Wednesday, February 25, 2015

CNBC: Why Greece Will Never Repay its Debt

CNBC runs this article which mentions the elephant in the room. Not only the Greek room, but probably many other rooms in the global financial house. This is something we have noted here on the blog a few times. The world's debt is simply too large now to ever be paid off. This includes the US debt as well. Below some quotes from this article and then a few comments.


"European officials should accept that Greece may never repay its $366 billion debt, analysts told CNBC, even if the troubled economy secures a bailout extension."

"Greek debt is not repayable in this life, Kingsley Jones, founder and CIO of Jevons Global, told CNBC on Monday: "We have to be realistic here. Greek debt is now 175 percent of gross domestic product (GDP); it's higher than it was when this whole business first started."

"Just look at Japan. It has government debt rapidly approaching 300 percent of GDP. One day, that debt pile simply implodes. It is not ever going to be repaid, nor will the Greek debt. There is no use standing on the high moral ground," Jones said."
. . . . 

"The terms of the current agreement pretty much require Greece to attempt to run a primary budget surplus over 4 percent for well over a decade...No country with an unhealthy economy has ever managed to do that. So, we think that the current terms that are required of Greece are frankly pretty unrealistic," Jones added."

"While Tsipras is no longer demanding a haircut given his limited bargaining power, experts say European creditors must realize there's no other solution if they want Greece to remain in the euro zone given the country's weak finances."

"What the Eurogroup should accept is that Greece is insolvent and needs a material haircut. They should have done that in 2010, but they chose to extend Greece more credit and push out the problem," said Nicholas Ferres, investment director of global asset allocation at Eastspring Investments."    . . . . . .
My added comments:

Every now and then we get a refreshing dose of honesty like this article. It points out the obvious fact that no matter what happens with this new agreement between Greece and the EU, the overhanging debt problem never goes away. In fact, the article notes that the Greek debt to GDP ratio is now HIGHER than when the whole bailout program started. Let that sink in. After years of living under this debt pressure and harsh living conditions imposed by the creditors, the debt ratio is now worse off than it started out.

It is kind of ironic that news reports quote German officials and other EU officials as saying that Greece finally adjusted to "reality." Meanwhile, they completely ignore the real reality. No matter what they do to try and force Greece to pay off the debt, it is never going to happen because the debt is already too large. The article points out Greece would have to run a 4 percent budget surplus for over a decade just to meet the terms of the current agreement (which still do not pay off the debt, they just reduce the debt to GDP ratio to 110 percent). Do you seriously think the people in Greece are going to accept a future like that?

This article also points out Japan is over 300 per cent debt to GDP and its debt is never going to be repaid. The US is in just as bad of shape if you account for all the unfunded future liabilities the US is obligated for (over 100 trillion dollars). Again, it is kind of ironic for some in the US to talk about Greece refusing to deal with reality. We talked about that earlier in this blog post.

So let's talk reality. Our family has been lucky enough to go to Disney World in years past. It's great fun to live in a fantasy world for a little while. But at some point you run out of money and it's time to go back to the real world. Because central banks have been able to create tens of trillions of dollars globally without anyone having to work for them, they have managed to create a Disney World financial system. It's getting harder and harder to keep the dream going because the debts are piling up so high. Their ability to just create new money (debt) to keep it all going is under  increasing stress. 

No one knows how much longer the dream world can last. It may last for several more years. But all it will take to send us back to the real world very quickly is one large sovereign debt failure somewhere in the world. Even Greece could be big enough if it defaulted because it is unknown how many derivatives are out in the system tied to the Greek debt. It is simply an unknown risk that sits out in the system all the time and no one can predict when it might surface. The derivatives tied to sovereign debt and interest rates are the real reason why there is such desparation to avoid admitting the reality that the debts cannot be paid

A new monetary system will have to be ready to step in to replace the current one before an admission like that can be made. Progress towards that continues, but could go on for some time before the change takes place. A sudden crisis could change things, but so far that has been avoided. 

All of this is why this blog got started in the first place (and why it will continue). Everyone knows (including Alan Greenspan) that at some point the present monetary system is not going to be able to sustain all this debt. All the debt everywhere in the world is much bigger now than it was when we had the 2008 financial crisis. Nothing at all has been solved regarding debt. The hope is that a crisis can be avoided (delayed) by simply continuing to extend all this debt out far enough that the interest payments can keep being made. But everyone knows it can't stay this way forever. Something has to give at some point in the future. But no one wants to discuss this elephant in the room yet.

We will just continue to cover it all here as best we can for however long it takes to resolve things. We still continue to believe that the eventual resolution will involve major change in the monetary system. Whether that change happens in 2015 or by 2025, we intend to follow it here.

Update from Reuters: Greece will find it hard to pay the IMF loan coming due

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