domingo, março 31, 2013

Times of fear and loathing in the Eurozone

Debt workout 101 - part 24 
On a grey and rainy Easter Sunday, in this endless winter of 2013, we must dig deep for courage and fortitude to overcome the fear and loathing brought about by the financial crisis in the Eurozone, as creditors and debtors face off in a replay of old antagonisms now rebranded into a simplistic and dangerous "north" versus "south".  

We are a  whole continent in denial, unable to understand the economic, social and political disaster that we are living in Europe, as the local savers of Greece and to some extent Cyprus are sacrificed in order to pay off cross-border investors  and creditors. Which country will be next? 

A small indication of our far adrift and off course we are in Europe is that we are at a loss for new words to describe the end of the illusion of a united and balanced Europe. The Single Market and the Single Currency, which were supposed to usher in a new era of peace and prosperity, have left us hamstrung and unable to undertake the most basic economic adjustments to reduce the divergence of national fortunes, 5 years into the crisis. 

So we republish, this time in English, a post written on 6-Nov-2011, about under-performing political leaders who have overstayed their sell-by date. Just replace the name Papandreou by the name of your least favourite national or European politician or official decision maker.  Begin with M.....

And pray for  the resurrection of the European ideals of balanced and sustainable peace and prosperity, an European Spring. 

Vitória pírrica em Atenas - 2

Pyrrhic Victory in Athens
The victory of Prime Minister Papandreou in the confidence vote in Parliament on 4th November-2011 -may give new meaning to the classic phrase  Pyrrhic victory, given he is seen as part of the problem rather than part of the solution. There are victories that are so costly  that carry within themselves defeat.

When a borrower's financial situation is deteriorating in this way, it is almost always necessary to change the management team. (See debt workout 101). On the one hand, the incumbent manager is disoriented, does not want to admit it, continues to deny and downplay the consequences, or even fail to understand the extent of the problem. Moreover, up the ante, quickly coming to the conclusion that those responsible for the crisis have no credibility to manage the new context of austerity.

Voting with their wallets, the vote of creditors or even the votes of depositors, outweigh the votes of docile members of Parliament.

So a change of government can be an essential, although not sufficient, condition to give a country like Greece a new start. 

Another curiosity is the difference in the comments that appear on television on both sides of the Atlantic:
- American analysts speak of "European banking crisis" and the urgency to recapitalize banks
- The European analysts speak of "Greek debt crisis" and the urgency to further tighten belts in Athens.

Considering the experience of foreign debt crises in other times and in other latitudes, the Greek foreign debt crisis has gone beyond the European "banking crisis", according to the old adage:

"If you owe the bank 100,000 and can not pay, YOU have a serious problem.
If you owe the bank 1 million and can not pay, the BANK has a serious problem "

At this stage of the crisis of over-indebtedness, will be much more important to recapitalize European banks and  promote local  savings in order to stabilize the domestic funding, than further reduce wages in Greece and other indebted countries.

Recalling another financial proverb: "You can not get blood from a stone".

Other analysts such as Paul de Grauwe recommend (see article in Express) that the ECB-European Central Bank will further increase its liquidity interventions "to save the Euro", another measure that will certainly prove to be insufficient.

The bank recapitalization and increased liquidity interventions are essential to save the European banking and international countries that borrowed too over-indebted and now finds himself saddled with nonperforming assets. This would enable  lenders to participate in the forgiveness of debt that is essential to help the debtors to recover some economic breath.

But to save the Euro is necessary to re-balance the competitiveness between countries in the Eurozone.
For example, it is necessary to cut Greek and Portuguese imports  which entails cutting German and French exports. There will be no exit from the crisis of balance of payments if there is no reduction of deficits and surpluses of trade within the Eurozone.

 And in this matter, we hardly see any measures, because the Troika persists in the wrong diagnosis and the wrong prescription, focusing on the internal deficit instead of attacking  the external deficits, trying to correct the bad governance of debtors rather than eliminating the practices of easy, not to say predatory, credit, of the  lenders.

Mariana Abrantes de Sousa