From May 19th 2012
After yet another week of self-inflicted turmoil the continental europeans continue to choose the option of trying to talk their way through the crisis. The markets are mercilessly punishing any sign of weakness as fear overwhelms rational thinking. And very slowly, ordinary Greeks and Spanish citizens have started to realise that financial Eurogeddon could be just around the corner. The more senior bankers try to calm the markets and their respective populace, the more distrustful the traders and people seem to become. ‘I’ll take my money, thanks very much’ is no longer the cry of the relieved wealthy, who long ago moved their precious Euros into a safer home at the European core, in Switzerland or in U.S. dollars.
So Greece is left with two options:
Stay in the Euro and face a decade or two of ‘austerity’, an almost permanently depressed economy featuring high unemployment and generally falling living standards.
Or an exit from the Euro, the reintroduction of the Drachma and a probable immediate significant decline in wealth. Instant economic pain, but with the possibility of recovery in a few short years.
Either way it will mean pain.
The Eurocrats and politicians think they can frighten Greece into voting-in a ‘pro-bailout’ political group. Meanwhile, the ascending Greek left think they can terrify the European core with the financial implications of a ‘Grexit’.
So what happens next?
It looks like the average Greek thinks that Europe will blink. Those that are already out of work can’t really see how much worse their situation can get. After all, whatever the outcome, you can’t lose a job that you don’t have. So June 17th will probably see an anti-austerity government assume control, with an inevitable battle of wills ensuing shortly afterwords. Mild compromises will be made by the Eurocrats which will not satisy the newly elected local political alliance. We will have a stand-off in the immediate post election period.
The markets know this.
The Greek people probably suspect this.
So the real question is whether Greece will survive within the Euro until June 17th. Will the Greek people continue to withdraw deposits from the already stressed banking system?
It’s simply a question of time.
Either way the Eurocrats, European politicians and ECB have some decisions to make. Do they make a move before the election, or wait until afterwards?
If Greece stays within the Euro, the ECB will have to back down and Europe will effectively have to give Greece an unlimited credit line on very easy terms. The German taxpayer will not like this at all. It will effectively mean LTRO/printing and a relaxation of austerity, not just for Greece but for the whole Eurozone. In other words a big reflation, big enough to take the fear from the markets.
If Greece leaves, the markets will ‘frazzle’. Abject panic will be instant as Greece acts as a catalyst, a sovereign Lehman moment. A collective financial nuclear event will be required that dwarfs anything seen previously, something that is so large that it washes through the markets like a nuclear hurricane, in strength and effect. All the world’s central banks will need to act in unison with a massive injection of liquidity, the FED, ECB, BOJ, BOE, BOC and possibly some of the smaller banks.
It would calm the markets but switch attention to the fear of inflation. Gold and other risk assets will react. Equities associated with gold will reverse their seventeen month declines and resume their eleven year bull market trend. We could soon see the old $1900 high taken out as fear of market panic is supplanted by a fear of hyperinflation.
OIl and other commodities will also advance as inflationary fears drive prices into areas that reflect the larger base of global money supply rather than demand.
Consumer prices will eventually increase. Perhaps by then the average U.S., U.K. and European citizen will have started to follow Asians by buying hard currencies as protection against value erosion.
Then in 2013 we have the U.S. ‘fiscal cliff’, the 40% or so increase in U.S. taxes that currently waits in the pipeline.
The U.S. debt mountain will be moving towards $17 trillion.
And the world and the markets will turn their attention to the real story, the elephant in the room that hasn’t been noticed while Europe implodes.
How will the U.S. pay its debt back?