Monday, June 18, 2012



These words used in 1980 by Margaret Thatcher, to demonstrate her resolve, appear equally true today of Angela Merkel, the only real man in the G 20 meetings. Whether she is maintaining her position due to conviction, or political and legal necessity, we will probably only learn in the history books.

However refusing to renegotiate the terms of the Greek bail out, apart perhaps in respect to the timing, is a very bold position and one which will accord her no allies whatsoever. This is either a very powerful display of brinkmanship, or a demonstration that she is determined that Greece and other countries either submit, or leave the Euro zone.

The other prodigal children of the Euro zone know that her giving in is their only hope, and the likes of Rajoy and Tremonti are certainly prepared to play very dirty games to achieve their objectives. They have absolutely nothing to lose as they are fully aware that their countries and their banks are bankrupt. The ECB is presently playing low profile business as usual, Draghi in particular is playing the role of Pontius Pilate,  although they also all know full well the extreme gravity of the situation.

The steps that would ensue a Greek default and imminent departure from the Euro, followed by drastic currency devaluation, would provoke a huge outflow of funds from Greece. Contagion would spread rapidly to other Club Med countries, who would move move vast funds to solid core countries banks, to avoid the same fate. This has  already happened and citizens should in a “free market” be able to chose the safest banks to hold their money.

The banks of Greece, Italy, and Spain in this scenario would then rush to request ECB assistance in replacing lost liquidity. The ECB could at it’s  discretion simply refuse to fund a central bank whose sovereign debt had just, or was about to default. The ECB could simply say they were being prudent and were just following the rules, something rather new for them. 

This is how to hold Mrs Merkel hostage, and the bankers know it perfectly well. The only question is how far down this road they can go before the process becomes irreversible?

With collapse imminent and thousands of people in the streets, queueing in front of banks, emergency capital controls introduced,  and border crossings blocked, to ensure no-one could leave with their hard earned cash, the trap would be sprung.

If there is one lesson to be learned from the Weimar Republic, it is that whenever politicians have been faced with similar crises in the past, in a fiat currency system, governments have always printed the money to make the problem go away, even if it stores up even bigger problems in the future.

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