http://www.beppegrillo.it/en/2012/04/euro_mission_impossible.html
Greece is un default
By Beppe Scienza
"A couple of weeks ago, anyone who had, let’s say, 10-thousand Euro in Greek Government Bonds, would suddenly have received 24 different bonds in return for his/her original Bonds and, when he/she proceeded to add up the respective values of these new Bonds, he/she would have discovered that they have a total combined value of only two thousand Euro. In technical terms, this “default” is called insolvency. Whenever someone (whether it be a Country’s Government or a private enterprise) is obliged to make interest payments or to repay any invested capital and fails to do so, in essence this amounts to bankruptcy, although in technical terms it is called insolvency or default." Beppe Scienza
Mathematician and economist Beppe Scienza's, Passaparola
Two misrepresentations regarding Greece
Firstly I would like to say hello to all Beppe Grillo’s friends. My name is Beppe Scienza. I am a lecturer with the Department of Mathematics at the Turin University and I (unfortunately) deal above all with the topical issue of the abuse of savings. In the case of Greece, the issue is somewhat complex, and more than a little contradictory since, just a few weeks ago the television news and newspaper headlines were telling us certain things such as: "Greece has been saved", "Greek public debt successfully restructured" and "Greek bankruptcy averted". Then, suddenly, a couple of weeks ago, anyone who had, let’s say, 10-thousand Euro in Greek Government Bonds, would suddenly have received 24 different bonds in return for his/her original Bonds and, when he/she proceeded to add up the respective values of these new Bonds, he/she would have discovered that they have a total combined value of only two thousand Euro. In other words, Greece was saved and I lost 80% of the money I invested, so what shall we call this? The truth must be told, and that is that there have been two separate misrepresentations here:
1) one perpetrated by the top politicians and the members of the European Union and its Central Bank, who said: "We are going to rescue Greece", "No way can Greece be allowed to fail under any circumstances" and "Greece must be saved" but meanwhile, they were hastily making preparations for Greece to go bankrupt, and
2) the second misrepresentation, which came a little while later because the fairy tale that is now doing the rounds is that Greece has been saved.
The restructuring of the Greek bonds, and God forbid they should go the same way as the Italian ones have, occurred in two phases:
1) first a proposal was put to the banks, provident funds and insurance companies, asking them to accept that the bonds they held be replaced with new government bonds and accept that the values be cut. In effect, the vast majority of these so-called institutional investors accepted this proposal although, as to just how willing they were to accept the proposal, I refer you to what the head of the German Commerzbank, Martin Blessing, had to say with regard to the acceptance of the restructuring of the Greek public debt, namely that: "This is about as voluntary as a confession made to the Spanish Inquisition". Whatever the case may be, the Central Bank somehow managed to convince the banks to accept this deal and that’s their business.
What’s not their business is that immediately thereafter, even those investors who had not agreed to the deal suddenly found themselves in that same boat, in other words the nominal value of the bonds they held was halved and their market value dropped by 80%. Now, in technical terms, this effectively amounts to “default” and is called insolvency. Whenever someone (whether it be a Country’s Government or a private enterprise) is obliged to make interest payments or to repay any invested capital and fails to do so, in essence this amounts to bankruptcy, although in technical terms it is called insolvency or default. Greece has gone into default and is in a state of insolvency as regards those investors who did not agree to the restructuring deal. Greece has failed to meet its obligations and this is called insolvency, so Greece is effectively bankrupt. This is not the first time that that Country has gone bankrupt and indeed all Greeks will undoubtedly remember the statement made on 10 December 1893 by the then Prime Minister Charilaos Trikoupis, who said in Greek: "Δυστυχώς επτωχεύσαμεν" (distihós eptohéfsamen), which translates as "Unfortunately we are bankrupt".
So the Country was bankrupt then, and similarly it went bankrupt once again in the 30’s. The Greeks truly can, and do honestly say "Δυστυχώς επτωχεύσαμεν ξανά" (distihós eptohéfsamen ksaná), or "Unfortunately we are bankrupt once again". So, let’s stop bullshitting everyone by saying that Greece has not gone bankrupt because Greece has indeed gone bankrupt!
Same face, same race
However, it must be said that there is something rather strange about this whole restructuring deal and that is that it has not affected everyone equally because something happened that, if such a thing was to happen in the case of a private company, it would be called preferential bankruptcy and would be classified as a criminal offence. By the end of 2011, Greece’s public debt amounted to 380 billion Euro, which is extremely high and more than 170% of GDP. One would expect that that figure would have at least been halved by now, yet it hasn’t, but why? Well, prior to the restructuring and prior to the voluntary agreement to the public debt cutting proposal, a little sleight of hand occurred whereby the codes of all the bonds held by the European Central Bank, the Bundesbank, the Italian Central Bank, etc, suddenly changed and these bonds remained unaffected by either the proposal or the mandatory value cuts. These bonds, which remained as they were except for the new codes, received their interest earnings in full and the full value of the ones that had expired was paid out, no bankruptcy there then!
Now we can’t honestly say that any private individual benefitted from all of this, but only the same old European Union financial system that lent the money in the first place. The action may even be justified, however, it is nevertheless rather strange and was discussed and even object to by Bundesbank President Weidmann, who felt that if the truth be told, this action appeared to be very strange indeed. So Greece was indeed bankrupt, but not when it came to the Greek Government Bonds held by the various central banks.
At this point, the important thing is not to become embroiled in any legal action against Greece and not to hand over any money to attorneys that promise to instigate legal action to recover at least some of the money that has been lost. Sovereign States are called “Sovereign States” precisely because the can decide not to pay their debts if they so wish, so either we declare war against them or that’s the end of the story. Now no one is thinking of declaring war against Greece, however, it is important not to throw good money after bad by instituting legal action, even if there is a good chance of winning it in Court because, although a number of parties won legal cases against Argentina, some even in the American courts, it all came to nought because they won the court cases but they never did get any of the money awarded to them.
It may well be worthwhile to take this argument by saying: it happened to Greece ... what could this mean for Italy? Could the Greek case be a model for what could happen in Italy? Obviously a very, very delicate topic.
One question that many people are asking themselves is: “How come we have gotten to this point?” It is said that it happened because the Greeks were falsifying their public accounts and was making a mess of it too. This is true, undoubtedly Greece was utilising derivative contracts, which is the reason behind the disasters in many of our Italian municipalities, regions and provinces. Greece had even done this with Goldman Sachs, for example, when Mario Draghi was with Goldman Sachs, just in the interests of accuracy. They had hidden the shortfalls and had made the public debt appear to be less than it really was. All of this in unquestionably true, however, it must also be said that a little more diligence, adroitness and farsightedness by the European Union and the European Central Bank would also have gone a long, long way indeed. How is it possible that no one had any suspicions whatsoever until finally, in 2010, the financial markets began to become concerned about Greece? How come, since Greece’s entry into the Eurozone, in other words for an entire decade there was never any suspicion that perhaps someone in Greece was busy fiddling the books or making things look better than what they actually were? Maybe everyone chose to look the other way because various other Countries, such as France, Italy or Germany were perhaps also doing something very similar. Someone had to know what was going on. Not everyone at the European Central Bank or the German one is a total idiot. There must have been some suspicion that all was not as it seemed, yet no one ever said anything. It would have been better if they had said something earlier, back in 2007 for example, when Greece’s public debt amounted to only 115% of its GDP.
Now for the other matter, namely whether Greece could be a model for what could happen in Italy? And what about Spain and Portugal? Could the same thing perhaps happen here too? We’re talking about Italy because anyone who has been to Greece will undoubtedly have heard the saying “Same face, same race". We Greeks and you Italians look so alike, we’re actually very similar indeed…
The financial market wake-up-call
Are we equally similar when it comes down to the situation of our public finances? I don’t like to sound like a doomsayer, however, there are indeed a number of similarities, that most obvious of which is our extremely high level of public debt. The biggest problem in Italy is not the difficulty in firing people, as the worst Minister in Monti’s Government, Mrs. Fornero would have us believe. Italy’s real problem, and one that has not yet been addressed, not least of which because it is a very difficult one to overcome, is unquestionably this Country’s public debt, which is currently sitting at 120% of GDP. This is double the ideal level of 60% of Gross Domestic Product as specified in Maastricht. It is currently sitting at 120% of GDP and although it previously reached this level back in the mid-Nineties, it was brought back down to 103% around 2007 before it began climbing once again.
And herein lies the rub. We cannot see how we will manage to bring it down, but this does not necessarily mean that we are headed the same way as Greece. In Greece, the level of public debt absolutely skyrocketed and from 2007, their public debt went from 115 percent, to 121 percent, to 137 percent, to 153 percent and then up to 174 percent. Here in Italy the dynamics are very different, however, at this stage we cannot say with any certainty that the Greek solution is not on the horizon for Italy too, albeit some way away yet. Unless there is some sort of real economic recovery in this Country, we cannot see how the problem is going to be resolved solely by means of some minor budget adjustments and a whole range of new taxes. Tremonti drafted two interim budgets worth about 30 billion Euro each and Monti has drafted yet another, "Same face, same race". It may merely be the stuff of nightmares, however, a little nagging doubt remains that perhaps Greece may well serve as a model for Italy and this cannot be totally excluded. Certainly it seems that the financial markets have not totally excluded this possibility. The financial markets have given a major wake-up-call, not only regarding Greece but Italy as well.
There is actually also another similarity between the Greek situation and that here in Italy. In the case of Greece, the wake-up-call came from the financial markets rather than the European authorities. Only when the value of the Greek Government Bonds began to drop back in 2009-2010 did everyone suddenly begin to sit up and take note of Greece. In Italy, this happened in July 2011. If we look at Government Bonds such as the Btp-i 2021, we see that they were trading at around 95 with little or no change. Then, at a certain point they suddenly began to fall, and fall and they are now sitting at around 81. It was the financial markets that forced everyone to admit that: "Oh dear! The Italian situation is really serious and we really need to do something about it". Let’s just hope that these same financial markets are not going to deal Italy the same sort of death blow that they dealt out to Greece!
The problem in Italy and in Greece is not only the level of public debt, but also a political problem. The politicians in power are suffering from a serious lack of credibility. Even in Greece, these politicians are well-qualified, or at least as well-qualified as ours are, however, extreme problems require painful remedies and in such cases the Italian politicians, in many cases at least, somehow always manage to raise suspicions that, whenever they come up with some any of proposal, they are doing so merely so that they can hang on to their posts and be able to continue stealing.
When Churchill promised the English, the British, that victory was assured although there would be many tears and much blood along the way, nobody dreamed of saying: “So you say, but all you want is to keep your post so that you can carry on stealing”. Unfortunately, these days if any Italian politician or member of the ruling class tables such proposals, may people simply turn around and say: “So you say, however, I’ll bet that we are the ones that will have to tighten our belts!”. This makes it very difficult for anyone to have any reasonable chance of bringing a semblance of order to our public accounts.
Spread the word!
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Euro: mission impossible
By now we are living in order to pay the interest on the public debt. It’s a furnace in which bit by bit we are incinerating social services, new taxes, savings, homes, and rights. While we are fuelling this blazing bush we are getting poorer. The poorer we get, the more the debt increases and the more the interest on the debt increases. After six months of Monti’s treatment, the public debt has grown and it’s approaching 2,000 billion while employment figures have gone down and for this reason, inevitably, the tax revenue in 2012 will show a sharp drop. In 2013 we’ll have to pay more than 100 billion euro in interest on the debt, that’s about a quarter of the 420 billion paid in taxes each year. We are going into a spin like an aircraft that’s plummeting in order to pay the interest accumulated by the PDL and the PDminusL during a calamitous twenty year period.
To whom are we paying the interest? Only 14.3% of the public debt is held by Italian families. Whereas 85.7% is held by banks, funds and insurance companies and other investors. 46.2% is abroad, mostly in French, German and English banks (*). Banks are the new masters, not at all willing to give up their pound of flesh. For example, to reduce the interest payments or to stretch the time frame for paying back the capital. Italy does not have monetary sovereignty. It’s not possible to devalue the lira and to thus have a realignment of the prices of bonds in our economy that is worth a lot less than it was when the bonds were issued. Devaluing the lira is equivalent to devaluing the bonds. Now that is no longer true. We have a noose round our neck that we cannot remove and that is getting ever tighter unless we restructure the value of the shares that are worth 20/30% less than their initial value. Without the loan of a thousand billion from the ECB to the banks at an interest rate of 1%, used to buy new shares at 5%, Italy would be in pre default.
There’s no use in putting off the problem. To decrease the interest payments on the debt in the medium term and at the same time issuing new State bonds with low or medium return is "mission impossible". The blackmail is always the usual one. If we don’t keep going with this route, we exit from the euro. But we have already left the euro. The euro no longer reflects the value of our economy, only 60% at the most. To exit from the euro must not be a taboo. Great Britain and Denmark are part of the EU and they have kept their currency. It can be done. We need to start discussing it. I’s never too late to turn back from the smooth path leading to hell.
(*) source: Bankitalia