Once again, I sadly report that Ambrose Evans-Pritchard at The Telegraph hits the nail on the head as to what is happening, yet cannot hit the broadside of a barn with a shotgun from 15 feet in regards to the solution.

It really pains me to see excellent analysis go straight into the toilet with hopeless proposals to problems at hand.

Please consider Appetiser cost of Greek exit is €155bn for Germany, France: trillions for meat course by Ambrose Evans-Pritchard.

Eric Dor’s team at the IESEG School of Management in Lille has put together a table on the direct costs to Germany and France if Greece is pushed out of the euro.

These assume that relations between Europe and Greece break down in acrimony, with a full-fledged “stuff-you” default on euro liabilities. It assumes a drachma devaluation of 50pc.

Potential losses for the states, including central banks.

Upper bound of the losses
Billions €
French State
German State
TARGET2 liabilities of the Bank of Greece
22.7
30.2
Greek sovereign bonds held by the Eurosystem: SMP
9.8
14
Bilateral loans to Greece in the context of the first programme
11.4
15.1
Guarantees to bonds issued by the EFSF to provide loans to Greece in the context of the second programme
8.4
11.2
Guarantees to debts issued by the EFSF in the context of its participation to the “Private Sector Involvement” –restructuration of the Greek debt:“sweetener”
6.5
8.6
Guarantees to debts issued by the EFSF in the context of its participation to the “Private Sector Involvement” –restructuration of the Greek debt: payment of accrued interest
1
1.4
Guarantees to bonds issued by the EFSF to provide loans to Greece in order to buy back sovereign bonds used by banks as collateral to obtain funding from the Eurosystem
7.6
10.2
Total
66.4
89.8

Sounds about right.

So far so good. I think a 70% devaluation is about right, but let’s not quibble.

Contagion Silliness

This is where Pritchard’s analysis starts getting more debatable.

Pritchard writes …”Needless to say, the real danger is contagion to Portugal, Ireland, Spain, Italy, Belgium, France, and the deadly linkages between €15 trillion in public and private debt in these countries and the €27 trillion European banking nexus.

This idea of contagion sounds much like the totally discredited “domino” theory in regards to Vietnam. Simply put the rest of Asia did not fall into the hands of communists when the US lost the war in Vietnam.

In this case, Spain will sink or swim on its own merits regardless of what Greece does.

If anything, there will be contagion in the reverse sense. There exists a possibility that Greece recovers “because” it exits the Eurozone (however structural reforms are needed as well).

The ridiculous fear is failure in Greece will lead to a failure in Spain. Clearly both states have failed already.

Mad Hatter Tirade

Pritchard then went off the deep end into a mad hatter tirade.

This nonsense can of course be stopped in ten minutes if the EU:

1) announces that it will equip itself with a real central bank (a lender of last resort) that takes all risk of sovereign default off the table — with conviction and overwhelming force, with no ifs and buts, and no ambushes from the Bundesbank.

2) announces EMU debt-pooling, fiscal union, a joint EMU budget and tax system, and an EMU government as a counterpart for the enhanced the ECB.

The idea that Greece and Spain can be saved by central bank printing “with conviction and overwhelming force, with no ifs and buts” is of course asinine.

Sorry Ambrose, “asinine” is the best word that describes what you propose. Greece and Spain can only be saved if and only if they implement badly-needed structural reforms.

Defaulting on debt which would cause inflation in Greece and Spain (not Germany), may assist recovery, but the 100% necessary condition in both cases is structural reform.

Pritchard then recovers by concluding …

My sympathies to the German people. This is what your leaders got you into (without asking permission). It was the elemental implication of monetary union.

We at the Telegraph screamed from rooftops in the early 1990s that EMU was a destroyer of nation states, and democracies. So did the brave German professors. Nobody would listen.

My guess is that German citizens will not accept this implication.

Precisely!

As Pritchard suggests, Germany will indeed pay. Mathematically Germany must pay. It’s something I have pointed out numerous times over the years.

The problem as Pritchard notes is the flaw in the Eurozone in the first place.

I commend Pritchard for being among the first to point that simple fact out. However, neither Keynesian nor Monetarist nonsense is the cure for anything.

Regrettably, Pritchard keeps attempting to put a square peg into a round hole, and worse yet keeps proposing “asinine” solutions to a fundamental problem.

If Wishes Were Fishes

  • If monetary stimulus worked, the LTRO would have been a spectacular success already. 
  • If monetary stimulus worked, housing in the US would be in full-blown recovery.
  • If monetary stimulus worked, Japan would not have a debt-to-GDP ratio above 200%. 
  • If printing worked, Zimbabwe would have been the greatest country in the world long ago.

It is really sad to see otherwise fine analysis go straight into the toilet with such ridiculous proposals as solutions.

Mike “Mish” Shedlock
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