Soros bets against Euro

[Jan Klimkowski]

Denninger's latest Market Ticker editorial:

Greece Will Leave The Euro: Be Prepared


Stop pretending folks, and start preparing.

Karolos Papoulias, the Greek president, warned party leaders that their continued failure to agree was risking "fatal consequences". Citing a secret government document, he said Greeks were already pulling £80 million a day out of the country's banks. Almost €1 billion (£795 million) has been withdrawn since the last elections on May 6.

"The extension of political instability will lead to fatal consequences. The absence of government is a serious risk to the financial security of the Greek people and our national existence," the president was reported as saying.

Mr Papoulias said he had been warned by the central bank and finance ministry that the country faced "the risk of a collapse of the banking system if withdrawals of deposits from banks continue due to the insecurity of the citizens generated by the political situation".

Fatal consequences my ass.

Well, not for Greece anyway.

But let's put a couple of things to bed, ok?

First, one of the common chestnuts is that if Greece leaves the Euro, it will then devalue the Drachma (true) and this will result in a more-competitive environment for their goods and services on the world stage (true.)

What's not mentioned is how that happens.

Let's say your salary is €2,000 monthly before Greece exits. Your new salary is D2,000 ("Drachmas"; I don't happen to have a symbol for it handy.) The drachma is then allowed to float against the Euro after being issued at 1:1 conversion and it falls by 40% almost immediately.

Your new salary is still 2,000 units of currency, the price of what you produce remains as it was in units of currency, but both your salary and the price of the things you make have gone down in external units.

In other words while I, as an American, now can visit your nation while spending many fewer dollars, you cannot buy American products without spending many more Drachmas.

Is this good or bad? That depends on your point of view. If you were formerly unable to be employed as demand for your production at the Euro-denominated wage was insufficient and now it's sufficient, a job is better than no job, right?

But the idea that there's no cost to this is false. The cost is that your inflated wage, which was unsupportable, along with the inflated benefits the government was providing but couldn't afford, both contract to what can be afforded.

The difference is that you now have a floating exchange rate and thus others, outside, can afford to buy your goods and services while on "holiday" and similar, and thus you have a job. But do not mistake this for the idea that you got a free lunch -- you most-certainly did not, and that which you import will go up dramatically in price. Your standard of living will go down, as it must, since your income will now inexorable (and correctly) be matched to what the market will pay for your goods and services.

This is the adjustment that must take place. It must take place in Greece. It must take place in France. It must take place in Spain. And it must take place in The United States.

It is not what anyone wants to talk about, but it doesn't matter if we want to talk about it or not. The fact of the matter is that government cannot provide services that it cannot fund with current taxes. No government can over the intermediate and longer term. Blowing serial financial bubbles to hide this fact is economic suicide and will inevitably lead to either collapse of the inflationary bubble or collapse of the government and currency. It cannot be otherwise as leveraging debt upon more debt is a Ponzi Scheme and is entirely reliant on someone coming along to "bid up" asset prices on a continual basis. When the next buyer fails to appear -- and he always eventually does -- the scheme collapses.

The real problem is that the banking system in Europe is massively leveraged and is still counting all these sovereign credits as "money good", carries no reserves (or effectively no reserves) against them and has embedded and hidden losses in the hundreds of billions of Euros. There are various estimates on the "damage" from Greece sticking their bonds in the paper shredder and sending the pieces to the ECB as their answer, but the most-credible I've seen are somewhere around €400 billion. This is for Greece alone; the problem is that Greece is not alone, and if they do this (and they should) what prevents Italy, Ireland and Spain from doing likewise?

Further, the German public will shortly come to realize that they are effectively subsidizing almost every other nation in the Eurozone right about the time the first of those losses are realized and their banks are assessed to cover them. That's the point where Merkel loses her ability to govern as the fact that she has serially and intentionally deceived her people will be laid bare on the table (disgusting though laying her bare would be.)

The most-likely outcome of that revelation? Germany returns to the Mark to cut off what would otherwise be ruinous capital calls from the ECB.

This game is pretty much over folks. Oh sure, there will be those who will argue otherwise, and markets will alternate between cheers and jeers for a bit. But for someone to expect a different outcome at this point one must show how Greece can be persuaded to make their internal adjustment by means other than tearing up those bonds and accepting that their government must stop deficit spending -- one way or another.

I just don't see it.