John Hemming's Web Log John's Reference Website
Monday, May 14, 2012
  Greece and their debts
We have a number of patterns of behaviours of governments.   The expropriation recently by Argentina of a Spanish company's holding in YPF is one example of governments not following the law of contract.  If Greece votes to try to renegotiate their deal with the Eurozone I expect them  to have an unstructured bankruptcy.   The question, of course, is what happens after that.  I cannot see the Eurozone simply saying "don't worry we don't want repaying".

Clearly the Eurozone cannot accept a further renegotiation as if they do then everything starts to unravel. The Irish government's banking reorganisation involves a number of repudiations of contract.   Some of the effects on small holders of debt have been quite extreme - although they would argue that they fall within the debt contracts.

If Greece tries, for example, to set up a New Drachma and refuse to pay their debts to the Eurozone (in Euros) then I don't think they can remain in the EU as they will not be following EU law.

However, they will be in a much worse state than if they simply stick to the deal.

Labour have tried somehow to claim that the UK is not affected by this and the stagnation in the UK is somehow unique.  It is clear, however, that the whole of the Eurozone is in recession and even at the last quarter of 2011 seven Eurozone countries were in a double dip recession.  The good news for the European Economies, however, is that oil prices are going down being now about USD 110 for Brent USD 16 off the more recent peak.

People don't want austerity.  However, it is not within the power of governments to invent a lot more oil in the ground.  The oddest analysis is that of the Green party which recognises most the resource constraints whilst being one of the strongest voices against austerity.

However, it is entirely possible for people to elect a government which claims that 2+2=5.  We are now at the stage when Greece is likely to take this step.   The ECB, it appears, is now more willing to release controls on the M0 money supply (although they are doing this in part through the LTRO).

This is the big issue as the size of the national cake has a direct effect on the size of the portions available to different sectors of society.


 
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