Nine years later, Greece is still in a debt crisis!

By Simon Black SovereignMan.com
March 22, 2017 Santiago, Chile

Sometimes you have to marvel at the absurdity of the financial universe in which we live.

On one side of the Atlantic, we have the United States of America, which triggered yet another debt ceiling disaster last Thursday when the US government’s maximum allowable debt reset to just over $20 trillion.

Of course, the US national debt is pretty much already at $20 trillion.

(That’s roughly $166,000 per taxpayer in the Land of the Free.)

This means that Uncle Sam is legally prohibited from ‘officially’ borrowing any more money.

But far be it from the US government to start living within its means. Sacrilege!

These guys have zero chance of making ends meet without going into debt.

Just last year, according to the government’s own financial report, their annual net loss totaled $1 TRILLION, and the national debt increased by $1.4 trillion.

And that was in a relatively stable year. There was no major war or financial crisis to fight. It was just business as usual.

This year isn’t going to be any different.

So, cut off from their normal debt supply (the bond market), the Treasury Department is resorting to what they call “extraordinary measures.”

They’re basically pillaging government employee retirement funds, and will continue to do so until Congress raises the debt ceiling.

It’s a repeat of what happened in 2015. And 2013. And 2011.

Pretty amazing to consider that the “richest” country in the world has to plunder retirement funds in order to keep the lights on.

Former US Treasury Secretary Larry Summers said it perfectly when he quipped “How long can the world's biggest borrower remain the world's biggest power?”

Then, of course, on the other side of the Atlantic, we have Greece, which is now in its NINTH YEAR of a major debt crisis.

Incredible.

Greece has had nine different governments since 2009. At least thirteen austerity measures. Multiple bailouts. Severe capital controls. And a full-out debt restructuring in which creditors accepted a 50% loss.

Yet despite all these measures GREECE IS STILL IN A DEBT CRISIS.

Right now, in fact, Greece is careening towards another major chapter in its never-ending debt drama.

Just like the United States, the Greek government is set to run out of money (yet again) in a few months and is in need of a fresh bailout from the IMF and EU.

(The EU is code for “Germany”...)

Without another bailout, Greece will go bust in July-- this is basic arithmetic, not some wild theory.

And this matters.

If Greece defaults, everyone dumb enough to have loaned them money will take a BIG hit.

This includes a multitude of banks across Germany, Austria, France, and the rest of Europe.

Many of those banks already have extremely low levels of capital and simply cannot afford a major loss.

(Last year, for example, the IMF specifically singled out Germany’s Deutsche Bank as being the top contributor to systemic risk in the global financial system.)

So a Greek default poses as major risk to a number of those banks.

More importantly, due to the interconnectedness of the financial system, a Greek default poses a major risk to anyone with exposure to those banks.

Think about it like this: if Greece defaults and Bank A goes down, then Bank A will no longer be able to meet its obligations to Bank B. Bank B will suffer a loss as well.

A single event can set off a chain reaction, what’s called ‘contagion’ in finance.

And it’s possible that Greece could be that event.

This is what European officials have been so desperate to prevent for the last nine years, and why they’ve always come to the rescue with a bailout.

It has nothing to do with community or generosity. They’re hopelessly trying to prevent another 2008-style meltdown of the financial system.

But their measures have limits.

How much longer do Greek citizens accept being vassals of Germany, suffering through debilitating capital controls and austerity measures?

How much longer do German taxpayers continue forking over their hard-earned wages to bail out Greek retirees?

After all, they’ve spent nine years trying to ‘fix’ Greece, and the situation has only become worse.

For a continent that has been at war with itself for 10 centuries and only managed to play nice for the last 30 or so years, it’s foolish to expect these bailouts to last forever.

And whether it’s this July or some date in the future, Greece could end up being the catalyst which sets off a chain reaction on both sides of the Atlantic. 

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World’s largest hedge fund manager predicts bleak future for markets

by Simon Black
February 9, 2017
Santiago, Chile

There are lots of famous investors and hedge fund managers who are legendary stock-pickers.

Warren Buffet is a great example.

Others are hard-core quantitative analysts who build complex trading algorithms.

Ray Dalio, the billionaire founder of Bridgewater Associates, is neither.

He’s a macro investor whose fortune was built on an uncanny ability to spot big macro trends.

He predicted in 2007, for example, that the US housing bubble would burst, and warned the Bush administration that major banks were on the verge of collapse.

The government ignored him.

After the 2008 collapse of Lehman Brothers, Dalio immediately recognized that the Federal Reserve would have to print trillions of dollars to bail out the system... so he positioned his firm for big profits, buying assets like gold and foreign currencies.

Dalio was right again.

Now Dalio has a new warning for anyone who’s willing to listen.

In October he admonished a room full of central bankers in New York that there was simply too much debt in the world.

At the time, total global debt was an astounding $152 trillion.

Total debt has now risen to $217 trillion, according to a report published last month by the Institute for International Finance.

And as Dalio points out, this has consequences.

He told central bankers back in October that “there is only so much one can squeeze out of a debt cycle, and most countries are approaching those limits.”

Governments often go into debt in order to finance big spending projects which stimulate economic growth.

But eventually the amount of growth you can generate from debt reaches a point of diminishing returns.

We can already see plenty of data to support this assertion.

China has taken on hundreds of billions of debt over the last several years in order to maintain its economic growth.

But measures of China’s “debt efficiency” now show, according to the Wall Street Journal, that it takes “increasingly more debt to generate the same GDP growth.”

So China is rapidly reaching its limit in terms of how much economic growth it can squeeze from its debt.

Debt, i.e. government bonds, are supposed to be boring, low-risk investments.

Grandparents buy government savings bonds for their grandkids. Retirees and pension funds hold them as “risk free” assets.

But in a recent piece written for the Economist, Dalio suggests that “the bond market is risky now and will get more so. Rarely do investors encounter a market that is so clearly overvalued and so close to its clearly defined limits…”

He bleakly projects that “investment returns will be very low” and that investment risk will increase, i.e. the “reward-to-risk ratio will worsen.”

Dalio concludes his piece predicting that “savers will seek to escape financial assets and shift to gold and similar non-monetary preserves of wealth, especially as social and political tensions intensify.”

The funny thing about these big-picture, macro trend predictions, is that they seem so obvious in retrospect.

Just look at the 2008 financial crisis.

Banks had spent years accumulating $1.3 trillion worth of no-money-down mortgages made to unemployed borrowers with terrible credit.

Eventually the entire financial system blew up.

Duh. It makes so much sense looking back.

But in 2007 almost everyone thought the boom would last forever.

Nearly every major crisis begins with a false set of beliefs, like “housing prices always go up.”

And after the collapse everyone wonders how we could have believed such nonsense.

Today’s false belief is that these unsustainable debts don’t matter.

Looking back a few years from now it will seem painfully obvious.

$200+ trillion in global debt? $20+ trillion in US debt? Did we seriously believe this would turn out OK?

Dalio’s is a powerful warning, and he poses a logical solution: precious metals and real assets.

Maybe he’s wrong. Maybe $200+ trillion in debt really is consequence free.

Maybe the ultimate false belief of “This time is different” turns out to be true.

Maybe.

But it’s hard to imagine you’ll be worse off taking some very simple steps to reduce your exposure to such obvious risks.

Until tomorrow,

Simon Black

Founder, SovereignMan.com

PS:
Consider a membership in Sovereign Man: Confidential to learn about the most cutting edge ways to invest in real assets and reduce your exposure to these obvious risks.

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Brexit is not just Europe’s problem. It highlights a crisis in democracies worldwide.

By Dan Balz, Washington Post, June 27, 2016

LONDON–Britain’s political system remained in turmoil Monday, virtually leaderless and with the two major parties divided internally. But the meltdown that has taken place in the days after voters decided to break the country’s ties with Europe is more than a British problem, reflecting an erosion in public confidence that afflicts democracies around the world.

Last Thursday’s Brexit vote cast a bright light on the degree to which the effects of globalization and the impact of immigration, along with decades of overpromises and under-delivery by political leaders, have undermined the ability of those officials to lead. This collapse of confidence has created what amounts to a crisis in governing for which there seems no easy or quick answer.

The debris here is clear. The Brexit vote claimed Prime Minister David Cameron as its first victim. Having called the referendum and led the campaign to keep Britain in the European Union, he announced his intention to resign the morning after the vote. The results also now threaten the standing of Labour leader Jeremy Corbyn, who faces a likely leadership election after seeing more than two dozen members of his leadership team resign in the past two days.

Alastair Darling, a former chancellor of the exchequer, outlined the extent of the crisis here during an interview with the BBC’s “Today” program on Monday. “There is no government. There is no opposition. The people who got us into this mess–they’ve gone to ground,” he said “How has the United Kingdom come to this position? We have taken this decision and have no plan for the future.”

The seeds of what has brought Britain to this moment exist elsewhere, which makes this country’s problems the concern of leaders elsewhere. In Belgium and Brazil, democracies have faced crises of legitimacy; in Spain and France, elected leaders have been hobbled by their own unpopularity; even in Japan, where Prime Minister Shinzo Abe faces no threat from the opposition, his government has demonstrated a consistent inability to deliver prosperity.

Anthony King, a professor of politics at the University of Essex, said the underlying factor is that many people no longer believe that, however imperfect things are economically, they will keep getting better.

In the face of that change in public attitudes, he said, much of the political class “is behaving the way it used to behave, the old arguments, the old fights, the adversarialism.” That has created what he called “the palpable disconnection” between political leaders and ordinary people. “That is true across much of the democratic world,” he added. “How do you put that right?”

The problem is especially acute here at the moment and threatens to grow worse in the near term. A longtime analyst of politics here, who spoke on the condition of anonymity because of his position, said: “If you thought your [American] politics were a mess, we can outdo you any time. I’ve never known it in any way, shape or form as bad as this.”

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Britons, Feeling Apart From E.U., May Make It So With ‘Brexit’

By Sarah Lyall, NY Times, June 2, 2016

LIVERPOOL, England–Just as many Britons feel emotionally apart and even alien from Europe, so they see the European Union as an opaque, bewildering abstraction, a mysterious bureaucratic behemoth that hoovers up their money and independence while giving little (or nothing) in return. British understanding of its workings and purpose has not been helped by the over-the-top arguments being thrown around in the debate over the referendum, scheduled for June 23.

But underlying all the dire predictions of doom–that staying or going will cause Britain to fall apart in various apocalyptic ways–is a deeper emotional issue that speaks to the country’s sense of self. Who does it think it is, and where does it think it belongs? Has it ever felt like it’s part of Europe?

Separated from the Continent by language, tradition, historic antagonism and an inhospitable body of water, Britain has always seemed to be an uneasy participant in the wider European project. It took years to sign up, and its agreement was always marked by caveats and exceptions to the rules. Even when it did join, it felt to many Britons as if someone had given a British pub owner a bunch of fancy French Champagne bottles and said, “Here, use these for your British ale from now on.” The trappings might be different, but the beer is still the same.

In the 15 years I lived in London (I returned home to the United States three years ago), I was constantly struck by the sense of otherness with which many English people regarded Europeans. (It’s more complicated for Scots, who are by nature anti-English and thus pro-anybody else, and for younger people and Londoners, who generally feel part of a wider world.)

But travel around England, talking to older people, and you find below the surface a sense of unease, of distrust. Even people who believe that Britain should stay in the European Union, for economic and trading purposes, do not feel very European.

At every turn, Britain proclaims its singularity. Most countries fly the European flag next to their national flags; Britain doesn’t. Most of Europe uses euros; Britain uses pounds. When you arrive at a British airport, you’re given a British landing card and directed to a passport line that says “British and E.U. Passports,” even though that is redundant: British passports are by definition European Union passports. British politicians in the last 20 years have increasingly talked about British values and British traditions, about what sets Britons apart from Europeans rather than what they have in common.

British people don’t speak the same language as other people in the European Union–not literally, not metaphorically. This is a country where one of the main railroad stations, Waterloo, commemorates Napoleon’s defeat by the British, where a serious objection to building the Channel Tunnel was that it might encourage rabid animals to sneak in from France, and where Beauchamp Place in London is pronounced “BEECH-am.”

The idea that things are easily lost in translation is reflected in the opening line of P. G. Wodehouse’s “The Luck of the Bodkins,” as a Briton confronts the daunting prospect of having to make himself understood on the Continent.

“Into the face of the young man who sat on the terrace of the Hotel Magnifique at Cannes,” Wodehouse writes, “there had crept a look of furtive shame, the shifty, hangdog look which announces that an Englishman is about to talk French.”

The so-called special relationship with the United States isn’t providing much comfort to the Brexit side these days; President Obama’s recent admonition to vote no in the referendum enraged many people who believe America should stay out of it and let their country think for itself.

As for Europe, some of the British sense of dissonance comes from loss of empire and the country’s complicated feelings about World War II, a moment that showed Britain at its shining best while simultaneously stripping it of its position as a major international power. And some of it stems, simply, from an island-centric sense of otherness.

“I might be part of the E.U., but I live on an island,” said Alan Lyon, 49, who shovels cullet–broken glass–in a glass factory. Mr. Lyon’s great-great-grandfather lost both legs in World War I; his grandfather fought in World War II. “We couldn’t mention Germany or France around him, he hated them so much,” he said.

Britain’s populist tabloids have a long history of slipping happily into anti-European remarks. “Up Yours Delors” read a famous headline in 1990 in The Sun, urging its readers to tell Jacques Delors, then the French head of the European Commission, to “frog off.” (Mr. Delors supported increased European economic integration, which The Sun did not.)

Prince Harry once wore a Nazi commandant costume to a party. And in 2006, officials specifically warned fans traveling to Germany for a soccer match not to do things like shout “Sieg heil” at the referees, or to put their fingers under their noses in a way meant to evoke Hitler’s mustache. Perhaps the favorite television episode here is one on “Fawlty Towers” when a hotel owner, played (again) by Mr. Cleese, responds to a group of German guests by lapsing into xenophobic insanity, goose-stepping around the dining room and referring to prawn cocktail as “prawn Goebbels.” (“You started it,” he says when the traumatized customers object. “You invaded Poland.”)

The pro-Brexit side has successfully tapped into anti-foreign feeling by conflating the European migrant crisis with what many Britons see as a local immigration crisis caused by lax European laws and porous European borders. In their view, the country is being overrun by foreigners who not only take their jobs and welfare benefits, but also bring fundamentally different values into Britain.

Recently, Britons were appalled at the news that a German comedian who went on television and recited a rude poem about Recep Tayyip Erdogan, the Turkish president, is to be prosecuted under a German law prohibiting the insulting of foreign leaders. As a way to thumb its nose at both Germany and Turkey, the influential right-leaning Spectator magazine started a “President Erdogan Offensive Poetry” competition, inviting readers to submit anti-Erdogan limericks.

The winner was Boris Johnson, the former mayor of London and leader of the Brexit campaign, who implied in his poem that Mr. Erdogan was overly fond of goats. Announcing the winner in the magazine, Douglas Murray, who organized the competition, said the existence of the poem (and of Mr. Johnson) showed Britain’s superiority over Germany, which is part of the European Union, and Turkey, which would like to be.

“I think it a wonderful thing that a British political leader has shown that Britain will not bow before the putative caliph in Ankara,” he said. “Erdogan may imprison his opponents in Turkey. Chancellor Merkel may imprison Erdogan’s critics in Germany. But in Britain we still live and breathe free.”

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A British vote to leave the E.U. could shatter the United Kingdom

By Griff Witte, Washington Post, May 30, 2016.

EDINBURGH, Scotland–When Scotland voted in an independence referendum in September 2014, nationalist leaders pitched it as a once-in-a-generation chance to break a three-century-old bond.

But less than two years after Scots opted to remain in the United Kingdom, the specter of secession again looms over the lush green expanse of the British isles. The trigger this time is another referendum with existential impact: next month’s vote on whether to leave the European Union.

If Britain chooses to ditch the E.U. despite a vote to stay from the Euro-friendly Scots, nationalist leaders here say they will revive the push for an independent nation in order to keep Scotland inside Europe. And they think that the second time around, they would win.

“Pulling Scotland out of the European Union against our will would be a change in material circumstances,” said Alex Salmond, who led the push for independence in 2014 and now represents Scotland in the British Parliament.

In that scenario, he said, there will be “a referendum on Scottish independence within the next two years. And this time, the result would be ‘yes.’”

The potential for a British breakup as fallout from the June 23 referendum underscores just how much is at stake when the country decides whether to become the first nation to withdraw from the 28-member E.U.

A shock to the global economy, a rupture in the Western alliance and a change in occupancy at 10 Downing Street are all possible consequences of a British vote to leave–popularly known as “Brexit.”

The very existence of Great Britain could also be on the line.

British Prime Minister David Cameron reluctantly offered the public a direct say over the country’s E.U. membership for much the same reason he acceded to the Scottish call for an independence vote in 2014: He thought it was the only way to settle the fundamental questions at the heart of British identity. Is the United Kingdom part of Europe or not? Is it one nation or two?

But the potential for a British exit from the E.U. to reawaken the push for Scottish independence reflects just how badly Cameron’s strategy may have backfired. Instead of laying the issues to rest, critics say he may have unleashed the age of the “neverendum”–a prolonged period of turbulence that does not stop until the public votes to take Britain out of Europe and split Scotland from the United Kingdom.

“In order to put these questions to bed for a generation, you need a vote of 60-40,” said Menzies Campbell, a veteran Scottish member of Parliament who supports keeping Scotland in Britain and Britain in the E.U. “If the losing side gets 45 [percent], they’re not going to give up.”

That was what pro-independence Scots won in the 2014 vote. Since then, their side has delivered a pair of electoral thumpings: The Scottish National Party won by huge margins in both the 2015 British parliamentary elections and in the Scottish parliamentary contests this month, suggesting that the appetite for independence has hardly ebbed. Opinion polls show that Scotland would be about evenly divided if the independence vote were re-run today.

If Britain chooses to leave the E.U. next month–despite Scottish objections–that could tilt the balance in the nationalists’ favor, reinforcing divisions between north and south.

The visceral anti-E.U. sentiment that runs through English politics can hardly be found north of Hadrian’s Wall, the ancient stone fortification that bisected Britain during Roman times. Polls show a decisive advantage for the “in” campaign in Scotland, while England flirts with “out.”

The reasons for the difference are both historical and contemporary. Scotland has long had a close affiliation with continental Europe, going so far as to side with the French in wars against the English. As citizens of a small nation, Scots see membership in a broader European community as a comfort; the English are more likely to see rival power centers on the continent as a threat.

“There’s an emotional connection between Scotland and Europe,” Campbell said. “We’ve never had the residual antagonism toward Europe that has been maintained in England.”

But perhaps the most important reason for the split in opinion is immigration.

In crowded England–which makes up nearly 85 percent of the U.K. population but only about half the land–many people regard arrivals from elsewhere in Europe under the E.U.’s free-movement rules as an unwelcome burden. In sparsely populated Scotland–the entire population of 5 million is roughly equal to the inner boroughs of London–there is plenty of room for newcomers.

“Scotland is not full up,” Salmond said. “We’re much more like America of 100 years ago than the England of today.”

Scotland is not the only place in the United Kingdom where next month’s referendum threatens to bring politically destabilizing consequences. In Northern Ireland, where a tenuous peace has held for nearly two decades, a vote to leave would add a new line of partition to the Emerald Isle, with the Republic of Ireland inside the E.U. and the counties of Northern Ireland outside it.

Analysts have warned that such division could hinder the economy, prompt renewed border controls and revive dangerous levels of sectarianism. In an echo of the nationalist push in Scotland, Catholic leaders in the generally pro-European north say that if Britain opts to leave the E.U., there should be a referendum on the reunification of Ireland.

Surveys suggest that Protestant voters would block any such move and keep Northern Ireland inside the United Kingdom. The polls in Scotland are far less clear, but the determination of nationalists to hold another referendum is not.

Indeed, Salmond said that a second independence referendum will be held sooner or later, regardless of which way Britain votes next month.

“Independence is inevitable,” he said. “We’re just debating time scale now.”

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There Goes Europe

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The desperate wish in what is loosely called the West to at least appear morally correct is unfortunately over-matched by the desperation of people fleeing unstable, overpopulated places outside the West, and it is a fiasco beyond even the events of the moment.

The refugee / immigrant crisis around the Mediterranean is a preview of a horror show to which there is no end in sight, and is certain to escalate. So anyone who indulges in fantasies about organizing an orderly, rational distribution of displaced persons for the current wave, is badly missing the point. Wave beyond wave awaits after the this one. And then what will the well-intentioned sentimentalists say? We wanted to do the right thing… we meant well… we cried when we saw the little boy dead on the beach….

Yes, the tragic intrusions of the US military in Iraq, Libya, Somalia, Syria, and elsewhere have been reckless and stupid. But that is not the whole story. The desert nations of the Middle East and North Africa (MENA) have populations abnormally swollen by a century of oil-and-gas-based agriculture, really by the benefits of Modernity in general. Now that the oil age is chugging to an unruly crack-up, and Modernity with it, and the earth’s climate is doing wonky things, and the rich nations to the north have faked their finances to the point of bankruptcy, well, circumstances have changed.

In the years ahead, populations will be fleeing and shifting from many more unfavorable corners of the world. The pressures are mounting all over. Alas, the richer nations in which the fleeing poor aspire to gain a foothold, will also be contending with the disabling effects of a universal economic contraction — the winding down of the techno-industrial system and the global economy with it. That process has the potential to shatter political unions, overthrow established social orders, and provoke wars between the demoralized countries who still possess dangerous military hardware. At the least, it will produce economic conditions in Europe and North America probably worse than the Great Depression of the 1930s.

So, the idea that the nations currently bethinking themselves “rich” can take in, shelter, and employ the masses fleeing MENA (and elsewhere) is absurd. Somehow the people in charge, plus the intellectual classes who shape opinion and consensus, are going to have to arrive at some clear notion of limits and boundaries. It is actually happening in parts of Europe right now, extempore, where the immediate crisis is worst, for the moment in Italy, Greece, and Hungary — which first interned the refugees and then let them loose on the road to Vienna, probably only a way-station to Germany. Soon all nations across Europe will be agonizing, shucking, jiving, or improvising some sort of desperate response.

Among other confusions of policy and intention, the public “debate” so far does not make any distinction between true political refugees fleeing for their lives or economic migrants seeking to improve their prospects elsewhere. It is surely easy to empathize with both categories of persons, but that doesn’t mean you give up the control of your borders just to make yourself feel better. That is pretty much what has happened in the USA, where the Left, for political expediency, has deemed it indecent to call “illegal” immigrants what they are, and the Right has just been pusillanimous and hypocritical about it. Hence the unfiltered persona of Trump who, for all his titanic shortcomings, has at least managed to make his rivals look like the craven midgets they are.

Likewise, the rise of Marine LePen in France, Geert Wilders in Holland, and other parties seeking limits to immigration, perhaps even deportations. Personally, I reject the idea that it’s “racist” to want to preserve one’s national culture and character (especially in language), or to favor bona fide citizens for gainful employment. Europe has the additional obvious problem of an immigrant Islamic population overtly hostile to European culture and tradition. Why is it morally imperative for Europeans to countenance what amounts to low-grade warfare?

The situation that smoldered for decades is now exploding. Don’t expect to see any end to desperation and instability in MENA, but do expect new demographic crises out of other regions: Indonesia, Ukraine, Pakistan, West Africa, and Brazil, with its cratering economy. It’s not inconceivable that China might bust apart politically, with centrifugal consequences. The global economy is contracting. We have indeed attained the limits to growth. Cheap oil is bygone and the capital infrastructure we have won’t run on expensive oil — including the oil industry itself. New technology or further central bank legerdemain is not going to fix that. We’re in population overshoot and a scramble is underway to bail on the places that just can’t support the people who live there. National boundaries will be defended. Sentimentalists will have to step aside. History is not a bedtime story about bunnies and kittens.

SEPTEMBER 2015



ABOUT JAMES HOWARD KUNSTLERVIEW ALL POSTS BY JAMES HOWARD KUNSTLER

James Howard Kunstler is the author of many books including (non-fiction) The Geography of Nowhere, The City in Mind: Notes on the Urban Condition, Home from Nowhere, The Long Emergency, and Too Much Magic: Wishful Thinking, Technology and the Fate of the Nation. His novels include World Made By Hand, The Witch of Hebron, Maggie Darling — A Modern Romance, The Halloween Ball, an Embarrassment of Riches, and many others. He has published three novellas with Water Street Press: Manhattan Gothic, A Christmas Orphan, and The Flight of Mehetabel.

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Greece reaches deal with creditors, avoids euro exit

By Pan Pylas And Raf Casert, AP, Jul 13, 2015

BRUSSELS (AP)–After months of acrimony, Greece finally clinched a bailout agreement with its European creditors on Monday that will, if implemented, secure the country’s place in the euro and avoid financial collapse.

The terms of the deal, however, will be painful both for Greeks and their radical left-led government, which since its election in January had vowed to stand up to the creditors and reject the budget cuts they have been demanding.

Before it can get 85 billion euros ($95.07 billion) in bailout cash and support for its banks to reopen, the Greek government will have to pass a raft of austerity measures that include sales tax increases, reforms to pensions, and labor market reforms.

Greece will be on a tight timetable to implement its reforms–a reflection of how little its creditors trust the government to honor a deal. Greek Prime Minister Alexis Tsipras infuriated his European partners last month when he called for a popular vote against economic reforms the creditors has proposed.

The Greek people voted against those proposals, but will be horrified to see that they now face even tougher measures.

Both sides acknowledged the bitterness that marked their negotiations and kept them negotiating nine hours past a Sunday midnight deadline.

“Trust needs to be rebuilt,” said German Chancellor Angela Merkel, adding that with the deal, “Greece has a chance to return to the path of growth.”

In a first step toward getting its bailout loans, the Greek government has to pass a set of measures into law by Wednesday.

Measures include an increase in the sales tax and reform of the pension system. In later weeks, Greece will have to open to competition industries that have long been protected, such as the energy sector. Labor laws will be made more flexible.

If it meets these requirements, Greece will get a three-year rescue program and a commitment to restructure its debt, which is unsustainably high at around 320 billion euros, or around 180 percent of annual GDP.

Tsipras argues that because of these concessions Monday’s deal is, despite the tough austerity, actually better for Greece than the proposals Greeks voted down just a week ago.

“We managed to avoid the most extreme measures,” Tsipras said. “Greece will fight to return to growth and to reclaim its lost sovereignty.”

He said he had managed to avoid a demand by some creditors to transfer Greek assets abroad as a form of collateral and to avoid the collapse of the banking sector.

Greeks seemed mainly relieved that the country was not facing financial collapse.

Kostas Lambos, a pensioner, said things would be “difficult in the beginning” but people had to understand the severity of the situation.

“This was a necessary step for the country to emerge from the dead ends that had been created in the last few years,” he said.

Greece’s banks, which have been shut for two weeks, were still closed on Monday and limits remained on cash withdrawals. Without a deal, they faced the prospect of collapse within days as they are steadily drained of money.

When the banks will be able to reopen will depend on whether the European Central Bank decides to increase emergency credit to Greek banks now that a bailout deal with Greece has been clinched in principle. It was unclear whether the ECB would make such a decision on Monday or after Greece passes its first batch of reforms.

French President Francois Hollande said the Greek parliament would convene within hours to adopt the reforms called for in the plan and he celebrated Greece’s continued membership in the euro.

Losing Greece, he said, would have been akin to losing “the heart of our civilization.”

Other European officials were less emotive.

“The Greeks have to show they’re credible, show that they mean it,” said Jeroen Dijsselbloem, president of the eurogroup of eurozone finance ministers and a longtime critic of the Tsipras government.

If the talks had failed, Greece could have faced bankruptcy and a possible exit from the euro, the European single currency that the country has been a part of since 2002. No country has ever left the joint currency, which launched in 1999, and there is no mechanism in place for one to do so.

Greece had requested a three-year, 53.5 billion-euro ($59.5 billion) financial package, but that number grew larger by tens of billions as the negotiations dragged on and the leaders calculated how much Greece will need to stay solvent.

Greece has received two previous bailouts, totaling 240 billion euros ($268 billion), in return for deep spending cuts, tax increases and reforms from successive governments. Although the country’s annual budget deficit has come down dramatically, Greece’s debt burden has increased as the economy has shrunk by a quarter.

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Greeks Reject Bailout Terms in Rebuff to European Leaders

By Suzanne Daley, NY Times, July 5, 2015

ATHENS–Greeks delivered a shocking rebuff to Europe’s leaders on Sunday, decisively rejecting a deal offered by the country’s creditors in a historic vote that could redefine Greece’s place in Europe and shake the Continent’s financial stability.

As celebrants gathered in Athens’s central Syntagma Square, the Interior Ministry reported that with almost 90 percent of the vote tallied, 61 percent of the voters had said no to a deal that would have imposed greater austerity measures on the beleaguered country.

The no votes carried virtually every district in the country, handing a sweeping victory to Prime Minister Alexis Tsipras, a leftist who came to power in January vowing to reject new austerity measures, which he called an injustice and economically self-defeating. Late last month he walked away from negotiations in frustration at the creditors’ demands, called the referendum and urged Greeks to vote no as a way to give him more bargaining power.

While Mr. Tsipras now appears to have his wish, his victory in the referendum settled little, since the creditors’ offer is no longer on the table. There remains the possibility that they could walk away, leaving Greece facing default, financial collapse and expulsion from the eurozone and, in the worst case, from the European Union.

At stake, however, may be far more than Greece’s place in Europe, as experts have offered wildly differing opinions about what the referendum could mean for the future of the euro and, indeed, the world’s financial markets.

The vote took place under what some analysts called a financial carpet bombing. The European Central Bank severely limited financial assistance to Greek banks, forcing them to close a week before the referendum, making it hard for retirees to get their money and raising widespread fear here that people would lose their deposits.

The news media, dominated by Greek oligarchs, saturated the airwaves and the newspapers with stories about losing gasoline and medicines, while the plight of elderly pensioners was afforded far more attention than in the past, media experts said.

Nonetheless, many voters, tired of more than five years of soaring unemployment and a collapsing economy, said they could not accept the terms of the European offer, which imposed yet more pension cuts and tax increases, without any hint of debt relief.

As word spread of a likely victory for the no vote, people began gathering in Syntagma Square. They streamed out of the metro–which is free in this week of capital controls–and drove by, honking horns. Vendors sold Greek flags, and there was a peaceful, celebratory atmosphere.

For some voters, the week of hardship–they could withdraw only 60 euros, or about $67, a day from A.T.M.s, and already some pharmacists were refusing to fill prescriptions–only strengthened their sense that Greece needed to stand up for itself.

After five years in which unemployment soared beyond 20 percent and the country’s economy contracted by 25 percent, many said that a no vote was at least a vote for hope, the possibility of a new deal, rather than following the mandates of creditors who had failed to set Greece on a course to recovery.

For others, the hardship only proved that Greece, like it or not, was in the hands of its creditors and could do little but take whatever terms were being offered–the alternative of default, financial collapse and withdrawal from the euro being unthinkable. In many cases, they blamed Mr. Tsipras’s young government for having returned the country to recession when it had shown small signs of recovery just before the January elections.

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The forgotten origins of Greece’s crisis will make you think twice about who’s to blame

By Ana Swanson, Washington Post, July 1, 2015

Stop me if you’ve heard this one.

The Greeks, Italians, Spaniards and Irish walk into a bar, where the French and Germans are the bartenders. It’s happy hour, and the Germans and the French are serving half-price drinks. Although everyone quickly drinks too much, the bartenders keep on serving. Eventually, the inebriated customers head home and get into all kinds of trouble–fights, car accidents, some broken windows.

So who’s to blame? Clearly, the Greeks shouldn’t have drunk so much. However, the French and Germans also shouldn’t have served the Greeks when they were clearly drunk–especially if the French and Germans mind having broken glass in their neighborhood.

Unfortunately, this isn’t much of a joke. After an extended binge, Greece is now mired in financial crisis and is dragging the European economy down with it. In the last few days, Greece has defaulted on a important payment to the IMF and shuttered its banks to prevent massive flows of money from leaving the country. On Sunday, the country is slated to hold a referendum on whether to approve tough austerity measures demanded by Europe–a decision that could determine whether Greece will stay in the euro zone.

Some of the reasons for the crisis are obvious to anyone who looks. Greece has a lot of well-recognized economic problems: Its public sector is bloated and marred by corruption, and many analysts say that the country cooked its books to hide the real amount of debt from the rest of Europe.

There are also many well-documented problems stemming from the design of the euro zone itself–that the countries share a common currency even though they have different tax-and-spending policies. So that means that even though Greek workers aren’t as economically competitive as Germans, Greece can’t lower the value of its currency to make its products cheaper abroad and stimulate exports.

The same holds true for inflation, where Greece might benefit from a higher inflation rate that would make debt in today’s prices become cheaper, while Germany has a historic unease with any policy that might stimulate inflation.

There are some other ideas about the deeper origins of the Greek crisis that you may be less familiar with.

Once the Greeks joined the euro in 2002, they could borrow at very cheap rates given they were now borrowing under the continent’s implicit guarantee, and they dramatically over-borrowed.

“But given that there was high growth, no one was really worried about it,” says Matthias Matthijs, a professor at Johns Hopkins University SAIS and co-editor of the new book, “The Future of the Euro,” who relayed the bar metaphor.

Between 1998 and 2007, Greece’s annual economic growth per person was 3.8 percent–the second fastest rate in Europe.

But there were weaknesses within. The booming economy in Greece and other countries such as Ireland and Spain caused prices to rise, and the countries gave generous pay rises to their workers, which made their exports more expensive. That made the countries less competitive, but since they were growing so fast, it didn’t matter too much.

Then the financial crisis hit. As economic growth slowed, these countries’ competitive weaknesses and unsustainable debt loads suddenly became glaringly obvious.

“It’s when the tide goes out that you see who’s swimming naked,” Matthijs says.

Matthijs says there is a lesser known narrative he finds more compelling. Basically, he says, it helps to explain why the bartenders kept on serving.

In the mid-1990s, even before it came into existence, markets made a huge bet that the euro would be a reality. Specifically, investors, many in northern Europe, bet that interest rates in northern and southern Europe would converge. At the time, interest rates in southern Europe were much higher than in northern Europe, simply because people thought investing in countries like Greece was much riskier than investing in countries like Germany.

In anticipation of the euro zone, investors put lots of money in the cheap, high-yielding bonds of southern Europe. That helped to drive down yields and fueled borrowing and an economic boom in southern countries.

Ultimately, investors were right–Greek interest rates on 10-year bonds fell from around 20 percent in the early 1990s to only 3 percent in 2002. “They made a lot of money in the north betting against higher interest rates there. That fueled the boom, before the euro came, that overheated these economies.”

As economies overheated, it’s not a surprise that their competitiveness suffered, says Matthijs.

In short, many in the north pushed for a financial regime that didn’t fit the Greek economy, because they personally stood to benefit. Many rightly blame the Greeks for its current crisis, but some of the blame belongs farther north as well, he argues.

Matthijs compares the situation to the U.S. subprime crisis. Who was really at fault for the housing crisis in the U.S.: The subprime borrowers who bought houses they couldn’t afford, or the predatory lenders who encouraged them to take them out?

“The Germans don’t like that comparison. But they were greedy. They wanted the higher yielding bonds there, they wanted to invest there,” he says of southern Europe.

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How About a Global Currency?

By Leonid Bershidsky, Bloomberg, July 1, 2015

It’s almost a truism to say that membership in the euro exacerbated the Greek crisis. The thinking goes like this: Because Greece doesn’t have its own currency, it couldn’t increase its competitiveness and boost growth through devaluation. Although devaluation is a valuable instrument, I think most countries and companies would benefit if the world, not just Europe, used a single currency.

Today’s fragmented financial world is unfair. On the one hand, there’s Denmark with such a glut of currency, local and foreign, that its central bank’s key deposit rate is minus 0.75 percent and companies are considering overpaying their taxes because the Tax Ministry pays 1 percent interest on the excess. Then there’s Greece, which has had to limit withdrawals from automated teller machines to 60 euros a day because of a severe cash crunch.

Consider the case of Apple, with an enormous cash pile that earns next to nothing. The company had about $160 billion in March 2014 and made $1.795 billion in interest and dividend income that year–which is less than 1 percent, considering that the company’s kept increasing the cash holding. And there are companies, even entire countries, that would kill to be financed at that rate–but are forced to accept much higher ones, and not necessarily because they are unsafe borrowers, but because they are often dragged down by risk perceptions that have little to do with reality.

Before the 2008 financial crisis, financial globalization–defined as international capital inflows–was on the rise, partly because investors underestimated risk. After the mortgage crash, it became clear that rating agencies weren’t much help to investors in making such estimates and that local and specialized knowledge was needed to make intelligent decisions. The European debt crisis only confirmed this.

The fiscal regimes, political and macroeconomic risks of countries vary so much that mistakes happen, even when a foreign investor can afford detailed and knowledgeable analysis. The bond guru Michael Hasenstab’s investment in Ukrainian bonds for Franklin Templeton is a case in point: The trade was thoroughly analyzed and Hasenstab traveled to Kiev last year to talk to officials and executives, but the country now wants him to accept a 40 percent haircut as part of its International Monetary Fund-led bailout.

To ensure that financial resources are distributed more evenly throughout the world, it would make sense to cut down country-specific risk. Taking monetary policy out of individual countries’ hands would go a long way toward that goal. Currency risk would be eliminated–the same monetary unit would be in use everywhere–and there would be a uniform interest rate environment. The creditworthiness of specific borrowers would be investors’ biggest area of concern. That’s still a big unknown, and there would always be enough coups, revolutions, corruption, fraud and mismanagement to throw the best models off kilter. Yet there would be much less to worry about.

Now, the world’s 140 or so currencies sometimes make cross-border flows dangerous. Switzerland and Denmark have both suffered from their commitment to their own currencies this year. The ability to devalue is nice, but it’s illusory, to a large extent: It helps balance a budget, bring down debt levels and make exports more competitive, but it hits ordinary people with high inflation. Besides, according to a 2010 paper by Stephen Kamin, director of international finance at the Federal Reserve System, by giving up the right to print their own money, governments stand to lose less and less. And they might even need the discipline imposed by an outside monetary policy authority.

If the world used the same currency, the problems inadvertently caused by the euro wouldn’t be replicated. German banks were too willing to lend to projects in the European periphery because they felt they could trust members of the same exclusive currency club and because the euro made investing in Europe almost frictionless, an advantage the rest of the world didn’t have. The one world, one currency club would make friction disappear.

Of course, there would be the question of who should administer the global central bank. The U.S. would want to–the dollar is as close to a global currency as we have–but resistance from other global players would sink the project. This is where something like Bitcoin could come in handy: a decentralized system that works with little human intervention. “Mining” rules could be established to prevent anyone from cornering the market, but the system would self-regulate.

This is naive utopianism, of course. The obstacles to such a project are beyond estimation, as so is the technical complexity. But this pipe-dream is a reminder of how tough and complex the euro project is. Those who hasten to write it off as a failure don’t show it enough respect. Sure, there have been setbacks, and some countries may prove unable to keep taking part, but its participants are accumulating data that may one day allow us to figure out how to bring the whole world closer together.

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Greeks Line Up for Money and Stock Up on Goods as Cash Rationing Starts

By Anemona Hartocollis, NY Times, June 29, 2015

ATHENS–Uncertain what might happen next, with banks and financial markets closed, across Athens people wasted little time Monday, rushing to the nearest A.T.M. to withdraw their new daily maximum of 60 euros, determined to raise every last cent while they could.

Yet, even as Greeks faced a new level of chaos and hardship this week, they were being confronted with another unsolvable riddle: a vote on their future that was even more uncertain than the current chaos.

“Simply put, we’re confused,” Eleni Gardikioti, 31, an insurance worker, said. “We don’t understand what games they are playing, whether to stay or go and whether there is a permanent goal in all that.”

There were good arguments on each side, she said, as she fished out a coin to give to a beggar.

In a referendum on Sunday, Greeks will be asked to decide whether to accept a take-it-or-leave-it bailout offer by the country’s creditors, and remain mired in austerity in the eurozone, or reject the deal but suffer the consequences of leaving the euro.

The question is not as simple as it might sound. For one, the bailout offer has already been withdrawn by the eurozone’s finance ministers, so it is not clear the parties could reach a deal now even if Greece voted in favor.

Prime Minister Alexis Tsipras clouded the matter further on Monday by saying a vote against the deal would not necessarily mean abandoning the euro, but rather would give him leverage to negotiate a better agreement with Greece’s creditors–other European Union nations, the International Monetary Fund and the European Central Bank.

Anecdotally, how people said they would vote in the referendum had little to do with those considerations, but broke down largely along lines of age and class. Older and more affluent Greeks leaned toward voting yes and younger and poorer Greeks leaned toward no, essentially as a protest of what they viewed as foreign oppression.

Whatever the outcome, Athenians were busy adapting to the new reality on Monday, focusing more on getting through the week than worrying too far into the future. People were emptying supermarket shelves, filling up containers at gas stations and lining up at automated teller machines, hoping that the supply of hard cash would not run out before it was their turn.

Athenians everywhere wore looks of anxiety, despite a pleasantly cool summer day. Over the last few weeks, Greeks have withdrawn billions of euros from the banking system, leading to capital controls. On Monday, customers found many cash machines shut down until noon to be reprogrammed with the new limit. For hours after the machines began operating again, people stood in line, waiting to receive their rations of cash.

Standing outside the cash machines seemed to have a counterintuitive effect on some people, hardening them against the European creditors rather than making them angry at their own government.

“We’re all happy with Tsipras!” said Eleni Hartofilaka, waiting to take her €60 (about $67) out of an Alpha Bank branch. “We’re happy for the Europeans to learn not to be on top of us.”

For some, the word “no,” or “Oxi” in Greek, has a historical symbolism that makes it even more appealing in the present context. As every Greek schoolchild knows, the annual Oxi Day commemorates the answer, in spirit if not verbatim, delivered by Prime Minister Ioannis Metaxas to a demand from Mussolini to allow Italian forces to occupy strategic parts of Greece at the beginning of World War II.

Ms. Gardikioti said that she and her boyfriend had limited savings and little to lose. Even if a no vote meant a retreat to the previous Greek currency, the drachma, after a period of hardship, the Greeks would recover.

At the Evangelismos Metro station near Central Athens, Dimitra Papaioannou, 30, had just taken a free subway ride, after coming to the city by bus from the northern town of Larissa to visit her doctor. She had arrived in Athens with almost no cash because the A.T.M.’s in her hometown had been bled dry.

She said she had not decided whether she would vote on Sunday, but if she did, she would vote no to the European bailout proposal. Unlike city folk, she could be self-sufficient, she said, rolling a cigarette.

“I will go to the village and dig to live,” she said. “I believe no one should fear. Here in Athens, they will go hungry. In the village we have our field, a chicken. Of course, doctors we won’t have, or maybe.”

A few blocks away, the A/B Vasilopoulos supermarket, a major chain, was mobbed, as though a major hurricane were on the way. A cashier said she was exhausted as she rang up groceries at lunchtime. “You should have seen it this morning,” she said.

Discounted Pampers were sold out, and people were forced to buy the more expensive version. Housewives were leaving with gigantic bundles of toilet paper. The cheapest brands of olive oil and pasta had sold out. Stock clerks were everywhere, replenishing supplies of everything from sugar to frozen vegetables.

“Don’t panic,” one woman urged another, as she picked over the noodles. “I think the Greek companies like Misko will still be producing pasta even if we cannot import it.” Italian ravioli, she added, examining a package, maybe not.

Several people said that the general mood had become so distressed and polarized that people were talking about the possibility of civil war. Mr. Tsipras seemed to be alluding to such fears in his brief speech Sunday night announcing the capital controls. He urged “dignity” and “calm” and echoing Franklin D. Roosevelt, said “Our only fear is fear.”

At a small but elegant antiques store, Art & Craft, the proprietor, Miltiades Macrygiannis, actually had a customer, though, he noted after she left, she spoke Greek with an accent, indicating that she was foreign.

Surrounded by hanging lamps, carved mirrors, old worry beads and objects bearing the evil eye, to ward away evil, Mr. Macrygiannis said that like most businesses, he could not get cash to replenish his stock now that cash controls were in effect.

He planned to vote yes, but reluctantly, as the lesser of two bad choices. “I wouldn’t imagine, even as a nightmare, the scenario of going back to the drachma,” Mr. Macrygiannis said. “It would take 10 years to get us back on our feet again.”

On the other hand, “You can say yes to this agreement, a very painful agreement, and it means too many taxes, cutting down on pensions.”

Those who will gain, he said, are the superrich who have squirreled away their euros in Switzerland or the Virgin Islands, and will be able to swoop in to buy devalued goods and property.

What upset him most, he said, was the uncertainty. “The Greek government right now, they don’t give me the next day,” he said. “They ask us to vote no. Then at least tell me what is going to happen the day after.”

He added: “We fought to be in the European Union for so many years. Greece will not be in Europe but countries like Bulgaria and Romania will? It sounds like a bad joke.”

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Greeks face new uncertainty as vote called on bailout

By Demetris Nellas, AP, Jun 27, 2015

ATHENS, Greece (AP)–Anxiety over Greece’s future swelled on Saturday, with people queuing outside banks to withdraw cash, after Prime Minister Alexis Tsipras’ call for the people to vote on a proposed bailout deal increased the risks that the country might fall out of the euro.

The call for a vote has strained relations to a near breaking point between Greece and its creditors, some of which say there may be little left to do to save Greece after five months of fruitless and frustrating talks. The sides are haggling over the reforms the country needs to make in exchange for more financial support but have managed to only increase uncertainty over the country’s financial future.

Greece has a debt due on Tuesday and its bailout program expires the same day, after which it is unclear whether its banks would be able to avoid collapse, an event that could be the precursor to Greece leaving the euro.

The Greek Parliament is debating and will vote at midnight Saturday on the government’s request for a referendum, as finance ministers from the 19 euro countries, Greece’s main creditors, gathered to discuss the situation in Brussels.

Across Athens, people started flocking to cash machines shortly after Tsipras announced the referendum just after 1 a.m. local time. The queues grew the next day, though the number of people and the availability of cash varied widely. The Bank of Greece assured in a statement Saturday that the flow of cash will not be interrupted.

The concern over what awaits the country in the hours and days to come was palpable. At one branch of Pireaus Bank in central Athens, one of very few that opens on Saturdays, about 50 people queued up in the early morning before they found out the bank would not open at all. An elderly woman fainted.

The referendum will ask Greeks to vote on a proposal of reforms that the country’s creditors made on Thursday. The Greek government rejected it as imposing cuts that are too harsh on the general population.

The Greek government said it would recommend Greeks vote “no” in the referendum. What would happen in that case–whether Greece would have to leave the euro or try to renegotiate more time with creditors–is unclear.

Eurozone officials were openly frustrated by the Greek move and increasingly pessimistic.

If it became accepted among European politicians that Greece could not agree on a rescue deal, the European Central Bank could decide to end the emergency credit that it allows Greek banks to draw on. The banks would likely collapse and the Greek government would have to support them itself. Penniless, the government would have to revert to printing a new currency, effectively drawing it out of the euro union.

Such a move would put the country through a new era of economic pain. With the new currency less valuable than the euro, the government would have to write off a chunk of its foreign loans–mainly owed to eurozone countries–and many companies and households would go bankrupt.

The uncertainties of all this would roil European and global markets, though experts are divided on the extent. Some say Europe is better equipped to handle a Greek euro exit, but others note that it is unclear. The euro dropped in value on international markets after the referendum was called.

In the streets of Athens, views were mixed on the merits of holding a referendum.

“The people are not in a position to decide. Those who are in position to decide are the ones that know a bit more and they must explain and simplify the issues for the people,” said Grigoris Kanellopoulos, 41, a street seller of bagels.

Athina Kontosozou, 56, has already made up her made about how she will vote.

“No (to the creditors’ proposals), no to any more measures. We don’t know what will happen (after the referendum). Let’s hope that things will be better. And they will get better. We believe it”.

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Greece Fire, Stop-and-Seize, Texas Gold – New World Next Week

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Will leaving the euro break Greece or make it?

Nick Miller, The Age, June 18, 2015

London: Less than a century ago, Europeans were literally walking across borders with suitcases full of money. Millions of Austro-Hungarian crowns were put in sacks and tied to horses or jammed into boxcars.

That is until they closed the borders and made it illegal.

Before the Grexit, there was the “Austrexit”.

For an insight into the exit of Greece from the euro–how it could happen, and the chaos that may ensue, economist Michael Spencer dials back almost 100 years, to the wreckage of World War I.

With the breakup of the Austro-Hungarian Empire into Austria, Hungary and Czechoslovakia, so too the currency union broke down. Citizens were told they had to bring their old crowns to the post office, to be stamped and thereby turned into new, local currency.

But when you create a new currency, Mr Spencer explains, you get “massive cross-border flows of the old currency”, as everyone tries to move their money to where it will be worth the most.

One estimate is that 6.5 billion crowns, equal to the entire estimated circulation in Hungary, were transferred out of Czechoslovakia and Austria (which faced unprecedented unemployment, huge debt payments and the problem of paying for a big civil service, leading to justified fears the new currency would quickly inflate).

In Czechoslovakia, as the currency separation began, borders were ordered closed and all postal communications abroad were suspended for two weeks. Heads of households were ordered to surrender all their crowns for stamping, and bank deposits were converted at a 1:1 rate. Half of the stamped currency was withheld by the government as a “forced loan”.

In Austria, the government put controls on the sale of securities and stocks to the other states to prevent an influx of notes from Czechoslovakia.

For the record Mr Spencer, chief economist for Deutsche Bank Asia Pacific, is not saying Grexit will happen. They are “still of the view that a deal will get done in the next few days”, making this all just hypothetical.

“The Greeks dislike austerity but they want to stay in the euro … If they put in place capital controls and people in Greece are trading IOUs or tax refund receipts or whatever people come up with … that’s a scenario in which we think the Greek government loses its popular support. [Greek Prime Minister Alexis] Tsipras will do what he needs to do to avoid that outcome.”

But nevertheless, Grexit is on the table, governments are making contingency plans and economists are imagining what it would look like.

In 1994, Mr Spencer co-wrote a paper on the fragmentation of the Austro-Hungarian crown. He still sees it as the “key historical example of a currency union breakup”.

Though things are different now. “Now of course you don’t need to walk across the border, you just log onto your bank account with your security code and transfer money out of the country,” Mr Spencer says. “There’s nothing to stop someone in Greece taking their entire [bank] deposit, transferring it to a bank in France, then living off the ATM.”

There will have to be strict controls on money to stop that happening–the Greek banking system has already lost 40 per cent of its deposits in three years. “It’s going to be absolutely chaotic for a few weeks and the rest of Europe will look on in [horror].”

And there is a lingering hangover.

“My reading of economic history is that when you’ve had these kinds of crises you don’t wake up the next morning saying ‘oh what a relief the currency’s been devalued’, you wake up thinking ‘I am poorer, prices of everything that I want to import have gone up by 40 per cent’. Consumption collapses, imports collapse.

“It’s entirely possible that a year later the economy is growing … but it could be years before Greeks feel that they are better off than they were before the devaluation.”

But other economists disagree.

In 2012, a team from Capital Economics led by Roger Bootle won a £250,000 ($508,000) prize for outlining the “smoothest process by which a member state could exit the Eurozone”.

The model is highly technical, and envisions a “substantial default” of government debt. It proposes top-secret preparations, followed by a public announcement just three days ahead of the new currency being introduced.

Immediately after the announcement, domestic banks and financial markets close to prevent capital flight. There would be no “stamping” of euros into drachmas–instead all wages, prices and bank deposits are immediately converted to the new currency, and “non-cash” means of payment are used until the new money is printed.

Mr Bootle says his plan is not only possible, it’s desirable.

“The main purpose of making such a change is to allow the exchange rate to fall. That should not be resisted by the Greek authorities, it’s part of the solution,” he says. He would expect the drachma to stabilise at more than half the value of the euro.

There is no escaping the need for capital controls and restrictions on the banks, to avoid “financial catastrophe”, Mr Bootle says.

However he doesn’t think the practical challenges of printing a new currency are particularly difficult. People can carry on using euros, or build up credit, or circulate IOUs. “It’s a comparatively minor problem, a short-term thing,” he says.

And the project as a whole is “eminently desirable”, he says.

After the disruption to transactions, and the banking system, and the shock for Greeks as import prices shoot up, the economy would respond and start to recover (helped by a massive upsurge in tourism and a boost to local agriculture and manufacturing).

“I don’t see any way, without this, that Greece can escape from the current mess,” Mr Bootle says. “When people say to me ‘oh wouldn’t an exit from the euro cause a few problems’, I want to know which planet they’re living on. There’s a question of what the alternatives are, and this does offer the prospect of a very real escape.

“It wouldn’t be a disaster, it would be a salvation. In a year’s time people will look back and say–why on Earth didn’t we do that sooner?”

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The Ghosts of Europe Past

By Brendan Simms, NY Times, June 9, 2013

CAMBRIDGE, England—THE cheerleaders of the European Union like to think of it as an entirely new phenomenon, born of the horrors of two world wars. But in fact it closely resembles a formation that many Europeans thought they had long since left to the dustbin of history: the Holy Roman Empire, the political commonwealth under which the Germans lived for many hundreds of years.

Some might take that as a compliment; after all, the empire lasted for almost a millennium. But they shouldn’t. If anything, today’s Europe still has to learn the lessons of the empire’s failures.

The similarities with the Holy Roman Empire—which at its greatest extent encompassed almost all of Central Europe—exist at many levels. Today’s European Council, at which the union’s member states gather, reminds one of the old Reichstag, where the representatives of the German cities and principalities met to deliberate matters of mutual concern.

And like the European project, which originated in a determination to banish war after 1945, the “modern” Holy Roman Empire, which was reformed by the 1648 Treaty of Westphalia, was intended to defuse the domestic German antagonisms that had culminated in the traumatic Thirty Years’ War.

But most similarities are less flattering. Both the European Union and the empire are characterized by interminable and inconclusive debate. The German phrase for delay, which translates as “shoving something onto the long bench,” stems from when imperial bureaucrats pushed their uncompleted paperwork farther and farther down a long bench in the Reichstag council chamber.

And like the European Union, which is rived by tensions between larger and smaller states, the Holy Roman Empire proved too weak to contain over-mighty members like Prussia and Austria. Fears of partition and collapse abounded. The Reichstag was paralyzed; the emperor was hamstrung by rival princes.

Granted, in a world of increasingly absolutist neighbors, the empire stood out in its respect for the law and a high degree of personal freedom. But the truly powerful states of the 18th and 19th centuries were those that learned from the empire’s mistakes.

The German experience was a cautionary tale for the American colonies after the Revolutionary War. They, too, were profoundly divided over how to defend themselves, and above all on the question of how the huge debt accumulated during the war should be repaid.

The existing Articles of Confederation were too weak for the task, and the founders cast about for alternative models. In the Federalist Papers, James Madison and Alexander Hamilton looked at the federal system of the Holy Roman Empire, but they found it to be “a nerveless body, incapable of regulating its own members, insecure against external dangers, and agitated with unceasing fermentations in its own bowels.”

Instead, the patriots embraced the model of the Anglo-Scottish Union of 1707, when the two kingdoms, formerly so divided, had come together by merging their debts, parliaments and collective efforts on the international stage.

The resulting American Constitution created a powerful executive presidency and a representative legislature and made possible the creation of a consolidated national debt, a national bank and eventually a strong military, all of which in time turned the United States into the superpower it is today. The Holy Roman Empire, by contrast, failed to reform and disintegrated after it was defeated by Napoleonic France in 1806.

Some 200 years later, this history has been forgotten. Today’s constant round of European summit meetings and reform initiatives remind one of nothing so much as the interminable and futile German “imperial reform debate,” and they are likely to have a similarly unhappy, if less spectacular, end.

Like the old empire, the union has become preoccupied with legality and procedure at the expense of participation and effectiveness. This renders the euro zone cumbersome in the face of competition from the east and causes the bond markets to doubt its creditworthiness. Indeed, everything that Madison and Hamilton wrote about the empire then is being echoed today in Washington, albeit sotto voce.

Fortunately, there is a solution from history. The euro zone faces the same choice as the Holy Roman Empire and American patriots of old: how to overcome discredited forms of confederation. Rather than digging themselves into a deeper recession and democratic deficit through austerity measures, the states in the common currency need to form a full and mighty union on Anglo-American lines. They must create a strong executive presidency elected by popular vote across the euro zone, a truly empowered house of citizens elected according to population and a senate representing the regions.

The existing sovereign debts should be federalized through a “Union Bond,” with a strict subsequent debt ceiling for the member state governments. There will have to be a single European military and one language of government and politics: English.

This is the only framework that will endow the euro zone with the democratic legitimacy to reassure the bond markets, underpin the implementation of good financial governance across the entire union and defend its interests and values on the world stage.

More than 200 years ago, the choice was between the Holy Roman Empire and Britain. The Americans opted wisely and prospered; the Germans continued to muddle through only to see their empire extinguished. History thus holds out both a great opportunity and a terrible warning for the euro zoners.

Brendan Simms is a professor of history at Cambridge University and the author, most recently, of “Europe: The Struggle for Supremacy From 1453 to the Present.”

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