#53. Greece – symbol of our times


Having dragged on well beyond the point of tedium, it would be easy to dismiss the Greek debt crisis as of purely local concern.

In fact, all of us should be studying the Greek situation, because it looks increasingly the dress rehearsal for some kind of global crisis.

Though often likened to tragedy, the Greek debt saga actually looks more like an uneasy combination of black comedy and badly-scripted soap. Like the worst of soaps, the plot is repetitive – everyone warns of dire consequences, both sides talk tough, one or both walks out in a huff, a last-minute reconciliation is effected, and the ritual begins all over again.

And, like a period drawing-room comedy, what we actually witness is farce, the comedy lying in the characters’ apparent ignorance (until the finale) of facts well-known to everyone in the audience.

Greece – the facts

Since the repetition has gone on long enough – whilst the farce is becoming tiresome – let’s examine the facts which are surely known to everyone except, apparently, the characters on the stage.

First, Greece cannot ever repay its debts. Indeed, it can only keep up the payments if its creditors will keep adding to the capital amount (the immediate, almost surreal issue being whether the lenders will provide €7bn so that Greece can “pay” current instalments of €1.5bn).

Second, the proposed “reforms”, designed to create a budget surplus with which Greece can tackle its debt, would actually exacerbate the problem by inflicting severe damage to the country’s GDP.

Third, the only solution to the Greek problem is devaluation, something which would have happened long ago were not Greece tied in to the Euro.

Finally, the Euro is dysfunctional anyway, because it tries to combine a single currency with a multiplicity of sovereign budgets. The plain fact is that this cannot work, as monetary and fiscal policy need to be aligned. All that Euro membership really does, then, is to force the competitively weaker member countries into painful internal devaluation, where what is really required is conventional devaluation. Add to this the fact that Greece should never have been allowed into the Euro in the first place, and the only workable solution becomes self-evident.

That solution is devaluation, meaning that Greece has no option but to leave the Euro. The country’s existing debts, which can never be repaid anyway, would balloon to surreal levels if redenominated into a weak “new drachma”. What this means is that Greece must default, at least on debts owed to international institutions.

As Wolfgang Munchau has explained in a brilliant analysis in the Financial Times, Germany and France alone stand to lose €160bn when this happens, making Mrs Merkel and Mr Hollande the biggest losers in the history of money. They have a lot more to lose than Mr Tsipras.

This should remind us of old adage: “if you owe the bank £1,000, you have a problem – but if you owe it £1,000,000, it has”.

Why a crash is coming

Just lately, there has been a lot of discussion about whether some kind of crisis is impending. In its modest way, the Greek situation encapsulates why those who do anticipate a smash are almost certainly right.

Consider the elements of the Greek soap-come-farce. Debt is excessive, and can never be repaid, yet borrowing continues to escalate. The monetary system is dysfunctional, and any form of growth – other, that is, than the simple recycling of borrowed money – has become elusive. Greek government spending is unaffordable, the public is both bewildered and angry, nobody has any solutions, and nobody is willing to face facts. At the end of the day, a huge amount of value is going to be lost.

This encapsulates the world picture pretty neatly. First, globally as in Greece, debt is excessive. Second, and far from acting more conservatively after the pain of 2008, we have gone on borrowing, adding $57 trillion to the global debt pile since the banking crisis.

Third, the measures implemented after 2008 have been short-term, unplanned expedients which make the problem worse. Finally, no-one is yet prepared to recognise that vast amounts of value are going to be wiped out.

The continued – indeed, the increased – propensity to borrow in the years since 2009 surely indicates one of two things. First, it might reflect global idiocy. Though I don’t rule this out, the second implication seems far more likely. This second implication is that growth, other than the spending of borrowed money, has become almost impossible to find.

As with the Euro, the global monetary system is becoming dysfunctional. In the aftermath of 2008, the realisation dawned that the immediate problem wasn’t the sheer scale of global debt but an impending inability even to keep up the payments. This virtually forced the authorities into ZIRP – zero interest rate policy – as the only way of staving off disaster.

It quickly became clear that simply slashing the policy rates operated by the Fed, the Bank of England, the ECB and other central banks wouldn’t be anywhere near enough. Market rates had to be reduced as well.

As you know, the market interest rate is the yield on bonds, which express the annual payment (or “coupon”) as a percentage of the price of the bond – so, if the price of the bond doubles, the yield or interest rate is halved.

To this end, the authorities poured newly-created money into the capital markets with the specific aim of increasing capital values and thus depressing yields. To the extent that this has kept sovereign debt serviceable, it has worked – but, in the medium- and longer-term, the medicine is likely to be worse than the disease.

Far from tackling the debt bubble, we have compounded it with a capital market bubble. One investor put this very well, saying that, whilst he now understood the concept of QE, he no longer understood the concept of money.

Put very briefly, we have debased the monetary system in order to cope with the debt problem.

To complete the analogy with Greece, almost everyone – apart, seemingly, from the decision-makers – know where this has to end. They also know that, when it does, it will crystallise huge losses of value.

If you’ve read John Stuart Mill, you will know that a crash of this sort does not, of itself, destroy value. Rather, it simply reveals a loss of value that has already taken place.

Technically, money lent to Greece will not have been “lost” until the day of default, but the reality is that that money has already been lost, the loss actually occurring when money was lent to a creditor who could never conceivably pay it back.

It’s pretty much the same globally. Vast debts, though not yet written off, cannot possibly be honoured. Hugely inflated capital markets represent sums that seem certain to be lost when the game of monetary “musical chairs” comes to an end. Other over-inflated asset classes – in the British instance, the property market – are all poised to reveal already-incurred losses when the crash comes.

As Keynes put it, “markets can remain irrational longer than you can remain solvent”, so the timing of a crash remains conjectural. What we do know, however, is that the longer it is put off, the worse it will be when it happens.

This being so, we need to bear in mind that the authorities will face a far bigger problem than they faced in 2008, and with even fewer available tools than they had at that time.

For a start, they cannot cut interest rates that are already at zero.

The bail-out of the banks cannot be repeated, because governments’ existing debt levels preclude the credible provision of yet more support. In other words, the trick of transferring banking losses to taxpayer balance sheets can’t be repeated without calling sovereign viability into question. This time, we may have no alternative to letting failed banks actually collapse.

This in turn means that value loss could overwhelm institutional structures, and that whole systems may cease to function.