Greece is, once again, shaking the foundations of the Eurozone, and there is, again, talk of a “Grexit”. Stock markets are tumbling and fear the results of the January 25 anticipated elections. That being said, only naive people can really be dumbfounded by this new crisis, since it is so obvious that Greece will never be able to repay its debt. The red zone has been crossed a long time ago, since its debt represents 174% of its GDP, the second largest level in the world, behind Japan. In Japan, however, the central bank is buying back debt without stop, contrary to the ECB in the Eurozone, which buys a little time and creates an illusion, a “luxury” that Athens cannot afford.
In order to understand this crisis, one has to look at the nature of Greece’s debt. Public institutions (countries or organisations) hold most of it, since banks and private investors fled the country with the first crisis in the Spring of 2010. Greece is thus indebted toward the Eurozone countries to the tune of 194.7 billion euros, of which 52.9 billion directly toward several countries, mainly Germany and France, and 141.8 billion toward the European Stability Fund, to which all Eurozone countries must contribute. Also, the ECB bought back for 25 billion euros worth of bonds in 2010-2011 and the IMF made loans of over 31.8 billion euros. In total, 251.5 billion euros of public debt are weighing on European countries and the IMF. Add 70 billion euros owed to private investors (especially vulture funds, always very aggressive in case of a restructuration) for a total public debt of 321 billion euros.
An outright default or a restructuration of the Greek debt would have a direct impact on European countries’ public finances, and most of those countries are battling high budget deficits of their own. There could be a risk of a domino effect if other failing countries were to ask for similar ‘restructuration’. An exit from the Eurozone, as mentioned by Angela Merker, according to Der Spiegel, would signify a total write-off of the debt and an effective loss for European countries. In any case, the Eurozone’s credibility would be greatly impaired.
The eventuality of extreme-left candidate Alexis Tsipras, leader of the Syriza party, grabbing power worries the markets, and rightly so: He would immediately re-negotiate the country’s debt and put a stop to the austerity programs. If he loses, the markets will breathe a sigh of relief and will start to go up again... which will prove to be a fatal error because, anyhow, Greece is bankrupt and there will be a day of reckoning, whatever happens!
What should be questioned, however, is the functioning of the euro itself in order to allow innovative solutions, such as double circulation (Greece would bring back the drachma while staying in the Eurozone – both currencies would circulate in the country). But the euro as “sole currency” sounds more and more like dogma and, up to this moment, all they can do is fill the Danaïds’ cistern or let the Eurozone explode. European leaders think the ECB will somehow set things right, and Mario Draghi is keen on selling this idea, but what is he really proposing? Quantitative easing... oh, my! ...The worst is yet to come!
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Philippe Herlin Finance Researcher / Member of the Goldbroker.com Editorial Team
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.