Sunday, September 18, 2011

Greece will restructure next month

The Easter Bunny and Europe were locked in a room until one emerged victorious. Who won? The Easter Bunny, of course, since there is no such thing as Europe.

"Europe" has about as much political meaning as the Western Hemishphere, Southeast Asia or the Arab League.

The American republics belong to the OAS; Southeast Asian countries belong to ASEAN; Arab states belong to the Arab League; European states belong to the EU.

None of these organizations has sovereignty or control over its members. Lenin described sovereignty as “ the monopoly of violence”. There is no doubt that the United States has the monopoly of violence over its members, as was demonstrated by Lincoln. 

Imagine if the US federal government lacked taxing power and relied on voluntary "contributions" from the member states? That's how it operated from 1777 until 1789 and it didn't work, just as Europe isn't working. Voluntary contributions don't work. Taxes do.

Brussels has no such control over its members. (Who’s going to invade Germany if they don't sign up for the bailout?)

Every communique coming out of Brussels demonstrates that no one is in charge. Not the European Commission, not the Council, not the ECB and not the rotating "president". The EU is a club, not a state. The member states are democracies, subject to the will of their peoples, not the EU.

Greece is the current case in point. Greece will run out of money next month. Either Greece is allowed to default, triggering a larger eurozone crisis, or else the “rejectionist front” consisting of Germany, Netherlands, Austria and Finland (all AAA by the way) will have to cave and sign on for donating their taxpayer's wealth to Greece for the indefinite future. No one can force the rejectionists to do this, and I think they won’t. (And if they do ultimately do donate money, it won’t be to Greece.)

The reason is this: whether it is via the EFSM bonds or via a eurobond, in either case a AAA rating is required. The EU has no balance sheet and can’t issue debt. 

The AAA bond rating can only be achieved by a joint and several guarantee by the eurozone’s member states. If such guarantees were issued, each member country would now have a large but unquantifiable contingent liability that in all likelihood will called upon in the end. And when the bill comes due, will Portugal pay it's prorata amount? What if they can't--or won't? And who will make them?

As the guarantee is several, that means Germany is potentially on the hook for the whole tab. Germany is not going to buy this plan, and has already said so, more than once. Merkel has had it with Sarkozy and his endless schemes (all intended to pin the tail on Germany). France is terrified of a eurozone breakup; Germany is not.

As commentators have been noting, Germany’s and France’s AAA ratings are not ironclad. If they staple on a few hundred more billion euros, there would be downward pressure. Personally, I expect France to lose its AAA in any case, based on its fiscal trajectory. But Germany will never give up its AAA, no matter how much it despises the ratings agencies.

Therefore, I expect a Greek “restructuring” next month, followed by eurozonal bank guarantees and/or nationalisations. Either way, the problems will be fiscalised at the national level. (Forget an ECB bailout; the ECB won't budge.)

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