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Monday, 3 October 2011

The Greek patient has drugged itself in a debt-coma; are we going to force-feed more debt-drugs into the country? Or are we going to let it sober up, preferably under strict doctor’s supervision?!

Monday, October 3. It is yet another day of panic on the Asian and European exchanges.

The Dutch AEX index, for instance, is 2.07% lower, 1.30 hour after opening. A red dot in a sea of red, as Frankfurt, London, Paris, Brussels, Zurich, Madrid and Tokyo all opened or closed lower. Brussels is a relative outlier with only 1.50% loss, while Frankfurt is choking with 2.85% loss.

And what is the cause for yet another panic attack at the exchanges? Well, Greece didn’t make the designated budget deficit of 7.6% for 2011. The country will probably miss this target by almost a full percent: 8.5%. And even this mark is very questionable, as more setbacks might follow during the remainder of the year.

Also for next year, the target of 6.5% budget deficit will be missed by a whisker: 6.8% is the forecasted deficit nowadays.

And there is more: one party in the government coalition of Slovakia stated that it doesn’t want to add more money to the EFSF bail-out fund. And the (extended) money supply to the European bail-out fund must take place by unanimous decision of the EU members.

Although the Slovakian opposition parties will presumably vote in favor of the EFSF extension, there is a slight chance that the European ‘mouse’ Slovakia roars and vetoes the plan to the bottom of the sea: Slovakia’s 15 minutes of fame, followed by 5 years of misery (France will be ‘not amused’).

But now about Greece: the country suffers from harsh, IMF and Euro-zone driven, financial measures at all fronts:
·    Civil servants are fired by the masses;
·    Tax-collection is taking place at higher gear, but probably not at the people that evaded most taxes;
·    Massive cutbacks are planned and executed within the whole economy;
·    National treasures and islands are sold to the highest bidder;
·    The people that have money left, are (financially) fleeing the country: like rats leaving a sinking ship;

So instead of firing up the ailing Greek economy, the massive cutbacks will choke this very sick patient further in its coma: the Greek economy will shrink by an estimated 5% in 2011. In other words, the Greeks get a very small carrot and a very big stick.

But even if the Greek receive their €8 bln dose of financial drugs again… and again, it won’t solve anything. The Greek debt will only be higher, the Greek economy will remain ailing in the coming years and the financial markets will take it for what it is: not a solution.

And the Greeks? They will feel victimized by their ‘unscrupulous’ government and  the Euro-zone and they will protest their economy even further into trouble.

Therefore, I think it is time to stop the supply line of financial drugs that makes the country only more ill, instead of curing it.

Let’s execute ‘solution two’ of last Monday’s article Will the Euro implode?:

Greece should be allowed to make a haircut on its outstanding debt of 50% or as much more as it takes to build down the budget deficit, without killing the economy. In other words: it should default, preferably in a controlled way. At the same time the country should stay in the Euro.

After the default, Greece will come in the financial market’s penalty box, just like Argentina did in the nineties. This is good. The Greeks must be confronted with the fact that the country, its government and its citizens messed-up themselves and not some vague entities, called ‘the Greek elite’ or The Euro-zone. Europe should in the first place leave the mess for the Greeks, as it is their mess anyway.

And on the other hand, Europe should be there to give the Greeks a helping hand when explicitely asked for: Top notch civil servants of other European countries should help the country reorganizing its civil service and its tax-collection apparatus, like financial doctors. Large European investors should be invited to help the Greek rebuilding their economy. But only when the Greeks ask for it!

When executing this strategy, there will remain two risks:
·    The contagion risk within the other peripheral countries.
·    The risk for the French, German and other banks that are heavily involved in Greece.

Concerning bullet one: the Euro-zone proved beyond a reasonable doubt that it is uncapable of rescuing only one small country, so it should not even bother to save the other ones. If these countries have to go, they have to go.

The second bullet concerns the financial consequences of such a default: like Lehman being revisited.

Instead of bailing-out everybody and their sister, the governments should decide what parts of what banks deserve to be rescued and/or what parts can’t be missed in the financial process.

For the rest: let the banks and bankparts fail that deserve to fail and don’t bail-out all the shareholders and bondholders involved in those banks with taxpayer’s money.

But let’s do something about the Greek mess, before it ‘kills’ the whole Euro-zone.

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