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Tuesday, 24 October 2017

A plague on all euro houses

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Peters: I can sadly see no argument why the Greeks should vote anything other than…

After the pummelling which we nearly, but didn’t quite, take on Monday, I would dearly love to declare this to be a Greece-Free Tuesday but that would be fatuous as it is the day on which Greece will fail, for a second time within a month, to meet its obligations towards the IMF.

But it will, alas, for reasons known only to those to whom century-old laws of lending seemingly don’t apply, not be declared to be in default. It might not be formally bankrupt but it is, believe me, totally and irrevocably broke. Isn’t that enough?

So the people of Greece have been handed the hospital pass and are being asked to vote on something which is not on the table by a government which is trying to make them believe that a “No” vote will strengthen its hand in future negotiations. Well it would, wouldn’t it. Is it going to face the people and declare that, since it came to power, it has never missed an opportunity to miss an opportunity?

On the other hand, it could also be argued that by the time it was elected, it was all too late and that the real culprits were the leaders of those countries within the eurozone who failed to acknowledge when they had the chance five years ago that Greece simply wasn’t up to membership.

Five years and €300 billion of extra debt later might be too late although if the interested parties, formerly known as Prince, er, The Troika, now have to take a monster write-down on all of what they hold, could it not be argued that it is their own silly fault for believing that a Grexit in 2010 would have spelt the end of the single currency? Could it not quite legitimately be suggested that burdening the Greeks with an extra €300 billion of debt, simply in order to satisfy the vanity of the single currency’s creators and their insistence on their infallibility is plainly neither fair nor acceptable?

Jeremy Warner elegantly argued in the Sunday Telegraph that the IMF dropped the ball by having successive Managing Directors with vested interests in keeping the myth of the single European currency alive and that rational lending decisions were sacrificed to Euro-centric ideological orthodoxy. For this alone, he suggests, Christine Lagarde should either step down or be fired.

If Greece and its people have been sacrificed on the altar of currency union without fiscal union, why should it be the Hellenic taxpayers alone who are to be burdened for generations with the cost of this vanity? Why not let the taxpayers of those who refused to release it five years ago pay the price and then let them take revenge on their leaders.

Does thinking or knowing any of this help us, in our current predicament, find a way out? Of course it doesn’t, but it does beg the question as to why the Greeks, seeing as that they clearly didn’t make their bed without a considerable coercion, should be left to lie in it alone? The only way for them to “share the burden” is to default, exit the euro, let the creditors work out for themselves which way is up and move on. On that basis, I can sadly see no argument why the Greeks should vote anything other than “όχι”.

Puerto Rico…. no.

Meanwhile, the rest of the world has not been standing still with another major default on the horizon. By now, most will be aware the Puerto Rico is also on the cusp of going under with debts of US$72 bn which it can neither repay nor service. This morning, S&P cut the ratings of this, for lack of a better description, US colony to CCC- with a negative outlook. The governor, Alejandro Garcia Padilla, has asked for bond holders to “share the burden” and we all know what that means.

The story behind Puerto Rico’s problems should be a lesson to us all. Billions were borrowed in order to create the infrastructure needed for growth. But infrastructure alone doesn’t do it. There is a principal fallacy in the belief that if one pumps up the deficit willy-nilly in order to create infrastructure, that growth will naturally follow and repay the spending in spades and with dividends. It hasn’t worked in Japan and it didn’t work in Puerto Rico.

The creation of short-term employment funded by debt initially looks fine but there is no guarantee that it will become self-sustaining with private sector follow-through. Puerto Rico is certainly not the first example of a debt funded dash for growth having gone wrong and I’m fairly certain it won’t be the last either.

Chinese cuts

On the subject of debt, the PBOC cut its 1-Year Benchmark Lending rate by a further ¼-point over the weekend from 5.10% to 4.85%. Not at all unexpected but a couple of weeks later than I had thought it would be. If your debt-fuelled growth model begins to slacken, what’s better to do than to create more debt? Simples! Markets didn’t care hugely for what was supposed to be good news and fell 5½% – Greece had nothing to do with this, I can assure you – only to bounce back 4¼% today. Officially, both Shanghai and Shenzhen are supposed to be in a bear market, having fallen by 20% from their highs but all these silly little Wall Street cocktail bar definitions count for nothing in China.

Incidentally, Shanghai is still, even after the thumping correction, up 31% year to date and Shenzhen 73%. Bear market? Do me a favour.

Why the morning news team on the BBC would have felt the need to suggest that the retracement of stock prices should be signalling to the Peoples Bank what needs to be done next – cut, cut, cut – escapes me but it does remind us that there are still educated people out there who haven’t grasped that central banks are not here to simply prop up stock markets and that most of the economic and financial problems of the last decade which we are so desperately trying to work our way out of come from their having tried to do just that.

Monday was a big snooze, business-wise. Let’s hope, against hope, for better things today… If not, at least we can watch the tennis.

 

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