Cyprus Mail
CM Regular ColumnistOpinion

You can’t get blood from a stone

The sovereign insolvency at the heart of the Greek crisis is not unique or isolated. Greece is simply succumbing first

By Hermes Solomon

EVERY major central bank is doing its level best to create inflation. And history tells us that usually, at some point, this succeeds.

Shrinkflation is all about the ‘Crème Egg Debacle’, whereby there are fewer Crème Eggs in a multi pack now than there used to be, and worse than that there’s less chocolate, and even worse than that, the chocolate is of slightly lower quality.

You can talk to bankers, investment bankers and policy makers and they’ll say, “There’s no inflation”. But if you visit their homes the only thing they discuss over dinner is the rising cost of living.

It feels like everything that’s mandatory is going up in price, and everything that’s discretionary is going down.

The time to have begun to deal with structurally-unsound levels of debt was many years ago, even before the Lehmann crisis hit in 2008, which was the fire alarm that should have been heeded. But it was completely ignored by the political and banking establishments in the developed world, who instead opted to pour more money and more debt into the financial system rather than face up to the simple truth that Too Much Debt is a very bad central operating principle.

Prime Minister of Greece, Alexis Tsipras refusal to back down on his election promises has drawn stock market attention to a possible repeat of the Lehmann Bros crisis.

Greece has merely exposed the fatal flaw of the modern economy, its Achilles Heel, which is by definition, a system suffering from Too Much Debt. The only meaningful question to address at this stage is: Who is going to eat the losses – taxpayers or savers?

The sovereign insolvency at the heart of the Greece crisis is not unique or isolated. Most other countries around the globe share the same terminal condition of having Too Much Debt. Greece, a small player, is simply succumbing first.

As Greece proves that you can’t get blood from a stone, other countries will similarly demonstrate their debts cannot be repaid in full. And losses will eventually, inevitably, have to be taken. And when that happens, watch out.

In today’s over-indebted, over-leveraged, and intensely interconnected global economy, the losses created by sovereign insolvencies will spark a cascade of mortal shocks across the world’s financial system. Some countries will fall into deflationary depressions while others will experience roaring inflation.

Massive failures will ripple across industries and vast amounts of wealth will be transferred from the hands of the many into the few well-positioned in advance.

Ireland is watching the Greek debt outcome, eyeing a better deal with the troika as debtors barricade their homes to stop Irish banks serving expulsion writs/orders.

The world economic crisis is now hurting everyone. Even the ‘very rich’ are increasingly depositing their ‘ill gotten’ gains in Swiss banks for safety. HSBC client lists now show that drug lords and arms dealers banked on Swiss secrecy. And all we can talk about here is our elite ‘petty’ thieves…

Swiss National Bank head, Thomas Jordan said last weekend, “We are prepared to intervene in foreign exchange markets and have room to lower already negative interest rates, if necessary, to weaken the Swiss franc.”

If rates go negative, the US Treasury Department (or any other nation’s Treasury) will likely be called upon to print a lot more currency as individuals and small businesses substitute cash for at least some of their bank balances.

When asked about the prospect of using capital controls to weaken the franc, Jordan said, “It is not a measure that is at the forefront at the moment.”

The best way to admit the possibility of capital controls is to not explicitly, and unequivocally reject them.

When your central bank is perceived as a rock of stability in a sea of central banks, whose credibility is crashing on a daily basis (forced to cut rates to zero or negative to offset the still soaring dollar) and where the fear of a Grexit may lead to a dissolution of the Eurozone and the collapse of the Euro, what better way to eliminate capital inflow than to hint at the negative interest option and capital controls.

As Cyprus has “successfully” demonstrated in recent years, the blueprint of capital controls to preserve financial stability works wonders (if only for those outside Cyprus).

Who will impose capital controls first: Greece, where the spectre of wholesale bank insolvency is now raging and where a capital lockout may well be imminent, or Switzerland, which knows that the moment Greece is pushed too far and a Grexit is perceived inevitable, it will be flooded with a tsunami of euros desperate to find a safe haven?

The Cyprus economy has been neutered by the troika – cats are spayed – but economies and ‘dogs’ are not cats.

New Dutch director of Hellenic Bank, Bert Pijls has said that at least 25 per cent of NPLs are able to pay but don’t. He says that the bank has excellently qualified graduate staff, but is inhibited in using their skills.

Cyprus is governed by a ‘neutered’ gerontocracy, which supports Greece unwaveringly, even though Prime Minister, Tsipras is regarded as Moscow’s response to US isolation of Russia. Foreign Secretary, Kassoulides was obliged yesterday to deny ‘bases for Russia’ in Cyprus after President Anastasiades reaffirmed our friendship with Moscow – too many Roubles in Cyprus?

Then why pay up on your NPL if a currency crash followed by hyperinflation is imminent? Fixed asset values will soar!

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