Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Greece's Referendum

Politics / Eurozone Debt Crisis Jul 02, 2015 - 03:28 PM GMT

By: Alasdair_Macleod

Politics

This coming Sunday Greece will hold its referendum. The question to be asked is not, as the foreign press initially reported it, about leaving the euro. It is about accepting or rejecting the troika's bail-out terms.


The Greek government's finance minister is making this distinction clear to voters in the few days remaining. As if to ram the point home, Greece was reported earlier this week to be considering taking out an injunction at the European Court of Justice to block attempts to expel Greece from the euro on the grounds that there is no mechanism to do so. Well, there is in the Lisbon Treaty, but it needs Greece's approval, which amounts to the same thing. Indeed, in a blog written over a year ago the then economist Yanis Varoufakis wrote, "In short, the answer to a German 'Go jump' can be 'We shall not jump but we shall stay rock solid within the Eurozone and behind our demand for a debt conference. Just watch us'". Now that he is finance minister he is ensuring his prediction will come to pass.

Behind the press reports there is also a common, dangerous assumption; and that is Greece would be better off out of the euro with its own currency, which it can devalue at will. This is not what Varoufakis seeks. He is not naïve enough to think that a new drachma is a panacea. The truth is simpler: Greece is drowning in debt and needs to negotiate at least a partial default, a point Varoufakis has made time and time again.

Unfortunately, in the minds of the Eurozone establishment, for which read Germany as the main creditor-nation, a negotiated default cannot be permitted: it's the red line. Give in to Greece and you have Portugal, Italy and perhaps Spain and eventually France demanding the same forgiveness. The Eurozone's banks, while reasonably free of Greek debt, are loaded up with sovereign debt issued by these nations and cannot take haircuts on it without going under. It would not only undermine the Eurozone, but it could trigger a global financial crisis as well.

Furthermore the Greek government's own spending is exceptionally high, and from a creditor's point of view should be addressed. This is behind the troika's emphasis on radical pension reform, already rejected by this far-left government. But there comes a time when even the most lenient creditor has to bite the bullet and face reality, and that is what Germany is now being forced to do.

Of course this is a black-or-white argument, and reality is usually shades of grey. Normally politicians seek compromises so the press is naturally prone to believing that negotiations could be restarted at any time. However, Germany's continuing insistence that the law will prevail means Varoufakis's point will be addressed, if not through debt compromise, through the full pain of the financial rug being pulled. It really would be the end of the paved-with-debt road for Greece.

Paradoxically the worst outcome for everyone, creditors included, would be for the electorate to accept the troika's terms by voting 'Yes' in the referendum. If this happens Greece's debt problem will only be deferred, but not for long. The diversion of economic resources to pay debt-interest tightens the screw on the Greek economy, because the burden of debt escalates as GDP contracts, hastening economic collapse instead of deferring it. The troika, as instrument for this financial torture would naturally be judged by Greece's people to be motivated by hard reparations, just as France was with Germany in the wake of the Versailles Treaty of 1919. Follow this route and the life of the Eurozone may be extended for a year or so, but the political consequences could hasten its destruction. Germany's red line is very thin indeed.

Instead, a 'No' vote should be an opportunity in the absence of a post-referendum agreement for Greece to scrub all its international debt and start again. It will get no substantive financial help from the EU or financial markets, so the government would be forced to address bloated government spending itself without resorting to money-printing. At least Greece's electorate will bear full responsibility for its own future.

It was easy to deride Varoufakis as the game-theorist turned finance minister wholly out of his depth negotiating with his hard-nosed opposite numbers in the Eurozone. History may judge him instead to have played a poor hand very well indeed.

Alasdair Macleod

Head of research, GoldMoney

Alasdair.Macleod@GoldMoney.com

Alasdair Macleod runs FinanceAndEconomics.org, a website dedicated to sound money and demystifying finance and economics. Alasdair has a background as a stockbroker, banker and economist. He is also a contributor to GoldMoney - The best way to buy gold online.

© 2015 Copyright Alasdair Macleod - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Alasdair Macleod Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in