Banks go bankrupt, that’s why there is a word for such things. But most of the banking and financial world won’t hear of it. If you cannot repay your debts, you can keep restructuring your debt, but this is only prolonging the inevitable. Default will come eventually, and you will be required to give away your assets to your creditors. Like a high stakes card game, each double or quits builds the collateral on the table until they have taken your watch, your car, your house and even the clothes on your back.
Man of the moment Alex Tsipras knows that Greece, despite looking like the European lame duck, is actually standing in a very strong position. He should be exercising his power, and fortunately for Greece, he is. Meanwhile the Germans and the French want Greece to accept more debt, money which incidentally would go straight back its creditors; Germany and France. They are bailing out their own creditors, and trying to lump Greece with the bill. I can see Tsipras’s reluctance to sign up to more ‘bailouts’.
The reason Greece is in a strong position, is because the last thing an economically weak euro zone needs is a country like Greece, laden with unplayable debts, to default and start in a short period of time to become economically prosperous again, in charge of its own currency. This would spell the beginning of the end of the euro and the ECB. When one individual stands up to the classroom bully, the illusion of power is shattered, and others feel bold enough to do the same. If Greece makes a go of it outside the euro, how many other fringe countries would follow suit?
The snap referendum is a good move, and will give the demos (people) the opportunity to have their say about which way Greece goes. If they vote for a new start, they must acknowledge the short term pain ahead, but a brighter future. Bust clears away the debt wreckage and allows new growth.
In the modern world of socially cushioning governments, and economically cushioning central banks, it seems that nobody wants to let nature take its course. People cannot be allowed to feel any kind of pain. But when an organisation or household over leverages beyond their ability to pay, nature must be allowed to take its course. Otherwise the healthy individuals suffer at their expense (as we have seen ZIRP erode savers’ cash).
My big question for the UK government is what they will do when the UK banks fail. We need a contingency plan in place where funds are transferred to a national bank account, and the bankrupt institutions are allowed to fold. No bail out. Bankruptcy. A new beginning. Where is this contingency plan? Never mind ring fencing banks, we need a national bank which can accept deposits from bankrupt banks to allow them to fail. If anyone out there has the ear of the chancellor of the exchequer, it may be worth asking him what his plans are. Any chancellor should be asking this question of their own system, as Greece is just the tip of the debt iceberg. A lack if inevitable contingency plans brings about panic, which can cause trouble.
Since QE commenced in 2009 we have been living in an economic la-la land. Nothing is real anymore. Capital has no value, and the income gap between the normal economy, and those who have access to the money in banks and financial institution for high stakes gambling, grows ever wider. Statistics used by the grand wizards of the high church of fiat currency are all but meaningless. Never fear, the smoke eventually clears. Things are about to become a whole lot more real.