Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 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