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EDMONTON, AB Jul 9, 2015/ Troy Media/ – The Greeks voted NO to Austerity last Sunday and, at a stroke, pushed the Greek debt crisis to the breaking point.
The German-led financial establishment is in shock and threatening dire consequences. But it’s important to remember that Greece is not the first European nation to default on its debts. On Monday, French economist Thomas Picketty reminded us that historically, “Germany is the country that has never repaid its debts.” He went on to say, “It has no standing to lecture other nations.”
He’s right, of course. Apart from the broad ranging Nazi debt purge in the ’30s, the London Debt Agreement of 1953 cancelled 60 per cent of German foreign debt after the Second World War in order to save the war-torn country from ruin.
Fortunately, in the face of a growing crisis, cooler heads are beginning to prevail. Even hardliners like German Finance Minister Wolfgang Schäuble seem to be softening their tone and talking about the need to preserve the dream of a united Europe.
So, what happens next?
Austerity plan dead
The first casualty of this referendum will be the creditor-inspired austerity plan. The plan was, admittedly, predicated on a wing and a prayer. The idea being, if only the Greeks would tighten the fiscal screws hard enough, all would be well.
But, let’s examine this a little more closely. Creditors believe that with stringent austerity Greece could attain a budgetary surplus of 4 per cent of GDP. If they did they’d quality for new bailout funds (more debt) and be able to payback their debts within 40 years. Even if we overlook the damage that 40 years of austerity would do to Greece’s social fabric and physical infrastructure, this plan depends upon the continuation of historically low interest rates. If rates were to return to normal (8 to 10 per cent), then no sacrifice and no achievable surplus could possibly match the exponential growth in debt interest.
The more credible reality for Greece is endless, punishing, indebtedness; a world devoid of hope.
If Greece were a company or an individual it would obviously be insolvent, and in a civilized society it would be placed into a controlled bankruptcy.
The big question for Europe is, if austerity is a non-starter, is it possible to establish a ‘Chapter 11’ for countries? And, if so, how would it all work?
The simplest and most obvious solution would be to provide a protective legal framework for Greece and then modify the European Central Bank quantitative easing (QE) program so it can solve the crisis.
Earlier this year the ECB launched its own version of QE, a program that the United States and the UK have been employing for years. At the moment, the QE program involves the ECB purchasing public sector debt and private sector bonds with newly created money. QE is a monetary sleight of hand where central banks ‘print money’ to buy toxic bonds.
There are two major constituencies directly impacted by Greek insolvency: the Greek government and people, obviously, but also the (largely European) banks that hold Greek debt as an ‘asset’ on their books.
Unfortunately, the QE program is designed to save banks not countries. Under the present rules, the ECB is prohibited from buying government bonds directly (it must make its purchases on the secondary market). In other words, while the ECB is able to buy the Greek bonds held by banks and other private sector institutions, thereby relieving their burden, it is prohibited from doing the same with the Greek government.
As the Greek crisis meanders over the next few months, an obvious truth will emerge. In order to save the Euro and European Union from complete disintegration, the politicians will have to start helping the ‘people’ instead of simply supporting the banks.
Follow Chinese example
If they’re smart they’ll set up AMC’s (Asset Management Companies) like the Chinese government has done in the past. These institutions would receive the worthless sovereign debt purchased with ECB money from banks (at face value) and from Greece (for a peppercorn) and then – as the Chinese did so successfully – just write it off. Make the bad debts go away.
No doubt, a precedent would be set; other indebted states in the Eurozone would want the same relief. But considering that a modified QE program could be employed in whole or in part, and doing so would relieve massive debt burdens and stimulate considerable growth, it might be worth the pain.
Robert McGarvey is an economic historian and co-founder of the Genuine Wealth Institute, an Alberta-based think tank dedicated to helping businesses, communities and nations build communities of wellbeing.
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