The new ruins of Greece

ImageEuropean Central Bank Executive Board member Lorenzo Bini Smaghi confused Greece’s problem with a liquidity crisis when he rejected any real solutions. Greece “must convince its citizens to pay taxes” and “retire at age 65 as everyone else does in the Western world…. The ECB is helping these countries with liquidity.” Bini Smaghi said.

The problem is that Greece is insolvent, not illiquid!

What’s the difference? Pretend Greece is a bank. A bank with a liquidity problem is a bank with plenty of performing assets and a positive asset to liabilities ratio but has too few liquid assets (ie cash) on hand to handle daily operations. An insolvent bank is a bank that owes more than all its assets.

Can a nation be insolvent? That would be difficult to accomplish because it would have to owe more to external creditors than all its domestic properties. But if ever there were national government that were insolvent, Greece is certainly there.

But Greece has an infinite income, in the long run, via taxing its citizens and their generations to follow – so how could it ever be insolvent? You could say the same thing about an insolvent bank. Given enough time to pay off liabilities, no bank could ever be insolvent because if you gave the bank 100 years to pay off its debts, that would also allow its borrowers 100 years to pay back their loans, too! Similarly, a human being would never technically be insolvent, either, if you allow the solvency concept to include that human being and all their children!

So it doesn’t make any sense to call Greece’s problems a liquidity problem – especially a central banker… If Greece has to pay back its outstanding debt at anything like its real value (ie Euro inflation < 2%) and at anything approaching a normal interest rate, it won’t merely take decades – it will never happen – because no one will choose to live there (as a tax-paying citizen, at least) any longer.

You can imagine the Greek wasteland where anyone that stays must pay virtually all their income to pay down a debt no one alive can remember accruing. Why would anyone stay? Or, why would anyone honestly report their income or assets?

The situation is untenable unless the rest of the Euro zone decides to take on a large portion of the Greek debt and/or embrace higher inflation. But with bankers like these, who needs conquerors?

Bini Smaghi also said he sees “upward inflation risks” and the ECB is continuing to monitor the price situation…. The ECB raised its benchmark for the first time in almost three years in April to stem rising inflationary pressures.


About stormculture

In pursuit of reality.
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