The image of Seilschaften, of a group of mountain-climbers connected by a rope, is as frequently used in German political discourse (both verbal and visual) as cricketing terminology in British. One common use is to represent self-interested political actors who look out for each other reciprocally. But the Greek crisis puts me to mind of a different sense of the term. The nations of the EU climbing the mountain of prosperity. Greece is lagging, but is also stuck in a position where it is blocking other members of the party. So they offer generous assistance, just long enough to manoeuvre it into a place where they can cut the rope and let it fall into the chasm without taking anyone else with it. Of course, there’s the extra piquancy that Europe’s leaders were primarily protecting private banks rather than their citizens and taxpayers.
Why are rich people so squeamish about the truth?
Some very smart people have taken to the Internet to ridicule Eurogroup president and Netherlands finance minister Jeroen Dijsselbloem for his inappropriate attack of clear speech. He said that “the Cyprus deal will serve as a template for future bank restructurings in the euro zone.” Sounds like something to cheer: Deposit insurance has been affirmed, but implicit taxpayer guarantees for wealthy bank creditors have been repudiated.
But instead we have Matt Yglesias saying “That’s the kind of remark that it would be very sensible for, say, a blogger to make. But Dijsselbloem is president of the Eurogroup of eurozone finance ministers, and a guy in his role is supposed to be reassuring people. Instead he caused them to panic.” And so Meneer Dijsselbloem issued another statement saying that of course the Cyprus bailout isn’t a template for anything, because every financial crisis is a unique special flower and no other European tax haven is an island and you can’t step into the same river twice… Continue reading “Beware the Dijsselbomb!”
Since yesterday, news reports are full of comments like this:
“Many economists fear that if Greece exits the euro, it could lead to financial contagion, as investors and ordinary bank depositors in other eurozone countries may fear that their own government will follow suit.”
What does this mean? Are the Spanish looking to the Greeks as a model? That would be really weird. Esos griegos tenían un gran éxito con su incumplimiento de las deudas. Hagámos lo mismo. Or is it a matter of queueing up? Greece has first dibs on default, and Spain just has to wait its turn. Or is this setting up a resonance in a Sheldrakian morphic field of default patterns? Perhaps we are witnessing the final consummation of the marriage of 21st century mathematics and 20th century pseudoscience that finance has been tending toward for the past three decades (at least).
Surely the impact on investors will depend in part on the effects seen from a Greek euro withdrawal. At the very least If we think back to recent history, presumably any reasonable person would have thought, after the Lehman Brothers shit-storm, that the US financial authorities would be less likely to allow another similar bankruptcy to proceed. So, if Greece leaves the euro in a ball of flames, Spain will be unlikely to see it as a model. And if Greece’s exit from the euro isn’t so terrible then… maybe it’s just not so terrible.
It’s starting to look like we’re all going to be entertained this summer watching the monetary reality show, Euro Survivor: Who can be the last country left in the Euro? Greece has already been voted off the island, even if it hasn’t left yet. Ireland and the Iberians are looking decidedly unpopular, and Italy seems headed downhill as well. (I never understood why Italy was not on financial deathwatch. Is such a massive default just too horrible to contemplate? Or perhaps people just assumed Italy couldn’t possibly print lire until Berlusconi has arranged adequate shell companies to siphon the printing contracts discretely into his own syndicate.) My money is on Luxembourg. It seems fair that they should get to keep the Euro for themselves, since I can’t remember what their currency was called before the Euro. Belgium may end up with two new currencies. (But what’s the first prize? Maybe they get the rump European Central Bank, and a free set of dominoes.)
Are banks crazy or a cartel?
When a government (let us say, in Athens) could possibly renege on promises made to banks who loaned them money or bought their bonds, which that government is unable to fulfill without draconian cuts to public services, all right-thinking people attack the feckless politicians and threaten a collapse of confidence and the world economy. This is a DEFAULT! Other governments and the IMF might jump in to pour money into the state coffers, on the condition that they flow out the other end into the investors’ pockets.
But when a government (could be in Athens, or in London, or for that matter Madison, Wisconsin) has made promises of pensions to government employees, but has failed to fund them adequately, it is short-sighted and greedy for these civil servants to insist on these promises being honoured.
Why is a default such a terrible thing? Because, they say, if the country defaults on its debts it will be shut out of the credit markets. Hmmm. Let’s suppose it is true. Why? Suppose you own a bank, and your thinking of lending to one of two countries, let’s call one of them Piigsia and the other Sameria. Both are heavily indebted. Piigsia introduces crushing austerity measures, while Sameria repudiates its sovereign debt. Which of those countries would you rather loan your bank’s money to? The one that’s shown a great willingness to pay off its debts but is financially crushed, or the one who may be more likely to try to weasel out of its debts, but is eminently capable of paying. Solvency is not merely (or even primarily) a state of mind. I mean, what good is it to have the current government express a willingness to pay off its debts, knowing that it’s likely to be punished by voters for these “good” intentions? Maybe they just don’t want to be serial defaulters, so having avoided defaulting this time will encourage them to default on the next batch of loans.
As for Sameria, it sucks for the other banks that have lost their money, but why should I give up a chance to make a good profit for the sake of punishing Sameria for hosing my competitors? In fact, in a competitive market, why shouldn’t I be happy that my competitors have made a loss, and just try to get better conditions for my loan?