Updated: June 20, 2011 8:22PM
Dear Mr. Berko: One short question, and I hope you can give a short answer. Can you please explain this Greek problem and why it’s so difficult for the European banks to agree on rescue terms? Can Greece’s economic problems spread to all of Europe? — M.R., Two Harbors, Minn.
Dear M.R.: This is more than just Greece. It also involves Portugal, Ireland, Italy and Spain. Since joining the European Union, these countries have become overripe festering boils on the tender butt cheeks of Europe. And these boils should be lanced before the putrid, yellow puss burst, showering the EU with poison.
The most critical of these five is Greece, which was given a $195 billion loan (QE-1) in 2010 by Europe’s Big Banks and still makes its loan payments. But rather than permit Greece to default, the banks gave Greece an additional $160 billion (QE-2) with extended maturity dates.
But in order to repay its original debt plus QE-1 and QE-2, Greece must impose austerity measures so severe that the country that gave us Aristotle, Plato and Socrates could become a Third World economy. Borrowing money to repay borrowed money to repay borrowed money is industrial-strength stupid. QE-1 didn’t work, and because Greece’s debt is three times its economic output, QE-2 won’t work, either. So by 2012 or 2013, Greece will be back at the trough to mortgage the Acropolis, the Temple of Apollo and the Sanctuary of Athena.
And at the epicenter of this Greek tragedy is Goldman Sachs, whose evil hunchbacks inveigled a series of sneaky derivative transactions more than a decade ago, disguising Greece’s debt so it could join the EU. And with the economies of those other four nations in tatters, Europe is likely to experience a difficult recession in a few years.
The best solution requires Greece (and the other debt-ridden countries) to resign its membership in the European Union and bring back the drachma. Then, it should extend the maturity dates of its debts and repay these loans with drachmas with a haircut of 25 cents to 50 cents on the euro. There’s a low degree of probability that this will work, but there is a high degree of probability that nothing else can work because Greece lacks the political, educational and industrial capacity and the infrastructure to function in a gigabyte, high-tech, economy.
But a restructure is opposed by the big banks that own $360 billion in Greek debt plus $600 billion more from Portugal, Italy, Spain and Ireland. A 50 percent haircut would be disastrous for several reasons: (1) If Greece is permitted to restructure, the remaining four nations will demand similar relief, (2) the big banks (Deutsche Bank, Dexia, BNP, Societe Generale, Royal Bank of Scotland, HSBC Holding, etc.) would be exposed to huge losses, imploding their low reserve capacity and (3) the big banks would be forced to raise a trillion dollars of new capital, which would humiliate those frozen-faced, starched- shirt bankers and give them serious laundry problems.
Greece lacks the economic strength to repay the original billions it borrowed so QE-1 and QE-2 are the proverbial straw that breaks the camel’s back. The over-weaned big banks have forgotten the 1919 Treaty of Versailles under which the Allies demanded that Germany repay all the costs of WWI. Germany tried to abide by the treaty but couldn’t manage its debt load, so the Nazi party gained ascendancy and the rest is history.
The European Central Bank must swallow its ostentatious pride, increase reserves and brace for nasty hits to the balance sheets. Failing that, the $160 billion QE-2 will calm the waters for a year or so, but in a couple of years, the monetary demands of the other countries will destroy the euro, and Europe will need open heart surgery.
Address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or email him at email@example.com.