Friday, 22 July 2011

Greece Defaults

It was inevitable, really. You can't run any set of accounts like Greece has been doing and expect an easy way out of it. So, regardless of what the EU mouthpieces refer to it as, whether as a 'restructuring', or a 'haircut' or a 'comprehensive deal', the net effect is this: Greece has borrowed a lot of money, and is not going to pay it all back.

The deal the EU has reached will extend another £96billion loan to Greece, reducing the overall interest it is paying on its total debt, and allow the European Financial Stability Fund (EFSF) considerably more freedom to buy up debt from struggling member states. Or, in other words, allow the EU to take on the debts of member states.

The markets have reacted well initially to this, but the real effects have yet to be seen. The credit rating agencies are saying that they are now viewing Greece as being in default.

My suspicions? That Greece, when it does eventually come to now inevitable restructuring, rather than find itself in a situation where it can borrow more money, will find itself able to borrow much less. Who in their right minds is going to lend money to a country who has a history of not paying it back? It's not going to happen.

But Greece will need to borrow money. It's economy is still flat-lining, and by virtue of its Eurozone membership, it is still unable to de-value its currency and start exporting its way back into growth. It needs to borrow money to survive.

So what will happen? The EFSF and the European Central Bank (ECB) will lend it money, of course. And by the back door, gradually, the rest of the Eurozone bloc will gradually start acting as a guarantor of Greek debt. And then the Eurozone will have a de facto common bond market, where the debts of sovereign nations are not issued by those nations, but by the Eurozone itself.

And of course, they'll need an organisation to manage the issuance of that debt, won't they? And that organisation will be, for all intents and purposes, a Eurozone Treasury.

Fiscal union.

I pity the Greeks. They have been conquered by finance. Their own government has mortgaged them up to the hilt, with their very sovereignty as security, and now, they have all but agreed to foreclosure. Unless their government shows some backbone, Greece is destined to become a vassal state of the Eurozone, its elected leaders simply acting as emissaries from the people who hold the real power, i.e. the Chancellor of Germany, and the French President.

My only question is: what will our Government be doing to ensure that we do not become caught in the same trap? That we are not dragged into this federal consolidation?

Unfortunately, I expect the answer is, grimly, nothing.