Raining Blood - Greece, Mercs, Merkel and the EFSF

Raining blood

From a lacerated sky

Bleeding its horror

Feeding my structure

Now I shall reign in blood!

- Raining Blood by Slayer - 

"One more referendum and I will fuck him up."

Today something vaguely frightening/flattering happened: the inimitable, esteemed and often unflappable blogger and keen observer to the human condition RogerofSicily dared me to explain or - even worse - make sense of the Kabuki theater that is the European effort to bail out Greece. It’s not exactly like he’s asking me to unify quantum physics and Einstein’s view of the world but it still made me kind of gulp with trepidation. But then again, this is Rock’n’RollFinance! So there, here we go: Challenge accepted! ...Don’t blame me if this gets boring half way through!

Rather than go straight to the “why bother?” part of the bail-out question, it might be worthwhile to start with the “how did we end up in this mess?” end. To brighten things up I’ll be channeling a bit of Teutonic working class heroism in an effort to bring us closer to comprehension. I’ll be drawing heavily on the efforts of Superfritz. Hope you don’t mind, but do consider yourself referenced!

So let’s step away from the global super-macro perspective and have a look at the German micro perspective to understand why this is (politically) not exactly straightforward. The story goes as follows:

German worker goes to work and builds a great Mercedes.

German worker gets paid 2,500 Euros, pays 1,000 Euros taxes/social security and saves 250 Euros on his savings account at stupid German bank, because he wants to buy a great Mercedes sometime in the future.

Stupid German bank takes the 250 Euros and buys some funny paper from a stupid US bank for 100 Euros and some more funny papers from US government for 100 Euros, converted into 100 Dollars. For good measure it also buys some 50 Euros of funny paper from the Greek government.

The stupid US bank is happy. It found someone even more stupid to buy its mortgage risks.

US government is happy. It has a handful of wars to run and taxes to break. Wars and tax breaks are expensive.

Greek government is happy. It has a legion of civil service unions to buy off and needs to keep up with the neighbours in the “buying-Bundeswehr-surplus-tanks” competition. Doesn’t have to bother with tax collection either now!

Stupid US bank pays huge bonus to banker who sold funny paper. Stupid German bank pays huge bonus to banker who bought funny paper.

Stupid US bank takes the 100 Euros and grants another mortgage to US IT consultant.

US IT consultant takes out mortgage, uses the money (incl. the 100 Euros saved by the German worker) to buy himself a great Mercedes for 100,000 Euros. Why wait and save to buy it? That's so 1950s! US IT consultant is happy. His house has turned him into millionaire. He drives a great Mercedes.

Mercedes is happy. It now has money to pay 2,500 Euro to the German worker, 10,000 to the German government and 87,500 Euros to its shareholders in Kuwait.

Kuwait shareholders are happy.

German government takes 10,000 Euros, pays 5,000 to pensioners and unemployed, 1,000 to Eastern Germany, 3,000 for "other expenses" and 1,000 Euros for non-existent olive trees in Greece and great Spanish Autobahns.

Greek farmer is happy. Considers buying a Mercedes. Spanish construction worker is happy. Considers buying a Mercedes. German worker doesn't really understand what's going on. Goes to work to build Mercedes.

Scene at the Eurozone bail-out summit

Restart at top. Repeat 10 times. 

= Trade imbalance.

Turns out, US IT consultants house is worth half his mortgage. US IT consultant gives house and car keys back to bank. Pity. But what a great time he had with his great Mercedes!

Stupid US bank goes bankrupt.

Stupid German bank reads the funny paper it bought from stupid US bank for the first time (500 pages in English, hello?) and finds out it's bankrupt, too.

German government uses taxes of German worker to bail out stupid German bank's shareholders. German worker's kids Kindergarten is not refurbished. No money left. But German worker still has savings of 250 Euros at state owned stupid German bank. Phew!

Stupid US bank is bailed out by US state, using the 100 Euros saved by German worker given to it by stupid German bank.

US government is broke. Invents new term for inflating debt away. "Quantitative easing”, sounds funny. German worker doesn't get it. 

US government returns 100 USD to stupid German bank. Bank converts 100 USD into 10 EUR. Ooops, 90 Euros gone. Stupid German bank is bankrupt again.

German government uses German workers taxes to bail out stupid German bank again. German worker's street is not repaired. No money left. But German worker still has savings of 250 Euros at state owned stupid German bank. Phew!

German bank now no longer keen on buying funny Greek government paper. Stops that non-sense. 

Greek government figures out it is broke too. Didn’t bother with tax collection. Why bother when stupid German bank gives you money? 

Enter ECB.

ECB council decides that sticking to rules is for stupid Germans. Easier without rules. Much more fun. Cranky Germans don't get the joke. Typical. ECB buys lots of Italian and Greek debt at knock-down price.

THE FUTURE:

ECB decides that 2% inflation is too ambitious. The rules are only paper, after all. ECB decides 10% inflation is better for majority of countries in ECB council. Cranky German still doesn't get the joke. Ah, these Germans...

German worker goes to bank. Wants to buy Mercedes with money saved. Bank gives him 250 EUR back. Plus interest. German worker is happy.

German worker goes to buy Mercedes. Turns out, Mercedes now costs 123,890,571,238,457 Euros, instead of 100,000 Euros. German worker uses savings to buy himself a glass of Schnaps instead. German worker is a bit cranky. Now understands what "Quantitative Easing" means. Doesn't get the joke. Lack of humour, presumably.

US banker: got huge bonus
German banker: got huge bonus
US IT Consultant: got Mercedes and huge house (for a while)
Mercedes shareholder: got dividend
Greek farmer: got subsidies
Spanish construction worker: got subsidies
Bond holders: got bailed out.
German worker: got bill.

German worker feels so 1950s. Needs to catch up with rest of world. Should have borrowed money years ago to buy Mercedes. Honest work and sticking to rules makes no sense. Quantitative Easing makes alles kaputt. 

Greek and British papers tell German workers it's all his fault because his granddad invaded Poland.

Merkel after the post summit press-conference

Not sure this explains what's going on but then again I'm not sure any of this _really_ makes sense.

I'm not even going to try explain how the EFSF is supposed to work in all this. I'll need to drink a lot more to try that.