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Plug To Be Pulled On Greece
Then after the FOMC announcement, on
Thursday EU financial ministers meet. There is a good chance that they
will finally pull the plug on Greece.
I keep focusing on Greece, Eric, because
it is a land mine just waiting for someone to step on. When they do, the
political ramifications could blow up the euro and maybe even ECB
itself because it has so much exposure to Greece compared to its capital
base.
The underlying problem is that financial
decisions at the ECB are being made for political reasons. Politicians
are trying to pretend that the ECB can continue to create money out of
thin air be keep giving Greece a liquidity lifeline. This misguided
thinking has consequences, and reality is about to hit home, which
raises an interesting question.
But Greece Holds The Cards
Which side is closer to reality? Greece or the so-called troika of the IMF, ECB and EU? I think Greece holds all the cards.
Greece is still generating income from
tax revenue, even in its weakened economic state. The problem Greece
faces is that it cannot possibly meet its social spending commitments as
well as carry its crippling debt burden.
The lenders have refused to grant Greece
any debt relief, which was the basic plank of Greece’s negotiating
stance with the troika. The troika opposed debt relief because if they
grant it to Greece, for the sake of European unity it will need to be
granted to every other overleveraged welfare state, which is more than
half of the countries in Europe.
Greece can go it alone. It won’t be easy,
but it can be done. And it will be much easier to accomplish without
the €320 billion debt burden hanging over its head. Greece can just walk
away, like Greece and many other countries have repeatedly done
throughout history.
Greece wouldn’t be able to borrow again
for a long while, but it probably shouldn’t anyway because it has
learned its lesson – debt can be unmanageable.
Greece Preparing For Default
There is one last point about Greece worth mentioning, Eric: Greece is clearly preparing for a default.
The Athens government has asked all
cities and other governmental bodies to move their available cash into
accounts at the central bank. This is being reported in the mainstream
media as a way for the central government to get its hands on more cash,
but that is not correct.
It is to prevent the ECB from taking this
cash of governmental bodies when the ECB finally bails-in the private
Greek banks. In other words, in a bail-in the ECB takes the euros
deposited in private banks, but not the euros deposited in the central
bank. So by putting their euro deposits into the central bank, Greece’s
governmental bodies can keep their money out of the hands of the ECB.
It’s just more evidence that Greece – not the troika – holds all the
cards."
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