It's all Greek to me...
How can anyone have any faith at all in the so called ‘technocrats’ to resolve Europe’s problems?
After watching CNBC's Michelle Caruso-Cabrera interview Greece's new Prime Minister, Lucas Papademos, my reaction to the unfolding situation with Greece and with the Euro as a whole was stunned disbelief. I told CNBC’s Martin Soong, Lisa Oake and Sri Jegarajah.
“If I were Greek, I would be on the streets rioting because I think that's the only appropriate response. There is an unelected prime minister installed by what we thought at the time was the ECB and the core of the european Union, but what we now know was Germany. There is a technocrat with no mandate, installed by Germany, who is part of a mechanism that denied the Greek people the referendum that they had been promised on the Euro, and who stands there and tells the world, ‘The Euro is what everyone in Greece wants.’ But if he looks out of the windows; there are thousands of people on the streets of Athens who don't agree with that.
There are a million people in Greece living below the poverty line who are actually starving on a daily basis, and Papademos sits there and says ‘We need this adjustment process, and yes wages are going to fall, but by the end of it we'll be ok.’ This is a multi-year process. For Greece to become competitive is probably going to take five to ten years. The people are not going to go along with it. They wouldn't have gone along with it even if they had elected the people in charge of it. We've been saying this for a period of time, and it's going to be painful in the short term which is why politicians don't want to do it, but the only way out for Greece is to leave the Euro.
People wonder exactly how this will happen as there's no provision for this type of scenario in the European constitution, but the EU doesn't have a constitution any more. It was torn up and buried on December 9th by Germany and France ...The EU has no legal mandate. Greece should actually just leave. It should re-introduce the Drachma and Drachmatize the Euro debt, and there are actually two really good play books for this. We were all here in Asia in 1997. We saw what happened. Yes, it was six months of pain, but it was a pretty sharp recovery after that, and South East Asia has done very well. Asean is in the situation today where it doesn't have debt problems.
But there's actually an even more current example. There's a European example. Iceland. It devalued its currency, and yet Iceland had one of the strongest growth performances of any economy in the third quarter of last year. Iceland has started to adjust. It's not got anywhere near as far in adjusting yet as it needs to, but it devalued its currency and because of that it's starting to write off debt and assets, and it's actually starting to grow again. Iceland actually grew at 3½ per cent in quarter three, so Iceland seems to be at the start of a path to recovery.
What we're seeing now is a situation where everything is politically driven. The dynamic is that Germany is now in charge of the cheque book. That's what happened on December 9th when we got an agreement that everything can be done in bi-partite deals now. If you need to borrow money, you go to Germany, and it's Germany who sets the conditions that will apply. In our office, we have actually stopped referring to Angela Merkel; we now refer to her as Alaric Merkel. Alaric was the king of the Goths, who in the 5th Century marched on Athens, didn't get into a war but surrounded Athens and starved the city into submission, and then from there, in 410, he marched on Rome, surrounded Rome and starved Rome into submission. To me that's what's happening in the Eurozone right now. We've got Germany dangling the cheque book, calling the shots, making all the threats. But how long will everyone else go along with this?
So the current offering of 3% on 20 to 30-year bonds is really a bribe. It's an iron fist inside a velvet glove. What are the options if you don't? I think we're getting very very close to the point where private investors are going to look at it and say ‘You know, on a net present value basis, we need to just repudiate that debt.’ So far, they've sort of pushed them along step by step, and they're getting closer and closer to the line in the sand; in fact they're probably re-drawing the line in the sand as we speak, so it's very hard to say the point at which they're going to turn around and say ‘enough's enough’, but we're getting close. There are clear signs.
Look at the CDS markets and everything the CDS markets are pricing in. Not only that – there's so much distrust in the Eurozone. We've been saying for some time that the key figures for 2012 are TED and LOIS. As the TED spread shows, no one wants to take the risk of lending dollars. And with LOIS, the Overnight Spread, no one wants to be the one who's lending money to other banks, and that is precisely why there's so much money parked in the ECB every single night. This money's not circulating, which is incredibly bad for the global economy, but it's also a sign that we're getting closer and closer to a terminal event. If you look at the TED spread and LOIS, they've gone from normal levels of around ten basis points, up to around 50 or 60 basis points. Over the last month or so, they've eased off, but we're closer and closer to capitulation. We're getting there, whether it's this week, this month, or six months from now, we're getting there. How far they can kick the can down the road we don't know, but it's getting closer.