personally have big reservations whether the model used to create these derivatives are stong enough to be able to take a 20 year extension on one of the “assets” that are part of the derivative.
The Greek default will certainly give the world a better idea of how big a problem exists with the current fiat money system.
But going back to Papademos’s stated aims. Even if the quants can spin it, the fact remains that it is highly unlikely that the Greek government will be able to service its debt, highly unlikely.
Assuming all the major players know deep down that Greece will ultimately default and that a “disorderly default” will have unknown consequences, what is the rescue plan?
There is only one obvious solution and that is to devalue the losses that come from any default.
I have a feeling that if it was not for Merkel this process would be much further down the line but the fact is Merkel is forcing the issue.
Germany has a pensions surplus which is unheard of in western countries. Germany has worked hard & responsibly to get to such a sound financial position, it does not want to give up its investment.
So what is happening with Greece? If Merkel knows that the banks are deeply in debt and Sarkozy knows that the only way to save the banks is to devalue the debt, could Greece be simply a pawn in the game between the savers and the gamblers?
Is Greece being used as a tool to manipulate Germany into money printing? And is Germany on the other hand putting stress on the quant models forcing the banks to come clean with their real positions before they have a chance to destroy the savings of Germans?
Whatever the case may be the facts remain. Papademos is on one hand saying that he wants to build a stable future by getting the Greek debt to a manageable level, to avoid default and on the other hand he is saying that he wants to pursue a course of action that will almost certainly guarantee that Greece defaults in the near future.