European finance ministers eased the terms on emergency aid for Greece, declaring after three years of false starts that Europe has found the formula for nursing the debt-stricken country back to health.
In the latest bid to keep the 17-nation euro intact, the ministers cut the rates on bailout loans, suspended interest payments for a decade, gave Greece more time to repay and engineered a Greek bond buyback. The country was also cleared to receive a 34.4 billion-euro ($44.7 billion) loan installment in December. Greek bonds rose and the euro reached a three-week high on the accord.
See? All have to do is pull out a hand grenade and threaten to pull the pin! Even though doing so would blow you to bits along with everyone in the room you’ll get whatever you demand as nobody has the balls to call the bluff.
“This has been a very difficult deal,” Luxembourg Prime Minister Jean-Claude Juncker told reporters in Brussels after chairing a 13-hour meeting that ended early today. “All initiatives decided upon today will bring Greece’s public debt clearly back on a sustainable path.”
How do you know Luncker, uh, Juncker, is lying?
That’s simple: His lips are moving.
There is no realistic way for Greece to pay what it owes. This means that the only real solution is for it to default, but that’s unacceptable because it means people have to take losses, and a large chunk of those losses would fall in places that can’t take losses — like the ECB.
“Official” losses would destroy credibility in the capital base of these institutions, including the ECB. That in turn could (and probably would) provoke capital flight, which would instantly destroy the ability of the ECB to “manage” interest rates and possibly even impair its ability to clear transactions.
That’s the real problem in a nutshell — the ECB and IMF made loans that they should have never made, all under the premise that “the Euro is inviolate.”
Such a declaration is functionally identical to declaring that the crazy aunt you have who is drug-addicted and steals anything that isn’t nailed down cannot be ejected from your home and is an “inviolate” part of your household, despite the fact that she’s draining you to the tune of over $1,000 a month in “stuff” that’s being pawned off to feed her habit!
You either cut that crap out or you’re (eventually) hosed.
More-ominously the Shanghai stock market broke a key technical level last night, declining into territory last seen in 2009. While we’re not yet at the nadir seen in ’08, the Shanghai market is threatening to head there — another ~30% down from here. There are some rather troubling analogues between China and Japan’s Nikkei all-time top, and the premise that China will continue to be in a position to power the debt-financing games that it has over the last decade or so looks to be on increasingly-shaky ground.
But the largest problem today is here in the United States. There is no realistic outcome given the positions of the Republican and Democrat parties in Washington today. The simple fact of the matter is that we have gotten to the point where we’re spending 30+% more than the government taxes through both parties, and to correct that both parties are going to have to accept that government simply cannot provide services that the people will not fund with current taxes.
That sounds easy, but it isn’t for two reasons: The ridiculous monopoly-style ramp-job in medical spending and the penchant for both political parties to lie about economic growth through the deficit spending of the last two decades.
In short $600 billion in deficit spending creates $600 billion in demand that otherwise does not exist in the economy. So is $1.3 trillion in deficit spending. The former was about 6% of GDP at the time (Bush’s Presidency) and the latter is about 8% of GDP, which are huge numbers.
Cessation of that spending is not just a political problem with the handouts that won’t happen, or with the lobbyists that will get told to stuff it, particularly in the health care arena. It is also a matter of admitting that we’ve been covering up a terrible economy for more than 10 years through these manipulations and that we must both accept reality and vow to sin no more.
Two words you’ll never hear in Washington DC make this very difficult: “I lied.”
But a refusal to tell the truth doesn’t change anything — it just makes you a serial liar, and arithmetic always eventually asserts itself. The bad news is that economic damage such as this compounds over time, and as such what was a 10% problem in 2000 turned into a 20% one in 2007 and now is approaching a 40% problem (in terms of government spending reductions) that are required to restore balance.
I’m sure you can figure out from that progression what happens if we don’t cut the crap, and soon.