Stocks plunge again as eurozone blocks aid to Greece as referendum set for December 4th
Posted on 03 November 2011 with 3 comments from readers
Asian stock markets dropped off the edge of a cliff again and US futures dived on news that the eurozone is cancelling all financial payments to Greece until the result of a referendum on the debt deal scheduled for December 4th is known, leaving Greece unable to pay public sector salaries.
Markets were hanging on a flimsy hope that a referendum might after all be avoided. But the Greek cabinet approved it yesterday. Eurozone leaders have responded with a tough lesson in what life outside the euro will mean for the impossibly indebted nation.
Horrible news
For financial markets this means that a new abyss must be priced into stocks and bonds. A disorderly default by Greece is now very much on the cards and will cause a great deal of collateral damage.
In the first instance the banks that have lent billions to Greece will be hit by massive write-downs. Then the banks who have insured this debt will be hit through insurance derivatives, and as we found with MF Global last week they could be anywhere in the world.
At the same time there is going to be severe collateral damage to other similarly highly-indebted European Union countries. Once Greece is gone the focus will be on Portugal, Ireland, Italy, Spain, France and even the United Kingdom which has the world’s biggest debt mountain (click here).
Interest rates on the bonds of these nations will surge higher and higher and gradually put them in exactly the same situation that Greece faces today. It is called a credit implosion. That is where we are in Europe right now.
Nobody knows exactly how this will play out, however. Greece will be left to fester in the mess of its own corruption and double-dealing. How deep the crisis will bite into other countries is not so certain.
Mass bankruptcies
In theory banking collapses trigger mass bankruptcies among debtors as their assets are sold to part-pay outstanding debts. Then the banks become insolvent in turn and have to be nationalized to prevent a complete financial collapse.
But financial and real estate markets cannot absorb huge forced asset sales without collapsing themselves. That in theory leaves great bargains for those with cash and an appetite for risk. However, you still have to be able to trust the system that sells you the asset.
Could you trust Greeks selling property to respect the title of a foreigner after their wholly untrustworthy handling of sovereign debt? Perhaps but you would want to be very careful all the same.
3 Comments posted by readers:
ref: the excellent article’s final para.
In Greece, the degree of social unrest indicates non-compliance on both a general and national scale is to come in the near future.
Whatever the Greeks do, economists’ average prognosis for the next 10 years+ is grim.
In order to govern by some form of consent, the Greek PM has no alternative other than to seek a mandate from his constituency – irrespective of what Markozy may dictate is best for their banksters’ interests.
Notwithstanding, investors should be acutely aware that Greece remains a country where corruption is endemic and to get anything done requires baksheesh.
- e.g. – with no Land Registry, purchase of property or assets could prove a nightmare to resolve in the event of dispute.
Bottom line: Greece has to has to undergo a sea change in best practices in all matters legal & fiscal. Without such, it is impossible to trust what passes for a system in Greece.
- and then, of course, there is the systemic risk triggered by CDS on Greek debt in the event of …. default ………. er, where’s the ‘Exit’???????????
Surely the sovereign deficits are too big to get rid of – ever. It is comforting to add 10 years or 50 years or 100 years but it’s just comfort – not reality.
Since no one has ever been in this situation before, namely of global sovereign deficits in many countries, no one can ever say what could happen – not even me.
However, the characteristic of debt is that it never goes away or, if it does, human suffering occurs in its place. If many-country-deficits can be got rid of over 10,20,50 years or whatever, then it means human suffering in all those countries.
I think that the human race is in a one-way street, which goes on and on towards a never-disappearing debt mountain. Growth will never remove that debt because the size of the debt is in a totally different dimension to growth.
I have argued, gloomily, that depopulation will lessen that debt and make it manageable.
If two people, a man and a woman able to reproduce, were left alive on the earth, there would be no deficit nor debt. They would be extremely wealthy.
If the people, who came from their bodies, could organise themselves into a perpetually gold-backed currency system, then the old deficit, which was present once before the depopulation to two people occurred, would not reappear. Provided they never went Keynesian and never left the gold standard behind as an old relic!
However, the depopulation, though successful, would involve massive human suffering.
Another excellent commentary, Ed.
@ dscartes:
Excellent! Greek society is disintegrating. Up until recently, Greeks did not trust other Greeks, but now, the very fabric of the Greek extended family is disintegrating as well. Family members don’t trust other family members. This situation is getting very ugly.
Your bottom line is worth repeating:
I’ve taken the liberty of repeating it here, while inserting another appropriate adjective.
Bottom line: Greece has to has to undergo a sea change in best practices in all matters legal, fiscal and ethical. Without such, it is impossible to trust what passes for a system in Greece.
In the aftermath of Greek default, there may be many Germans who want to buy Greek property . . . the challenge is how to write up a viable contract that has “teeth”, to ensure that the German buyer is not screwed!