EDITOR: | July 6th, 2015 | 2 Comments

Duchesne on Greece’s Default and Game of Thrones

| July 06, 2015 | 2 Comments
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winter-is-comingGreece overwhelmingly rejected conditions of a rescue package from creditors on Sunday, throwing the future of the country’s euro zone membership into further doubt and deepening a standoff with lenders.

If this were an episode of Game of Thrones, Jon Snow would say, “Winter is coming.” And we would understand that the next scene is unexpected yet predictable.

After missing a €1.6 billion ($2.2 billion Cdn) payment to the International Monetary Fund on Tuesday, Greece is in default on its loan obligations, the first developed economy to do so in the IMF’s seven decade history.

This was predictable as the austerity measures of the past five years have destroyed the optimism of the youth, which is plagued with high unemployment rates and no future prospect but living in the family basement for the foreseeable future. I’ve met with such youths who hold two master’s degrees and no chance of a job. These are educated and disenchanted voters with nothing to lose by refusing another round of austerity measures that offered no hope of improving their economic fate.

Now the future of the Eurozone is in the hands of a love triangle with the lenders, the Eurozone countries and the Greek economy.

Just like a Greek tragedy, the plot is predicable. Greece’s lenders have two choices: 1. Tell the Greeks to go stuff souvlaki, or 2. To get back to the table and work out a better deal with the Greek government. Would they prefer writing off loans as opposed to getting pennies on the Euro? Most likely it will be the latter because a bit of money is better than no money at all. They will push for a negotiated settlement.

The Eurozone countries, despite their blusters, are at risk to see the Euro take a plunge against more stable currencies, putting at risk the Eurozone economy. This will not please them but they need to reach a negotiated settlement to avoid economic winter.

I have family in Greece, independent business owners who are worried about getting their savings out of the bank and do not want to see their life’s savings disappear into a great economic void. They too badly want the Greek government to negotiate a new settlement.

The most likely outcome is that everyone will return to negotiate a new deal. Never mind Chancellor Merkel’s pride, a new deal is in everyone’s best interest. The deal will be more favourable to Greece, which now has the upper hand as confidence in the Euro declines.

Winter is still coming though. In his book Debt: The First 5000 Years, anthropologist David Graeber argues that debt is the principle that led to the creation of money: First there was debt, and then money was created as a tool to support the negotiation of debt. In other words, money as a unit of account was invented to quantify “I owe you” into units of something.

 Thanks to Greece, debt is now officially and irremediably foremost in our economies.

Winter is coming because now we have been taught that major countries can default on their obligations. Just as money was invented to support the concept of debt, interest was invented as some borrowers are expected to default on debt. The more significant the default profile, the higher we should expect the interest rate.

The bogeyman of winter is the emergence of countries facing high interest rates that will shift working capital into servicing debt rather than providing services. This will cause significant strife to western economies in need to support a growing population of pensioners with increased medical needs. Greece is just the first of our economies to face this problem as Greek socialism favoured early retirement. But other countries will face the same problem soon.

Winter is coming because there are two forces at play: debt and demographics.


Dr. Luc Duchesne

Editor:

Dr. Luc C. Duchesne is a Speaker and Author with a PhD in Biochemistry. With three decades of scientific and business experience, he has published ... <Read more about Dr. Luc Duchesne>


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Comments

  • Global emerging markets and the E*TRADE sell-off deadline? | InvestorIntel

    […] today, I just published Duchesne on Greece’s Default and ‘Game of Thrones’ – where as Luc says Jon Snow would probably describe this as “Winter is coming” […]

    July 6, 2015 - 10:31 AM

  • Kris

    Luc,

    For the common Europeans, not the politicians, there is no need for an agreement. Giving money to the Greek is as trowing money into a pit without a bottom.

    Even the Greek agree that the basis of their problems is the irrisponsible behaviour of their politicians, elected bij the same Greek who complain today. Are you aware that people working for the govenment got a monthly bonus when they started to work at time? other examples of irrisponsible behaviour?

    You could say: OK they made an error in the past. Give them a change.

    But even today with socialists in the govenment they are still not able to collect taxes properly. You know there is an island with tourism +50%, VAT taxes -30%. ?! Today, not 2 years ago.

    So the Greek cheated us in the past, and are cheating on us today. Why would we trust them for the future? Can you ask this question to the students you meat.

    For a country to remain in the EURO there should be an economical basis. Greece didn’t had it in the past (every economist
    agrees on this) and doesn’t have it today. And given their economy will never have it.
    The fact Greece entered the Euro was a polical descision, without any ecomical basis.

    So bottomline: we common Europeans who pay their taxes correctly are currently the victims of the Greek their behaviour.

    I agree that it is a tragedy for the people themselves but the least one can expect is respect for the people who’s money you receive. You know how much the average European already gave to the Greek?
    Let the Greek first prove they deserve some trust before we give them more money.

    July 6, 2015 - 11:45 AM

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