IT is looking worse by the day for Greece as the debt crisis trundles towards its inevitable and disastrous endgame. A default, however dressed up, can now only be a matter of time: the cash is fast running out.
There is growing panic in Frankfurt, home of the European Central Bank (ECB), which has emerged as one of the biggest unforeseen victims of Greece’s implosion. The ECB, formerly a bastion of conservatism, has found itself saddled with vast amounts of dodgy Greek bonds. Their loss in value would be crippling were Athens to fail to meet its next interest payment or even if a softer “rearranging” of Greek loans takes place. Astonishingly, the ECB could actually become insolvent, triggering a major constitutional crisis in Europe. A bust ECB could start printing itself out of trouble, in defiance yet again of the European Treaties, but that would surely be a step too far for German public opinion. Already, some German academics are suing the authorities, arguing – convincingly – that the treaties ban bailouts of imprudent countries and that these are therefore illegal. Given that the Greek banking system would have collapsed had the ECB refused to accept Greek bonds as collateral for its injections of liquidity, there is no easy way out.
One delaying tactic would be for Greece to privatise as much as possible to raise cash. This process has already started. One of the country’s biggest problems is its corporatist nature: real, deregulated, hard-core capitalism is needed to start creating real jobs and to build a sustainable economy. The idea floated by Jean-Claude Juncker, the Eurozone grandee, that Greece create an independent agency, including foreign experts, to manage the privatisation of state assets, is a sound one. Such an agency could be modelled on the German Treuhandandstalt agency that very successfully privatised East German companies after the fall of the Berlin Wall. Crucially, sell-offs need to be conducted openly; this must be no post-Soviet corrupt carve-up.
But while privatisation is a good idea in theory, no foreign investor with any sense should touch any of these assets. If Greece were to quit the euro and adopt a new currency, it would immediately undergo a massive devaluation of at least 50 per cent, with foreign owners of Greek assets suffering commensurately massive losses. Unfortunately for the Greek government, it would be equally silly for Greek citizens or firms to invest in privatised assets. For them, the only hope is to export as much capital as possible outside Greece before all hell breaks loose, the local banking system is nationalised, capital controls imposed and a far-left government elected. Local bank accounts and assets would see their value trashed in the event of a euro exit and devaluation; but money and assets invested abroad would retain their value. Capital has been fleeing Greece for many months already – why would anybody buck the trend and risk ruin by investing in the Hellenic economy?
For investors, the strategy is clear: keep well clear of any institution with exposure to Greece or any other troubled Eurozone economy. For European politicians, however, the task is altogether more difficult: the mighty euro they spent so long building is under threat, not from the dollar, another rival superpower or even from British eurosceptics, but from the internal weaknesses and contradictions that its opponents had always warned would be the single currency’s downfall.
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