May 14, 2012 (Investorideas.com Newswire) This analysis continues on from my last article in light of the recent French and Greek elections where voters rejected economic austerity in favour of money printing Inflation stealth debt default as politically an smoke and mirrors Inflationary depression is being seen as far more palatable for populations than a deflationary depression slow motion economic collapse. However to be able to print money inline with the true state of the respective competitiveness of euro-zone economies, then these countries governments have no choice but to exit the euro-zone, or be forced out as they one by one fail to follow through on agreed austerity measures.
Greece Slow Motion Economic Collapse in Progress
What may be lost in the noise that is the mainstream press is the fact that Greece has not been in a recession or even a depression, Greece has been in a state of slow motion economic collapse on the scale of past economic collapses such as that of Argentina but so far without the ability to default, devalue and inflate.
As the below graph illustrates that following the financial crisis of 2008, Greece had been following a similar economic trend trajectory to that of most western economies including that of the UK, US and Germany, however the real crisis began in late 2009 when the economic recovery from the pit of the Great Recession of 2008-2009 evaporated and the Greek economy began a slow motion collapse that has so far seen Greek GDP in real terms contract by 16% since the 2008 peak, with no end in sight Unlike the V shape of the more regular debt default economic collapses such as that of Argentina's of 2001 and more recently Iceland.
The reason for this is solely due to Greece's membership of the eurozone which has prevented Greece from defaulting on its debts since early 2010 and engaging in a sharp currency devaluation as markets would have corrected for the fact that Greece cannot compete against other countries. However instead of getting a grip on approx Euro 300 billion of public debt at that time, the Euro-zone despite since a 50% stealth default on private debt has still increased Greece's total public debt burden by a further Euro 280 billion of 2 scheduled bailouts to stand at a total of over 400 billion Euro's, leaving Greece far more indebted than where it were in late 2009 when economic collapse began, which is made infinitely worse as a consequence of the fact that Greece's ability to service this debt has fallen as a consequence of the economic contraction.
Similarly Greece as member of the Euro-zone has NOT had the option of experiencing a severe competitive devaluation of its currency of as much as 50% which would have instantly turned Greece's trade imbalances around as Greece would no longer be importing goods and services from Germany that it could not afford as well as what little it does manufacture would have become far more attractive to export markets and especially its large tourism sector, which in fact as a consequence of a drop in demand suffered an increase in prices as a consequence of fixed euro costs's which resulted in further reduction in demand and hence Greece has been in an economic death spiral.
The situation has now reached a critical point (though it has been at a critical point for a good 18 months now) where in my opinion Greece now has no alternative but to exit the Euro-zone (not European Union) and it will exit the Euro-zone sooner rather than later i.e. I would be surprised if Greece is still in the Euro-zone by the end of this year and most probable expect Greece to exit during the next few months (Summer 2012).
Last weeks Greek elections have set in motion a chain of events that virtually guarantee a Greek exit from the euro-zone as another election in Mid June is a near certainty that looks set to elect an anti-austerity government headed by the inexperienced Alexis Tsipras of the Syriza party, who's rhetoric that Syriza both wants to remain in the Euro-zone with a continuation of mainly German financing of Greek government expenditures to the tune of Euro 100 billion a year whilst stating that they will embark on an anti-austerity government spending spree without any consequences in terms of bond and currency market reaction because Greece neither has access to the bond market (currently financed wholly by Euro-zone institutions and the IMF) or a currency.
Mechanisms for Greece Euro-zone Exit
Following the election of the new Greek government in mid June 2012, Greece will default on its debts as a consequence of the resistance to release further bailout funds due to its anti-austerity programme. This will probably trigger a series of Euro-zone summits during July and August where the terms for exit from the Euro-zone will be agreed upon. What is unknown at this time is whether Greece will also have to leave the European Union as the Lisbon Treaty suggests. My opinion is that Greece will be allowed to remain in the European Union, however the solution will be legally very messy.
Hyperinflation Consequences for Greece
In conjunction with the summits formulating the mechanisms for Greece leaving the euro-zone there will be real world consequences for Greece in terms of the currency in circulation as a new currency would need to be printed and distributed (we may in the interim see vouchers or even photocopier paper currency used to pay public sector wages) causing chaos across Greece in terms of the standing of contracts such as Mortgages made in Euro's but no longer honoured in Euro's triggering a collapse of its banking system as no one will want to hold its new currency. This would result in plunge of the existing Euro and a collapse in the value of the new currency (when eventually printed) in the form of an hyperinflation panic event, i.e. we will see the Greek inflation rate soar as a consequence of Greece no longer being able to buy any goods or services from abroad due to the capital markets being closed to Greece. I had previously estimated that Greece could experience an annualised rate of at least 30%, which given the nature of the new government that would do nothing to address the requirements of capital markets could probably soar far higher amidst panic driven spike as any money left in Greece flooded out of the country before capital controls came into force.
This is the true state of the Greece economy that the Euro-zone in its ignorance has been delaying and worsening the realisation of, and so will the pain delivered be intense as the markets act to make the correction in valuations that lie at the heart of the Euro-zone crisis.
Greece Exit Consequences for the Euro-zone
All of the weak euro-zone countries are waking up to the fact that they have been in a state of denial because they are NOT Germany they cannot compete against Germany and therefore are only delaying the inevitable by remaining in a currency union with Germany that ensures their economies are also in a state of slow motion death spiral of economic collapse. In which respect they are in fact making the economic pain of their populations far worse as a consequence of dragging out economic collapse over many years rather than months as would have been the case had they had their own currencies and money printing presses such as that deployed by the UK that has successfully used smoke and mirrors inflation to mask the truth that Britain is in a far worse state in terms if indebtedness than most of the euro-zone countries.
Greece exiting the Euro-zone would crash the banking system as banks across the euro-zone start to fail domino style as a consequence of their direct exposure to 400 billion of Greek debt and counterparty risks which will put immediate pressure on all of the other weak Euro-zone members, with Spain and Portugal the next targets for exit as a consequence of these countries being on the same unserviceable debt fuelled economic collapse trajectories as Greece. In my opinion Spain and Portugal will both exit the Euro-zone within 6 months of Greece leaving so depending on the timing of Greece's exit Spain and Portugal could also both leave the the eurozone this year.
The following list suggests the probable order of Eurozone exits from the single currency based on debt to GDP coupled with the the level of economic contraction to date.
The wild card is Germany for as I originally speculated over 2 years ago (May 2010). Germany may decide to alleviate pressure on the rest Eurozone by planning its own exit. However all this would amount to a desperate belated attempt to buy more time to slow down the rate of collapse of the Euro-zone so as to allow the financial system to better survive a breakup of the whole eurozone.
Consequences of Euro-zone Collapse
Whilst contagion amongst euro-zone members may be a slow motion affair as countries one by one line up for exit, however the contagion amongst the banking sector will be immediate and europe wide as credit markets freeze, that has the potential to accelerate the collapse of the euro-zone as the potential bailout costs for preventing financial armageddon soar far beyond the means of any of the euro-zone member states to cover.
Off course the worlds central banks will do their utmost as they did during 2008 to prevent financial Armageddon by trying to contain the damage through a myriad of means that they are now well rehearsed in such as bank capitalisation's, providing foreign currency swaps, and in the final instance introduction of capital controls.
Over the past few years, I have several times touched upon strategies for protection against a euro-zone triggered collapse of the financial system and much of the conclusions remain just as valid today as excerpted below -
The following are my updated lists of tasks you need to do to protect your deposits because you are NOT being paid to carry the REAL RISK OF LOSS OF FUNDS ON DEPOSIT in Nominal Terms.
1. Ensure that you have at least 2 current accounts across banking groups and at least one with a safer bank such as HSBC.
2. Next make a list of all of your deposit / bank accounts, with the amounts on deposit.
3. Now group your accounts by banking sector group (see list here as a guide).
4. If you are anywhere near the £85k limit with any banking group then move those excess funds immediately! and Especially if it is a Eurozone bank
5. Small banks and building societies are at greater risk than larger banks and building societies because the government is the larger banks such as HBOS pose a greater risk to the financial system and economy so the government will be more reluctant to let them fail, but that does not mean they will actually cover deposits beyond £85k in the event of a collapse, so you still need to limit exposure to £85k
6. Consider transferring funds to your spouse so as utilise their compensation limit across banking groups, so you can double your compensation coverage by opening an account for your spouse with each bank.
7. Ensure you have procedures in place so that you can at short notice transfer funds from high risk banks to lower risk banks so as to limit the fallout from any banking system crisis. For instance open an NS&I Direct Saver account NOW (pays 1.75% gross), then use this during an unfolding sovereign debt crisis event to transfer your cash to as this is the safest deposit account available for UK depositors (Max £2mill, Min £1). Again do this now as you may not be able to do so during a debt crisis event due to high demand for the account. This is an imperative - NS&I is the safest bank in the UK, use it for short-term insurance - NOW!
Instant Access Savings Accounts with Lower Risk banks
NS&I - 1.75% - Government 100% Guarantee
Tesco - 2.90% (includes 1.65% bonus for 12 months)
HSBC - 0.75% (includes 0.5% bonus if you do not withdraw in a calendar month)
Higher Risk banks
Barclays - 1.25% (includes 0.35% bonus when you do not withdraw in a month).
SMILE (Co-op) 0.25%
Extreme High Risk Banks
Santander - 3.1% (includes 2.6% bonus for 12 months) - Euro-zone Bank
ING Direct - 3% (includes a 2.46% bonus if you do not withdraw in a month) - Euro-zone Bank
Halifax Online Saver - 2.8% (includes 2.7% bonus for 12months).
All accounts pay significantly less than current CPI Inflation of 5%.
8. Do not have ANY savings are fixed deposit exposure to banks that do not fall under the UK Financials Services Compensation Scheme.
9. Avoid exposure to Euro-zone banks and at the very least PIIGS banks, that is Greece, Ireland, Spain, Portugal and Italy as these are at the most risk of going bust thus triggering a lengthy process for savers having to wait for compensation. Remember that if Spain comes under pressure following perhaps Ireland and Portugal joining Greece, then the risks posed to the likes of Santander depositors will also significantly rise.
10. Keep enough in cash to cover at least 1 months expenditure, (I keep 2 months worth of cash).
11. Utilise instant transfer accounts between spouses, i.e. if you have accounts with the Halifax then you can instantly transfer funds between one another, therefore during a crisis you can instantly reduce the exposure if one person is above the £85k compensation limit at that time.
The best strategy remains as I have been advocating for a while to continue to cycle out of fiat currency assets and into harder assets such as UK property, for which I have at times had a healthy debate with many readers as I am fully aware that signs for positive trend for the UK property market are far and few between but the key point is that you want to be in assets that cannot be easily printed or that are leveraged to Inflation and fairly priced, and in that respect UK property as well as other assets such as consistent dividend paying stocks and after the recent sell off commodity stocks in general tend to fit the bill as well as index linked corporate bonds.
What is Probably Likely to Happen IF the Euro-zone Collapses
The fragile european banking system will fall like dominoes and not be limited to just the euro-zone for it will reverberate across the globe within a matter of hours as the value of greek and other peripheral government bond markets crash and the banking system literally freezes, especially as most of Greece debt (approx Euro 250 billion) is now is the direct liability of other governments.
I expect governments such as the UK would immediately step in to nationalise the bankrupting banks either in part or full as they did with Northern Rock, Lloyds and HBOS, for if depositors in any significant number actually started to lose access to any of their deposits then that would result in a catastrophic loss of confidence in the whole financial system and spark runs on all banks.
My best minimum advice is to prepare for the worst rather than leave it to chance, because if the government is facing an out of control bank run that potentially runs in the trillions it may decide that the pain of closing the banking system for a few weeks (Extended Bank Holiday Month) is better than the implications of more than doubling the national debt which would make George Osbourne's £130 billion annual deficit look like peanuts.
A closure of the banking system (Bank Holiday Month) will result in a huge drain on cash in the economy as cash machines would have stopped operating, therefore I suspect the Bank of England has already secretly prepared itself for this eventually by printing a huge quantity of actual bank notes by the container load, ready to ship out as soon as the crisis bites, which would be necessary to cover a closure of the banking system the effect of this would be highly inflationary, because printing actual bank notes is the same as that which happened during Weimar Germany sparking hyperinflation when people ended up buying loafs of bread with Wheel barrows full of worthless currency, inflation would go through the roof, forget 5% per year, we would be looking upwards of 5% per month!
But whatever you do, know this that the crisis in the Euro-zone CONTINUES TO DETRIORATE, this is not a new trend but one that has been in force since at least late 2009 and which in my opinion is approaching the end point that will prompt huge amounts of money printing that will detonate the Inflationary Time-bomb, because in the face of crisis, the only thing the governments can do is to print money and the bigger the crisis the more money will be printed.
Greece Black Mailing Eurozone?
As mentioned above most of the Euro 400 billion of Greek debt is now owed to other euro-zone member state institutions and the IMF, therefore a Greek default will have a double whammy on the Euro-zone as institutions such as the ECB will be sitting on huge losses that would require a bailout from member states even before it attempted to rescue the euro-zone wide banking system from collapse. Clearly the Greek politicians are using the losses the euro-zone would directly suffer were Greece to default as a blackmail tool to try and evade any responsibility. However the problem with the Greek strategy is that if Greece is allowed to successfully black mail the Euro-zone then so will other larger countries such as Spain and Italy eventually engage in similar tactics to evade economic austerity pain as their populations also demand a similar solution to economic austerity as Greece were being allowed to get away with.
European Union Collapse?
A collapse of the Euro-zone does not mean the same as a collapse of the European Union, it should not be forgotten that the EU survived for a good 40 years before the Euro-zone came into existence. The primary purpose for the creation of the E.U. was to prevent Germany from starting World War 3, which remains the primary objective that goes far beyond economic considerations, therefore even a collapse of the single currency would not be enough to bring about a collapse of the E.U., and as I stated earlier, I expect a Drachma Greece to remain within the E.U., just as will an Lira Italy, Pesetas Spain and even Frank France remain within the E.U.
Final comment on Alexis Tsipras and Syriza. If the Greek default and euro exit play out roughly as illustrated above then Alexis and his party will probably become the most hated government in Greek history, whilst watching their smiling faces on the TV, I can see that they have no idea of what's in store for Greece, the collapse will be a nightmare for ordinary Greeks, especially as it was only until relatively recently Greeks were living amidst a debt fuelled boom and the collapse has the potential to spiral out of control as we are already seeing with the blame being laid at the foot of immigrants, which is not many steps removed from spiraling towards a military conflict with neighbouring states such as Macedonia and Turkey.
Your analyst seeing continuing signs of a Euro-zone wide bank run underway.
Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of three ebook's - The Inflation Mega-Trend; The Interest Rate Mega-Trend and The Stocks Stealth Bull Market Update 2011 that can be downloaded for Free.
Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 600 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk
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