The Eurozone and Greece: Is the Crisis over?

15/01/2013 by

A journalist from Chile’s El Mercurio just put two questions to me:  (1) Is the Eurozone safe? and (2) Is Greece stabilising? Here are my answers:

1)  Are the threats over the Eurozone’s survival over?

Certainly not. The serious design faults of the Eurozone remain intact. The promised decoupling of the banking crisis from the debt crisis has been ditched. All moves toward debt mutualisation or for a central Eurozone budget have been suspended. The ECB’s bond purchasing program (OMT) remains in the sphere of the imagination, a purely phantom program whose announcement-effect cannot continue forever. Meanwhile, recession in the Eurozone’s centre and depression in the periphery is eating away at the heart of Europe’s social economy.

2)  Is the economic situation in Greece getting better (considering that the risk premium is lower than few months ago and the local stock market is going up)?

Greece has been given a reprieve, in the sense that it has been told that all discussion of being thrown out of the Eurozone is over – at least for now. Thus, the panic caused by the ‘conversion’ risk (i.e. assets being redenominated in drachmas) has passed and, thus, the stock exchange has moved upward. However, the falling yields of the Greek bonds mean absolutely nothing for two reasons: First, after the recent debt buyback, Greek banks hold no GGBs and, therefore, the GGBs’ increased value does not help the Greek banking sector in the slightest. Secondly, the Greek state is not issuing new bonds, which means that the Greek state cannot benefit from the falling yields. The only beneficiaries are the hedge funds that purchased the 35 billions of GGBs that remain in play and are trading them with each other for speculative reasons. Meanwhile, Greece’s social economy is continuing to collapse, with a defunct banking sector ensuring a dearth of credit even for profitable firms, unemployment reaching world record levels, and aggregate demand that is continuing to shrink. In brief, the stabilisation of Greece’s financial markets is in sharp contrast to the continuing tailspin of its social economy.

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