European Crash Dummies and Greece's Brick Wall
by Gary North: Newton's
Apple and Jobs's Apple: Their Dual Trajectory Is Inevitable
A crash dummy
has some of the physical characteristics of a human being. It is
used to test the safety of the interior of a car that has suffered
a major accident. A pair of dummies are strapped into the front
seat of a car that is on a track. Then the car is run into a wall
at high speed. The engineers then examine what happened to the dummies.
If the dummies had been human beings, would they have been killed?
But what if
the dummies were in charge? What if they strapped the engineers
into the car and ran the test?
This is what
is happening in Europe today.
are the bankers. The engineers are the politicians and EU bureaucrats.
The observers in the back seat are stock market investors.
the nature of the car, the track, and the wall, view
the comedy sketch of Australian comics Clark and Dawe. This
will prepare you for what follows.
THE EXPERTS IN CHARGE
is coming unglued, piece by piece. A Greek debt default is looking
more likely every day. Intrade,
the gambling site, on October 10 rated at 46% the likelihood
of a Greek default before midnight December 31.
experts in charge of big bank bailouts keep insisting that the problem
is manageable. There will soon be some sort of program that will
solve the problem. It is due out any day now. There are no details
Angela Merkel will approve of it. The German Parliament will also
approve it. A majority of German voters will not, but who cares
about them? Surely not the People Who Really Count.
with the European Party Line regarding Greek debt is that it never
changes. Let us not forget the words of Joaquin Almunia in 2010.
But, before we read his forecast in 2010, you should know that he
was then the Commissioner for Economic and Monetary Affairs of the
European Union. At the time, he
posted this on his official website.
EU is the world's largest market and the euro a powerful asset in
our competitive global economy. But in the face of 21st century
challenges, securing sustainable growth for the future of Europe
will depend on making the right policy choices today. As Commissioner
for Economic and Monetary Affairs, it is my goal to ensure that
sound policies for economic stability and dynamism and a smooth
functioning Economic and Monetary Union continue to deliver prosperity
for the 490 million citizens of the EU.
With this in
mind, read his forecast in January 2010 at the famous Davos conference,
an annual closed meeting attended by the world's elite. He was speaking
of the potential crisis in Greece.
have no plan B plan A is on the table. Next week at the commission
level we will adopt public recommendations for Greece and for other
economies to adjust their imbalances.
London Telegraph went on to report on the background
of Almunia's statement.
said those recommendations would centre on the adjustment of the
public deficit within the deadlines announced by the Greek government,
as well as improvement in the functioning of the public sector,
the budgetary process, the statistical system, pensions, and the
are required to overcome the present situation of the Greek economy,"
he said in an interview with Bloomberg TV at the World Economic
Forum in Davos. He was insistent that Greece would not default,
despite concerns over its debt mountain which have led to a series
of downgrades by credit ratings agencies.
will not default. In the euro area, the default does not exist,"
he said. He suggested there was no question that a bailout would
be necessary because Greece was a member of the single currency,
which afforded it more funding options than would be the case
if it was not a member of the euro.
not exist." Surely these words should be on a plaque on his desk,
the way that Harry Truman's "The buck stops here" plaque sat on
no longer holds the high position that he did in 2010. He was quietly
shunted off to a new position. He is now the European Commissioner
for Competition. He
offers these inspirational words:
state aid control, the most pressing issue is to manage the financial
crisis and its impact, but I will also examine to what extent
it is possible to streamline state aid control procedures.
A financial crisis? You mean the event for which there was no Plan
B in 2010 and no need for one? THAT financial crisis?
is an engineer. He is surrounded by engineers. They are developing
Plan C or is it Plan D? for the imminent default by
the Greek government.
much money are we talking about? The Greek government has about
€350 billion euros in outstanding debt, of which 75% is owned by
investors outside of Greece. Most of these investors are commercial
is this: Which banks? Weak banks. Banks that cannot afford to take
a major "haircut" write-down of Greek bond value due to a
default. These banks are mainly in Portugal, Italy, Ireland, and
Spain. The media have not yet understood this. If they did, we would
see headlines about the PIIS banks.
Banks in Europe
provide about 70% of the financing of consumers and businesses.
It's about 40% in the United States. So, if banks in the PIIS nations
stop lending, those domestic economies will take a hit. But these
nations are the weakest in Europe.
a problem: partial default by these nations or their banks. The
comparative size of the inter-European debts of these nations dwarfs
Greek debts. The
New York Times ran a graph of this in mid-2010.
This is the
domino problem. It threatens the European economy.
statement of the threat came last week from the head of the Bank
of England, Mervin King. I have never seen anything this frank from
a high official regarding the possibility of an economic collapse.
"This is the most serious financial crisis we've seen at least since
the 1930s, if not ever." This was reported widely in the British
King is not
alone. The financial media feature pessimists who think that Europe
is at the edge of an abyss. I do not recall anything like this.
wrote a very revealing first-hand account of discussions that he
had with Irish officials. There is a real possibility that Ireland's
government will default on its debt to the IMF and the European
invited to Ireland by a broadcaster, David McWilliams. Here is an
extract from Mauldin's
report. He refers to Michael Lewis, author of the recent best-seller,
Lewis noted from his time in Ireland that the Irish seemingly went
along the Irish government taking on the bank debt. The large majority
were not aware of the nature of the impending crisis. In the last
few years, that has changed. I have written extensively in the past
about how the Irish have figured out they are taking on debt for
banks that no government should have touched. It was just too much.
It's simple arithmetic: the Irish cannot repay that debt under the
current terms (even after the ECB and Europe gave them lower interest
rates in July) and ever hope to get out of debt in the next 30 years.
They have consigned themselves and their children to decades of
toil to pay back English and German and French banks (among others).
fact dawned upon them. They voted out the government that allowed
the debt to be assumed. It was a clear message, but the government
has not yet done anything to rid itself of the debt.
those like McWilliams who simply want to repudiate the debt. "It
should never have been done, so we will not pay it." He is not
alone; that view is becoming increasingly mainstream now.
press politicians and establishment types (and I did) who are
against unilaterally disavowing the debt, a strange thing happens.
I kept asking, "But the voters seem to want to forego the debt.
And the math suggests that Ireland can't pay back these foreign
bankers without great sacrifices." At first, they would point
out that Ireland is doing what needs to be done: cutting spending
and payrolls. We are not Greece, they say; there is a need for
"respectability." But when pressed, they would come around to
admitting that, "Yes, Ireland will get a haircut." Everyone I
met expected it to happen. The difference was the path to the
haircut. But while the politics matter, the destination is the
this late in the game? Because the government lied about the arrangement
until the final hours.
Irish Times ran a political cartoon on what the Irish call
their Prime Minister. It was astounding.
He was, indeed.
two years, he had publicly started that Ireland would not need a
bailout. He did so as late as mid-November, within days of the
party fell within weeks at the election. Too late.
Or was it?
For a sovereign nation, it is never too late.
There is no
question in my mind what a future government is going to do. It
is going to default. The voters will elect it to do this, and if
it pussyfoots around, it will be replaced.
default. It will be the first of a row of dominoes to fall. When
it gets away with it, voters in other nations will be alerted to
the fact that defaulting to the EU, the IMF, and the ECB is cheaper
than being saddled with a generation of debt and slow growth.
can be fooled for a long time, but not forever.
an obscure Belgian bank, was nationalized over the weekend. It was
leveraged 74 to one. To cover all losses, the size of which is not
yet known, the governments of France, Belgium, and Luxembourg ponied
up €90 billion ($120 billion) in loan guarantees. (By the way, Belgium
has not had an operational government for 17 months by far
the longest period of no government in the history of parliamentary
government.) This bailout was announced on Sunday, October 9.
Then an emergency
weekend meeting of French and German leaders pledged that their
nations will come up with a rescue plan for all European banks in
November. They offered no details. European stock markets soared
on Monday, as did American stock markets.
The crash dummies
are still in charge in Europe. The engineers who have been strapped
into the front seat. They turned to the observers in the back seat.
"Everything is just fine." The back seat dummies used their cell
phones to call their brokers to buy shares.
The crash dummies
have a fund with about €440 billion euros in it. Well, not actually
in it. It has the right to sell bonds to raise the money. It is
called the European Financial Stability Stabilization Facility (EFSF).
On its site,
Financial Stability Facility (EFSF) was created by the euro area
member states following the decisions taken May 9, 2010 within
the framework of the Ecofin Council.
As part of
the overall rescue package of €750 billion, EFSF is able to issue
bonds guaranteed by EAMS for up to €440 billion for on-lending
to EAMS in difficulty, subject to conditions negotiated with the
European Commission in liaison with the European Central Bank
and International Monetary Fund and to be approved by the Eurogroup.
So, in a major
crisis, in which (say) 30 Dexia-size banks are going bust, the EFSF
has the right to sell bonds to investors.
How will investors
buy these bonds? They will call their banks and say, "I am withdrawing
money from my account." You can imagine how this will cheer the
hearts of the bankers whose banks very large banks
get the calls from rich depositors.
You call this
a bank run. So do I. But the crash dummies call it Europe's #1 weapon
in the arsenal against a rolling wave of bank bankruptcies.
dummies are the bankers. The engineers are the politicians and EU
bureaucrats. The observers in the back seat are stock market investors.
are running the test. They have strapped the engineers into the
car. The engineers see a tremendous future. They are Keynesians.
They know the car is safe. The wall will miraculously drop into
the floor just before the car would otherwise have hit it.
in America have signed credit default swaps to bail out the European
dummies in case of sovereign debt defaults.
I suggest unhooking
your seat belt and getting out of the car. Soon.
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2011 Gary North
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