Kyle Bass: Greece a failed state, Euro will collapse, Japan debt crisis next

[ag]

I am all w/ Cameron. There is a reason Brits never joined euro - and they've been proven right. Cudos to them.

What he is,really, saying is that Europe "does not have a comitted, stable and successfull eurozone with an effective firewall, well capitalized regulated banks and a system of fiscal burden sharing", so we are, indeed, in an "ucharted territory". The problem is, it is pretty hard to get to "well-capitalized regulated banks and a system of fiscal burden sharing" when, at present, one of the eurozone members doesn't even have a government, or, for that matter, any realistic prospect for obtaining a government that would be even interested in providing "well-capitalized regulated banks and a system of fiscal burden-sharing".

So, for the moment, the task is to concentrate on getting to "a comitted, stable and successfull eurozone with an effective firewall, well capitalized regulated banks and a system of fiscal burden sharing". And that, unfortunately, implies getting rid of Greece - and, probably, a few others.

[ag]

The situation is unmanageable at this point. It should have been managed when Greece still had a government, capable of negotiating an orderly withdrawal. You can't commit to screwing the European financial system for the sake of keeping Greece in the euro zone.

[ag]

I haven't said a word about austerity (pro, or contra). Nor do I approve of the way the previous Greek governments vainly, if heroically, fell on their swords. They should have been negotiating withdrawal from the beginning of the crisis - it is extremely unfortunate for everyone that they chose otherwise.

The European financial system has been screwed by those, who designed it without regard to the existing political institutions. No additional ammount of screwing is necessary - the seeds of the disaster have been planted a long time ago. The system has to be urgently reformed, and that involves scaling back the level of integration, at least temporarily. The longer the present unsustainable situation continues, the more likely we shall see a chaotic disintegration - which would be disastrous for all.

Inflating the euro economy now to an extent sufficient to "save" Greece is simply not realistic - it will kille the patient (i.e., the euro) more comprehensively and surely than anything. That does not mean that strict "austerity" should be maintained - relaxing it (as  it has been done, in fact, by general agreement) will help others. But for Greece it is far too little, far too late.

[ag]

1. euro is A LOT more vulnerable than other currencies - because of the unique political arrangement. If you abolished the power of the US Congress to impose taxes and reduced the federal presidency to a minor bureaucratic job, incomparable in imporance with the truly powerful governorships, I'd be very scared about the federal (paper) dollar. I'd want gold. So that's exactly what they've engineered - "gold". Of course, it's not the best arrangement imaginable - but that's what's out there. Relax it - and it will be paper, that isn't going to stay around long.

2.  The ECB has been providing quite a bit of liquidity, hasn't it? It would be able to provide more, if Greece weren't there in the first place.

3. Without a crisis there will never be a possibility to manage a euro exit - except, possibly, as a general dissolution treaty. Otherwise, whichever politician would take his country out would be committing his/her own political suicide.


4. Lack of political exit mechanisms means, I guess, that ECB should be ready to save others with extraordinary measures, while letting the Greeks drop dead. I don't see any other way.

[ag]

Let's put it this way. Euro is either vulnerable to the break-up risk, or to inflation. If you insist that ECB remains in control and independent of anything and everything, it's not vulnerable to inflation of course. If you insist ECB is to yield to political pressures to avoid the break-up - it is vulnerable to inflation.

The fact is: what you propose is to take the de facto management decisions from the hands of the ECB and give it to national banks and politicians. If your proposals are followed, member states would be able to force ECB to do their bidding by taking decisions that would imply certain behavior of the ECB becomes inevitable, if the objective is to avoid the break up. So, no, under the measures you propose, ECB control will not be there. Hence, inflation.

I could see most other states surviving inside the euro - though I don't believe it makes sense for all of them. But Greece will not stay a euro member, no matter what anybody (realistically) says or does, methinks.

[ag]

ag, what sort of inflation do you anticipate if the debt is repaid by printing?  If I remember correctly the entire Greek debt is only something like 400 billion Euros.

Ah, the problem is not Greek debt. Of course, it would be much cheaper for the Germans to pay the Greek debt out of their own budget, without printing: to get rid of 400 billion Euros in Greek debt by printing you'd have destroy a lot more than that in Germany,  so it would make sense for the Germans simply to tax their own population and pay the damn Greeks that way.

But even that is of secondary importance. The problem is, that once the institutions are adjusted to make printing possible, the printing will never stop: everybody will be getting into debt and printing like crazy - when I print, I gett all the benefits, but the Germans pay most of the cost, so I'd be an idiot not to print. The damage done may be orders of magnitude bigger than the whole size of the Greek economy )

[ag]

No, that is not what I propose at all. Under my proposal the ECB's objective would be to balance the risks of controlling inflation and avoiding breakup, which is the natural result of recognizing both as serious risks. But if member states took decisions that would imply behavior of the ECB that would result in high inflation, those member states would not receive support and might be kicked out.

So, you will have countries continuously threatening break-up: as a matter of deliberate policy, not by accident.

Anyway, the ECB is already balancing the threats - and, I would say, bending all the way out to do everything possible to avoid the break-up and more. It would be a lot better to accept the inevitable.

[ag]

No, the printing would be done by the ECB, ag.  

Yes, of course. Doesn't matter in the least who'd doing it, though: it's a single currency area, isn't it?

Or are you saying ECB would just forgive the Greek debts ("print" the money and give it straigt to the Greek government) ? Well, short term that's pretty much the same as if Germany, France and the rest taxed their citizens and gave the money to the Greeks. On the other hand, in the medium term it would probably guarantee even speedier end of it all - at that point any government not borrowing 200% of its GDP ASAP and at arbitrary interest rate would be ridiculous. Why bother, when ECB will make sure it all burns? Euro will become a (loathed) history within a decade.

[ag]

In your post you said 'everyone' would do it.

Do what? Everyone would make sure ECB has to print money. Leaving the pro forma honors to the bankers is not going to matter.

[ag]

No one has threatened breakup in this crisis.

Of course, they aren't: given the existing institutions, this would be mad. But you are proposing a RADICAL change in these institutions, aren't you?

Anyway, nobody is going to be threatening break-up w/ words (that would be counterproductive). They are simply going to borrow to the hilt and have the ECB deal w/ it. That's all.

[ag]

Obviously nobody is deliberately screwing around now: because they now they will be screwed if they ever do. You are proposing that nobody should ever be screwed. That's a radical change, in my view simply designed to blow the euro up.

It's a lot more radical than a political union. Greater political union would preserve and build on the euro integration. Letting countries get away with murder would blow it up (something I am not at all sure Cameron would be sorry to see).

[ag]

Sorry, I accidentally pressed the wrong button and deleted part of your post. Absent minded idiot I am.
>>>>>
What's credible effort? And who will decide? Once you let the ginny out of the bottle, you'll never get it back in. Every effort will turn out to be credible.

And, clearly, previous Greek governments had been quite irresponsible: so, if you are ever going to find a test case of euro ejecting an irresponsible member , this is as good as any.

The problem of you being for "political union" is that there isn't even a small minority of Europeans who are currently advocating what it will take. This might happen - in another 50 years. That would be a good point at which Greeks could rejoin the euro (or the euro itself could be reintroduced, if it collapses now).