Semiotics versus hard facts
This is an English version of an article which Yanis published in Die Zeit yesterday and posted on his blog. Republished with the kind permission of the author.
Europe is currently struggling to escape from a trap of its own making. Back in early 2010, two realities were staring us in the face: A banking sector replete with paper titles (both private and public) whose market value had shrunk precipitously. And several sovereigns, Greece first and foremost, on the brink of insolvency.
During the first part of 2010, culminating in the May ‘bail out’ for Greece, Europe decided: (a) to remain in denial about the poor health of its banking sector, (b) to treat Greece’s insolvency as a liquidity crisis and (c) to prescribe austerity measures that deepened and widened the ensuing debt crisis.
Since then developments have made it abundantly clear that this is a course to nowhere. Predictably, the Greek crisis got worse not because the medicine was badly, or insufficiently, applied but because (a) it was toxic and (b) it had awful side-effects on Europe’s ailing banking sector.
Instead of mending its ways, Europe is now seeking a Vienna-style ‘solution’. Put differently, it continues to be in denial dreaming of some agreement by Greece’s major creditors to buy new seven year Greek bonds of their own accord (once the bonds they hold mature). The key words here are “of their own accord”. Why? Because a debt roll over without free volition will cause the rating agencies to declare that Greek debt is in a state of default, thus making it impossible for the ECB to accept it as collateral from banks; which will in turn lead to a cascade of bank defaults which will… Thus, we are now embroiled in a discussion on the definition of ‘free will’ that would delight political philosophers and linguists.
The truth of the matter is that no investor, in their right mind, would choose to roll Greek debt over if they could help it. Which means that if they are allowed to decide freely, only a minuscule amount of debt will be rolled over; thus rendering the whole exercise pointless. The alternative is to give them ‘incentives’ to buy new Greek bonds that are akin to the Mafia’s favourite expression “we shall make you an offer you cannot refuse”.
Today, it seems, politicians, the ECB and credit rating company Fitch have stitched up a two-part deal: (a) Creditors will be ‘leaned upon’ to roll over, and (b) Fitch will downgrade Greece to ‘restricted default’ but keep Greek bonds at CCC! In this manner, the ECB can continue to pretend that it accepts Greek bonds as collateral, the French government can claim that they avoided a default, and Berlin can celebrate its success in making some creditors pick up part of the bill.
If the above smacks of desperation it is because it is one last desperate bid to deny reality. Everyone knows that the time will come soon when linguistic games will no longer hold sway over the menacing facts. And when the rating agencies give the green light for the cashing of CDSs taken out against the Greek debt, Europe’s banks will come crashing down (courtesy of all the CDSs issued by their subsidiaries, and which the banks will have to cover for, repeating the sad rituals of AIG after Lehman’s).
The time to stop dithering has come. First, Europe needs to recapitalise its banks. Secondly, it needs to unify the Maastricht-compliant part of eurozone’s debt (through the introduction of a homogenous eurobond). Finally, we need a new pan-European investment spree (via the European Investment Bank). Then and only then will the ‘Greek’ problem be reduced to an order of magnitude in concert with my country’s actual size.
Photo courtesy of Die Zeit.
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The post Collaboration, with our European partners by Richard of Cunning Hired Knaves summed up in one sentence. For much better sentences and many more urgent points read the post.
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