It has been already three months since I wrote my last post. Unfortunately, professional obligations required my full attention during this period leaving me virtually no time for writing. But the situation in euroland has turned so incredibly surreal over the last days, that I just couldn’t let it pass without at least a brief comment.
If you have read my previous posts you should have understood that the reality of the euro crisis is exactly the opposite of what most (if not all) analysts out there believe it is. For this reason, the election result in Greece does not really pose a threat to the funding of the Greek Government and Greece’s stay in the euro; it poses a risk to the surplus countries losing funding from the deficit countries; it poses the risk of revealing which countries are really the euro’s core and ultimately who the real crooks are in this union of “trust” and “solidarity”.
Probably the whole world is now deeply convinced that in the event of a Greek euro “exit” the drachma would collapse because the government would print money to meet its obligations causing hyperinflation. I am not so surprised by this common belief. People believed for ages that the earth is flat. What every person is neglecting to observe however is that the country has run out of money already, so the newly issued drachmas are not going to be an increase in the country’s money supply but a replenishment of the money that has left the country since the beginning of the crisis. Money printing in Greece will not cause hyperinflation. It will avert hyperdeflation. And if the newly printed money is entirely directed to investment, the end result will actually be deflation.
Therefore my worry is not Greece but (believe it or not) the tiny country of Luxembourg. The IMF is also worried (see here). In the event of a Greek “exit” from the euro it is most certain that the common currency will collapse. But when the Grand Duchy reintroduces the franc there would be an oversupply of francs. The TARGET2 assets of the central bank of Luxembourg amount already to 115bln euros (March 2012), which is equal to two and a half times the country’s GDP or 90% of the central bank’s assets. If the TARGET2 assets turn to ashes (a likely scenario) the franc will either lose some 90% of its value or the Government of Luxembourg will have to borrow around 250% of its GDP in order to recapitalize its central bank and preserve the value of the currency, which will prove to be rather difficult. It is the economy of Luxembourg that is therefore in risk of complete obliteration in the case of a Greek exit. The rest of the surplus countries (Germany, Netherlands, Finland) face a similar although less dramatic fate.
On top of this came also the entirely nonsensical scenario of the ECB cutting funding towards the Greek banks. It makes absolutely no sense that either the ECB or the Bank of Greece will stop funding the Greek banks. The Eurosystem is currently funding the Greek banks because it is forced to, not because it wants to. Greek banks cannot repay these loans and neither can the collateral be repaid. Saying that the Eurosystem will cut life support from the banks is like saying that if I am owed 100 euros by you and you cannot repay me, then I will decide to stop funding you thereby writing down my receivable. Completely ludicrous.
And besides, why should the ECB take any decision that would push the country outside of the euro? In this case it would immediately put itself out of business.
From this perspective perhaps you can understand better why the eurozone is now in full panic mode, why the troika is suddenly so eager to renegotiate the terms of the “bailout”, why the newly elected French President didn’t waste any time after his inauguration to rush to Berlin and make a joint statement with the German Chancellor that Greece will stay in the euro, why the head of Eurogroup (who is also Luxembourg’s PM) dismissed the possible Greek exit as “propaganda” and why the head of the IIF foresees “Armageddon” if Greece leaves the euro.
Ironically enough, the preachers of monetary stability and fiscal discipline are just about to become victims of their own failed policies and be taught the very lesson they have so vociferously been trying to teach Greece over the last years. There is no way, none whatsoever, that can now avert the eventual interest rate, inflation and credit rating convergence in the eurozone. The market will get what it wanted in the first place. The euro as we know it is already dead. Me thinks that when this fiasco will be finally over, all governments of the eurozone will have collapsed, the central bankers of the Eurosystem will have all been dismissed from their duties and the IMF circus will be looking for a cave to hide. Adieu to all of them!
I will be back to my blog in a month’s time. Till then I would suggest to my Greek readers not to have any worry about the future of Greece from now on. There is no possible scenario that won’t lead to the solution of their problems. Conversely, I would suggest to any of those frantically demanding Greece exiting the euro to be much more careful for what they wish for. It can be very painful to realize overnight that it was actually themselves leaving beyond their means with other people’s money.