Stefan Homburg, a leading German economist believes the bailout of Greece is exactly that wrong thing to do and will exacerbate bankruptcy problems.
Nonetheless Homburg invested a “considerable sum” in Greek bonds on belief in the “boundless stupidity of the German government to pay up”.
Please consider this Der Spiegel Interview with Stefan Homburg.
SPIEGEL: … the voluntary participation of private creditors, which German Chancellor Angela Merkel and French President Nicolas Sarkozy have agreed on, will achieve little or nothing?
Homburg: It was all just a big show which was mainly intended to calm the German public. Merkel wanted mandatory participation, Sarkozy wanted none at all. In effect, Sarkozy has prevailed.
SPIEGEL: But the plumber is not, as they say, too big to fail — his or her bankruptcy wouldn’t cause entire banks to collapse. The European Central Bank has warned of a massive new financial crisis if it comes to the compulsory involvement of private creditors or even a restructuring of Greece’s debt.
Homburg: The alleged risk of contagion is a myth that doesn’t stand up to closer scrutiny. If you share my conviction that all this talk of Greece being too big to fail is simply nonsense, then there is no reason for bailouts …
SPIEGEL: … yes, but only if you’re right.
Homburg: No, it also holds true in the reverse situation. If the bankruptcy of little Greece were actually to trigger a global financial crisis, new bailout programs couldn’t solve the problem: They would actually exacerbate it. If no more states or banks are allowed to go bankrupt because this might precipitate a financial crisis, then we’re finished. Then the problem continuously escalates and leads to a much greater crisis.
SPIEGEL: Europe wants to use the bailouts to buy time. The idea is that during this period the banks can recover and countries like Portugal, Ireland and Spain can get back on an even keel, so the risk of contagion is not so great when the inevitable restructuring takes place in the distant future. That is the strategy.
Homburg: I wouldn’t call it a strategy. First, states bailed out their banks, now states themselves are being bailed out. But there is no next level to fall back on beyond this bailout. The bailout packages have merely exacerbated the crisis. Last year, if we had adhered to the Lisbon Treaty, which prohibits assistance payments, Greece would have restructured its debt, just as Uruguay, Argentina, Russia and other countries have done over the past 15 years …
SPIEGEL: In a monetary union, isn’t there a much greater danger that the crisis will spread from one weak member country to another?
Homburg: No. The contagion spreads in precisely the opposite direction, because many banks and hedge funds benefit from the following business model. Step one: They sell the bonds of the country concerned. Step two: They spread negative rumours about the country. Step three: After bond prices have fallen, they buy them back cheaply. And, finally, they take governments for a ride with this nonsense that a default would have devastating consequences. In a zero-sum game, there are not only losers, like us taxpayers, but also winners.
SPIEGEL: And what is the risk of contagion now?
Homburg: After the Greek bonds have been paid back at full value, the gamblers will turn to the next candidate, such as Portugal. If creditors suffered losses in Greece, however, they would renounce this business model. In this sense, the rescue measures are exacerbating the problem.
SPIEGEL: If there were such a business model, a lot of people would be buying Greek government bonds now.
Homburg: In recent days, I myself have invested a considerable sum in Greek bonds. They will mature in one year’s time and, if all goes well, produce a 25 per cent return on investment. I sleep very soundly at night because I believe in the boundless stupidity of the German government. They will pay up.
SPIEGEL: And what will happen next?
Homburg: Many politicians have also come to the realisation that the path that we are on ultimately leads to national defaults and currency reforms. This process is already irreversible, but nobody wants to say it out loud and go down in history as the one who triggered the explosion. So we leave the bankruptcy to subsequent German governments and, in the meantime, throw good money after bad. Sooner or later, this much is certain, the system will be blown apart by political and economic factors. And, unfortunately, there is a great danger that, when this happens, it is not only the euro that will fall apart, but also the entire EU.
The bailout is certainly the wrong thing to do for the reasons Homburg suggested. However, as much as I generally agree with the notion of “boundless stupidity” of governments, buying Greek debt is not risk free. There will likely be steep haircuts on long-dated debt.
Mike “Mish” Shedlock
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