From Grant Williams, author of Things That Make You Go Hmmm
Despite the attempts of politicians to keep a lid on speculation about a ‘Grexit’ in the forlorn hope that if they don’t talk about it, nobody will worry, there have been a staggering amount of column inches devoted this week to various roadmaps for such an event. The problem, however, is that, though many of the smartest minds can offer reasoned speculation, nobody knows exactly what this will look like. What we DO know is that the first stage of it has begun in the shape of good old-fashioned bank runs:
(WSJ): Bank runs across Europe are a growing fear. In Greece it appears to be the real thing. Depositors pulled 700 million euros out of banks on Monday, and Reuters reports the pace was basically the same Tuesday and Wednesday…
… It’s a very bad time to even breathe the words “bank run” anywhere in Europe.
Shares of Bankia, Spain’s fourth-largest bank and as of last week a ward of the state, were down as much as 29% today after the Spanish paper El Mundo reported that in the past week depositors had withdrawn 1 billion euros.
The report was quickly denied by the Spanish government, but the bank itself had no comment.
Now, whilst the smart money left Greek (and to an extent, Spanish) banks a long time ago, that is always a stealth process – it’s only at the end when the disconnected and disinterested in society finally wake up that the real panic starts and, when that happens, things tend to take on a life of their own and have far-reaching consequences.
As things stand, the waves of reality are finally crashing upon the shores of Europe’s own Fantasy Island and we are nearing the endgame.
As I have said repeatedly over the past year or so in these pages, it is only a matter of time before Greece is forced to leave the EU and abandon the euro in favour of a return to the Drachma. The rationale of trying so desperately to keep the Greeks inside the construct was flawed from the beginning as political desire was allowed to fog the simple mathematics of debt and a rigid belief that markets could be bent to the will of politicians subsumed the reality that those markets care not for words, but only for numbers— numbers which have been growing ever more frightening by the day.
The only options now left for Europe are either for the ECB to assume the debts of Greece (and, once that were done, most likely Portugal, Ireland, Italy, Spain and, one day, possibly even France), guarantee them and print the trillions of euros necessary to underwrite them or, should that prove unpalatable to the German electorate elected heads of the continent, allow Greece to leave and risk the contagion that such a precedent would set—contagion which would mean the printing of trillions of euros needed in order to compensate for the massive imbalances in the Target2 payment system and stop the entire European banking system from imploding.
Either way, somebody, somewhere is going to have to come up with trillions of euros and ultimately it won’t matter what the German electorate might think about it as they don’t go to the polls until 2013.
To that end, this week, the preparations began in earnest:
(FT): Wolfgang Schäuble, German finance minister, has given vital political cover to the Bundesbank, speaking out in support of the idea that Germany could tolerate a rate of inflation above the eurozone average.
Making a rare exception to the rule that Berlin does not comment on central bank policy, Mr Schäuble declared that price rises “in a corridor between 2 and 3 per cent” would be “tolerable” in Germany – slightly above the European Central Bank’s target of keeping average inflation across the eurozone at close to but below 2 per cent.
The oft-repeated opinion that Germans are fixated by Weimar-era history will surely be tested and, I suspect, found to be slightly misguided. Yes, the hyperinflation that swept across Germany in the late 1920s was a seminal event in the country’s history and yes, it led to horrors from which Germany is still recovering almost a century later, but in practical terms, despite the obvious reservations, it will be far easier to sell the German public on “slightly elevated inflation for a short period of time” (or “leicht erhöhter Inflation für eine kurze Zeit”—a translation you can write down because I have no doubt you’ll be hearing it very often, very soon) than the press would have us believe because Germans, like Americans, Brits and everybody else are, in the main, ignorant of the dire situation facing the global economy—and besides, 3-4% inflation, for a modest period, of course, is hardly going to be difficult to get back under control now, is it? Just ask Mervyn King.
Whilst fears of deflation continue to paralyze investors still traumatized from 2008, what we have in actuality is what Bill Murphy so eloquently calls ‘deflation in everything we own and inflation in everything we use’, a condition that will prove disastrous as politicians continue to push the same buttons harder in expectations of a different result.
Somebody, somewhere is going to have to print a LOT of money to try and make this all go away and that is the joke in all this.
For the logical follow up to who, what, and how much will have to be printed, read the previously posted note by Jefferies’ David Zervos.
As for the full note by Grant Williams, which has much more in it, it can be found below (pdf):
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