About two years ago when things started going downhill, the original bailout package for Greece totaled 110 billion euros.Â The second bailout deal, which has been seemingly put off indefinitely as the troika busybodies try to reach agreeable terms, is set to cost around 170 billion euros.Â If confirmed, Zerohedge estimates the total of the two packages will likely cost around 320 billion euros or 136% of the country’s GDP.Â Meanwhile, the never ending meetings with private creditors over bond haircuts has yet to yield a result that satisfies both parties.Â Headlines such as “Greece nears deal with private creditors” have become the laughing stock of the financial blogosphere.Â At this point, the date for a deal to be reached has been pushed back till March where bondholders are being pressured to accept a 70% haircut which will more than likely not be large enough.
Two years of budget austerity and increasingly violent protests have done little to save the country from its fiscal problems.Â From the beginning, many financial commentators, including this author, have argued the best thing for Greece is an outright and hard default.Â The endless stream of summits with politicians doing nothing more than wasting taxpayer money on high end hotel rooms and catered food are a clear sign that progress in terms of actually reaching a viable fix to the crisis is not occurring.Â And now, via The Slog, a rumored timetable appears to be in the works for the country to finally ditch the euro and tell creditors where to stick it (my emphasis added below).
Senior bankers on Wall Street have been given detailed documentation setting out a timetable to Greek default, including firm dates and technical â€˜ordersâ€™ about last use of the euro as a currency there. The revelation arrived at Sloggerâ€™s Roost last Monday, since when I have been trying to obtain corroboration. This arrived in the early hours of today (Thursday). One of the banks is Barclays Capital (Barcap) run by controversial figure Bob Diamond. The other must remain anonymous for the time being, in order to protect sources.
The document asserts that Greece will officially be declared in default by all the ratings agencies after the close of business on Friday March 23rd . At the weekend all Greek bank accounts will be frozen, with emergency measures detailed to prevent the flight of capital. Included in the paperwork is a list of very limited exceptions to the â€˜no withdrawalsâ€™ order. All major banks â€˜are instructedÂ not to deal with euro exchangeÂ as of open of business in Greece on Monday 26th march. All Greek markets will close for one day â€˜at leastâ€™.
It should be pointed out immediately that this so called “document” has yet to be confirmed as real.Â Still, it’s not a stretch to think that the heads of major banks exposed to Greece debt are preparing for the worst.Â All along, the talks of “bailing out” Greece were in actuality a justification to bailout the banks who were shortsighted enough to purchase the country’s bonds in the first place.Â Put simply, Greece wasn’t bailed out, the banks still left holding the country’s debt were.Â What else would you expect when both the head of the European Central Bank and the appointed Prime Minister of Greece are Goldman Sach alum?
If an outright default is indeed in the works, it will be for the best.Â The people of Greece could have avoided a great a deal of pain if this decision was correctly made two years ago.Â Instead, the political class did what it does best and kicked the can of reckoning all the way to the abyss and has no room left to go.Â When the yield on a 1 year Greece bond hit over 100% just a few months ago, the end was in sight.Â Today, a one year bond yield is an astounding 629%!
The banker class sees the writing on the wall and, regardless if the supposedly leaked document is real, is likely preparing to finally rid itself of its toxic and debilitating debt holdings.Â Of course such a consequence is not to be feared but embraced by all those who realize markets can only work if both success and failure are allowed to occur.Â Like investor Kyle Bass says, “capitalism without failure is like Christianity without Hell.”Â Preventing the market from ridding itself of unproductive assets not only sends mixed signals to investors but also serves to absorb limited capital.Â With default looming, it’s become perfectly clear that the billions thrown at Greece over the past two years might as well have been thrown in a pile, doused in gasoline, and set ablaze.
Perhaps more worrisome about a hard default, and nationwide defaults in general, is the prospect of declared banking holidays.Â As the leaked document mentions, the planned default will result in “all Greek bank accounts” being frozen, “with emergency measures detailed to prevent the flight of capital.”Â For well over a year now, there has been a slow but steady bank run occurring in Greece:
Combine this with impending default and capital controls are almost a given.Â To paraphrase Murray Rothbard, the institution of fractional reserve banking is functionally insolvent and reliant on the public to not do as the citizens of Greece are doing and justifiably reclaim their private property before a potential currency debasement.Â In Anatomy of the Bank Run, Rothbard describes this process:
It was a scene familiar to any nostalgia buff: all-night lines waiting for the banks (first in Ohio, then in Maryland) to open; pompous but mendacious assurances by the bankers that all is well and that the people should go home; a stubborn insistence by depositors to get their money out; and the consequent closing of the banks by government, while at the same time the banks were permitted to stay in existence and collect the debts due them by their borrowers.
In other words, instead of government protecting private property and enforcing voluntary contracts, it deliberately violated the property of the depositors by barring them from retrieving their own money from the banks.
The answer lies in the nature of our banking system, in the fact that both commercial banks and thrift banks (mutual-savings and savings-and-loan) have been systematically engaging in fractional-reserve banking: that is, they have far less cash on hand than there are demand claims to cash outstanding. For commercial banks, the reserve fraction is now about 10 percent; for the thrifts it is far less.
This means that the depositor who thinks he has $10,000 in a bank is misled; in a proportionate sense, there is only, say, $1,000 or less there. And yet, both the checking depositor and the savings depositor think that they can withdraw their money at any time on demand. Obviously, such a system, which is considered fraud when practiced by other businesses, rests on a confidence trick: that is, it can only work so long as the bulk of depositors do not catch on to the scare and try to get their money out. The confidence is essential, and also misguided. That is why once the public catches on, and bank runs begin, they are irresistible and cannot be stopped.
Given that large financial institutions serve as the middle man between a nationâ€™s central bank and respective Treasury, the government has a keen interest in maintaining the solvency of the banking system at all costs.Â This means shutting off the peopleâ€™s access to their supposed property at a time when they need it the most.Â The most likely outcome of a default in Greece will be the abandonment of the euro and readoption of the drachma.Â Depending on the size of the haircut bondholders will ultimately face, massive currency debasement will be opted for in lieu of imposing further austerity.Â The planned bank holiday will thus be used to transfer the deposited euros into drachmas; essentially robbing the people of their already slowly deteriorating store of wealth.Â Again, the banking systemâ€™s interest is being put above the rest of the countryâ€™s.Â Such is the nature of power centers occupied by easily corruptible men who greatest feat in life amounts to lying to more people than their opponent on election day.
Whether or not a hard default is being planned for on March 23rd, the inevitable will come in one form or another.Â For Greece, the past two years have been nothing more than an exercise in political theater and obfuscation.Â The heavily regulatory burden, generous welfare benefits, and pro-union policies have decimated the country’s private sector and diminished any hope of economic growth.Â Wiping the slate completely clean is the only viable option for a country that has defaulted on its debt a total of five times in the past two centuries.Â Ripping a band aid off in one fell swoop is never the end of the world and neither will be the bondholders suffering the consequences of their actions.Â The sooner the market is allowed to function properly and allocate capital toward more efficient outlets, the better the whole of the Eurozone will be.Â Now if only Portugal, Italy, Ireland and Spain would take the same path.