Debt Trumps Democracy Every Time

We will begin in Greece, the birthplace of democracy, a principle the banking elite likes to pay lip service to, before they get serious and ignore it altogether.

Russia is hogging the headlines right now, but a little further south, the Greek people have had enough of austerity and are leaning ‘left’, in the sense of wanting to exit the euro, repudiate their debts and the unrelentingly harsh policies of the ‘troika’ (the IMF, ECB and the European Commission).

Apparently, the Greeks are even thinking about electing a party that doesn’t want to go along the troika. Oh dear, alarm bells must have rang in the halls of power…

The Financial Times reported on Monday:

‘The EU’s top economic official weighed into Greece’s political maelstrom on Monday, lauding the economic reforms of the coalition government and warning the country that not repaying its debts would be “suicidal”.

‘On a two-day trip to Athens on the eve of Wednesday’s high-stakes presidential election, Pierre Moscovici insisted his visit was not intended to signal Brussels’ explicit backing for Prime Minister Antonis Samaras, who is facing an uphill struggle to win the vote and avoid a snap general election…

‘Syriza, the hard-left opposition party that is leading in national polls, has pledged to stop paying installments on Greece’s debt and negotiate new terms with international creditors, including a substantial write-off of eurozone-held debt, if it comes to power.’

The banks will not permit this. If you take money from a bank, you simply have to pay it back. This is absolutely, totally, non-negotiable. Greek debt is in the hands of the banks (and the ECB, held as collateral for other loans), and the banks want to get paid.

Britain is still paying off its war debts as far back as 1819. Most other European nations are in a similar position. When the Berlin Wall fell, the very first thing that happened was an insistence from the West that Moscow honour it debts from pre 1917 that the communists reneged on.

Taxpayers, not the banks, take the losses in our current system. That’s why over in the UK, British Chancellor George Osbourne is trying to put together a plan to sell the 25% stake in Lloyds Banking Group the government still holds. They spent £21 billion pounds of public money to bail it out in 2008.

Perhaps Osbourne could try selling to some of the Russian billionaires looking for a place to park their money. With their home economy falling apart and the Russian currency collapsing, the amount of buyers with cash in hand trying to escape the rouble has just gone up.

The Australian Financial Review reports both London and Moscow based Russians are shopping for London real estate around the £20 million mark, and ‘there had also been a significant rise in the number of Russians looking to buy investment properties.’ This is similar to the capital pouring out of China into Australia, Canada and the US.

The panic in Russia has also caused the Swiss franc to jump higher on ‘haven’ buying. That caused the currency to breach 1.20 a euro, a level unacceptable to the Swiss National Bank (SNB).

As a result, in January next year, the Swiss central bank will introduce negative interest rates on deposits above a certain threshold. That means depositors are paying for the privilege of holding cash in any Swiss bank.

The New York Times quotes the head of the SNB as saying, ‘The introduction of negative interest rates makes it less attractive to hold Swiss franc investments, and thereby supports the minimum exchange rate.’

Cash is running out of places to find a welcome home. Having said that, an important point needs to be made here. There is no shortage of cash in the world. Listed corporations have the most cash on their balance sheets ever recorded. According to Moody’s this week, for example, European companies are now sitting on more than US$1 trillion.

That’s doesn’t even include the massive Chinese savings rates. Indeed, today’s discussion relates to what we wrote in Cycles, Trends and Forecasts in late November. Here’s a glimpse:

‘The Chinese savings rate is fuelling a current global savings total — some say a ‘glut’ — of more than US$6 trillion in 2014. This is helping to drive bond rates higher and the yield on those bonds lower.

‘This might be a world first. So much money trying to find the ‘safe haven’ of government bonds has simply never happened before. The risk? Could ‘normal’ interest rates actually go negative? If the huge demand for bonds continues, interest rates could stay at low levels for this entire real estate cycle.’

As we said at the time, over time this implies the potential for huge increases in asset prices. Stay tuned for more on this later today…


Callum Newman,
for Markets and Money

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Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.

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