Saturday, 5 November 2011

This not a Greek Tragedy, it's a World Tragedy

The whole Greek drama is unravelling in front of our eyes and most people watch it with blissful ease thinking it really doesn't have much of an effect on Britain. After all this is a Euro and Eurozone problem and we are not involved in that particular caper.

Even our exposure to Greek debt is low. Of an estimated €490bn owed to banks by Greece, only about €15bn is owed to British banks while our exposure to Greek Sovereign debt is as little as €3bn.

Many have expressed the sentiment that Britain should just let Greece slip quietly off the map. It's a problem not of our making and certainly not one we should solve. With that little exposure, surely we can just walk away and cut our meagre losses?

Life these days is not that simple and certainly financial life isn't. First of all we are part of Europe and therefore the overall problem. Secondly, Europe is by far our largest trading partner and while our trade with Greece specifically maybe low, Europe now operates in a very different way. Just not helping would not reflect well on Britain.

But there is more to consider. You have to remember the last financial disaster in 2008  was triggered by a credit crunch when sub prime debt was highlighted as the instigator. Britain was a long way from that debt and could argue, as Gordon Brown and many economists did, that Britain had very little exposure to what was essentially an American issue. 

What Brown and many intelligent people failed to consider is that debt has become one of the most traded commodities in this whole globalisation thingy. Clever traders cut it up, repackage it, put frills over the box and call it gilt-edged and then this is repeated many many times and at each transaction a nice fat fee or commission is taken as profit even though the actual base assets on which the debt is based may have actually gone down.

The complex world of insurance, reinsurance, derivatives and exotics mean that Greek debt may be 'covered' by British banks in lots of other ways. This means that the world will again experience a lending crisis, a new Credit Crunch as banks will become paralysed to lend to one another as no one will know who is exposed to what and for how much.

You might have thought that we would have solved a few of these basic problems, learnt our lesson and moved on but the financial party has continued after we bailed the banks out last time.

So we face a new Credit Crunch as Sovereign Debt is the new sub prime and that means banks will shore up lending and that will put pressure on all of us again as banks declare bad debt exposure and we have to work out if have to bail them out again. 

So the theory to solve this Greek problem is simple. Bail out Greece and we avoid a Credit Crunch. This means we should be all very interested in this and the outcome of it. Because the belief is that if Greece can be saved so too can the Euro and its dependents like the rest of the PIIGS nations. Let the Euro fail and that whole bag of worms gets opened up and then the real problems begin for us all.

As was feared when Dubai defaulted on its debts, the world would suddenly realise that the kind of banking and debt trading we have created has no real economic strength to hold itself up. If a prolonged Credit Crunch were to ensue after multiple Sovereign debt defaults occur then we would face an incredibly bleak time as the dominoes continue to fall around the world in consequence.

The debate over what happens in Greece after a bail out rages on. Should Greece impose its austerity measures and nobble its population or should it be allowed to use the cash to grow? The EU and G20 has been unequivocal - the money comes with an enormous caveat. Think forward then to what would happen if a new Credit Crunch came with prolonged effects. Every country would have to go into hyper-mode to get its deficit and lending down as there would be simply no way to borrow - certainly not at a rate that would be sensible.

The Greek people's lot is one of sacrifice. And what the world is saying is that the Greeks can take that horrible medicine and suffer the consequences of economic shackles in order to save the rest of us. So thinking that letting Greece go is a punishment is wrong. Bail out is their punishment.

In Britain and the US we have resorted to QE 2 and 3 as we pump more false money after bad to try and stave off another recession. In the US case at least they used the new cash to breathe life into the asset-backed markets but Britain just went and bought its own debt. This was great to get us over a short term problem but the banks who received the money did not pass it on, they simply used it to recapitalise themselves and meet the new banking requirements. We solved another of the banking problems that might stop them carrying on their stupid activities.

What it all comes down is the same as before. Greek debt is just another hole in the economic dyke. Last time it was sub prime, this time it's sovereign debt. The underlying issue is the same - it revolves around debt and how we have made a global economic casino trading it when the basic thing is worth only the terms originally written. Profit after profit is made in a money making machine that makes more out of it out of thin air and just a few percent of the world's population benefit from it.

Until we change that fundamental banking issue, it will always be some other debt based crisis that will trigger crunch after crunch, recession after recession. The cycles will just get shorter and shorter as the dyke gets weaker and weaker.

And there is only so much money you can chuck at the problem. This is tragedy being played out in Greece but the whole world will be affected by the outcome.

No comments: