Greece vs Germany, last days of this match!

Posted: February 18, 2015 in Uncategorized

Well we are on the final showdown for this round on Friday.

This is important not because of the bailout, but because there is a current run on Greeks Banks (Euro 11 billion were withdrawn in December and a staggering  Euro 56 billion in January and I do not have the numbers from February.

The banks survive only due an Emergency facility called ELA – but as the Euro is printed in Europe….the ELA has almost finished its reserves.

Probably (and that is what the market hope and why everything is so eerily calm) there will be an extension (say 6 months). The only issue the agreement in the wording of the communications as  both Merkel and Tsipras have to look like winners in front of their on electorate. So clauses and details are very important.

The real issue is that the six month delay, buys just time as it is a situation that is not solvable.

This is a great article from Fidelity Investments, a large US investment firm – which definitely has more time and resource than me and shares my ideas.

What do you think Alexis Tsipras, the prime minister heading Greece’s new left-wing, anti-austerity but pro-euro government, did immediately after being sworn in as leader of the ruined country? Why, antagonise as many Germans as he could, of course.

On January 26, the day after elections allowed Tsipras’ left-wing Syriza party to form a ruling coalition with the fringe right-wing, anti-austerity Independent Greeks party, the 40-year-old Tsipras sped to the National Resistance Memorial at the Kaisariani rifle range memorial in Athens. That’s where in 1944 the Nazis executed about 200 Greek partisans in retaliation for the killing of the German general Franz Krech by resistance fighters. In his customary tie-less suit, Tsipras laid red roses on the memorial stone as veterans watched. In case anyone brushed aside Tsipras’ symbolic act, a spokesman for Syriza said Tsipras’ homage displays “the desire for Greeks for freedom, for liberty from German occupation”.[1]

German oppression today, according to Greeks, comes in the form of the bailout-enforced austerity that has destroyed their economy (nearly a quarter of GDP has disappeared since 2007) and created near-30% unemployment without curtailing government debt.[2] Tsipras’ deed, among other actions, was designed to show how serious he is about pursuing his mandate to overturn austerity and to default on debt repayments. The pity is that the leaders of the EU, Germany and other eurozone countries are determined not to cave into Greece. They would like to help Greece more, no doubt, but national politics won’t let them.

Investors be warned: a showdown looms over Greek public finances that could result in a Greek exit from the euro and a Lehman-style shock for the world. While all the bickering is going on, nervous Greeks could propel the fate of Greece out of control of the leaders of either side and a euro exit would become a near-certainty. Bear in mind that there is one outcome that Europe’s elite will never admit they fear in the showdown with Greece and it’s not a Grexit per se.

To be sure, European leaders are good at fudges that soothe bond investors – there’s no better one that Mario Draghi’s bluff to do whatever it takes to save the euro, as though a pretend central bank can control voters and the governments they elect. A default that’s called anything but a default would be the standard European incremental response to the EU standoff with Greece. This, however, would only be a short-term solution, perhaps only buying a few months before a bigger confrontation. Maybe the approach of a dénouement could prompt the statesmanship European politicians need to display if they are to complete their half-hearted monetary union. But the implementation in January of quantitative easing by the European Central Bank – whereby national central banks buy 80% of the bonds and only purchase their government’s debt to ensure no inadvertent debt sharing – only showed how politics in Europe is shaping as every country for itself rather than a shift towards closer union. The nationalistic politics forcing brinkmanship over Greece denotes a more dangerous phase in the five-year-old eurozone debt crisis. As UK Chancellor George Osborne said: “It is clear the stand-off between Greece and the eurozone is the greatest risk to the global economy.”[3]


In 1953, representatives from 20 creditor countries met in London and agreed to write off about 50% of the debt Germany had incurred between the two world wars. Greece, despite holding grudges from three years of Nazi (and Italian) rule from 1941 to 1944, was a signatory to the London Debt Agreement. That’s the barbed background behind Syriza’s call for German Chancellor Angela Merkel to sanction a 50% write-off of Greece’s public debt.

Greece sure needs some debt relief for Athens’ debt stands at least 170% of GDP in gross terms (and 165% in net terms) even after the biggest default in history. In 2012, private creditors “voluntarily” accepted writedowns of more than 100 billion euros (A$148 billion) on Greek debt. Their acquiescence avoided triggering the credit-default swaps tied to Greek debt, fireworks that would have ricocheted around the global financial system.

The problem for Greece is that it’s hard for any country to reduce its debt ratios once debt exceeds GDP, even when interest rates are low, a government is running a budget surplus and an economy is still expanding. IMF projections for Greek achieving sustainable finances are based on Athens realising a budget surplus before interest payments equal to 4% of output even though such austerity shrinks an economy.[4] So a default by Athens – and any change to loan conditions is a default – is inevitable. It’s whether one is acceptable or not to the EU and eurozone governments. The problem is that Greece’s debts are now largely held by public bodies; an estimated 80% is held by the European Central Bank and other eurozone governments. Thus taxpayers throughout Europe would incur losses from a Greek default.

Berlin and other creditor nations won’t easily allow Syriza to trump the EU in these negotiations for three reasons. The first is that Germans are losing faith in Merkel’s assurances that their wealth won’t be blown on lazy southerners. Their confidence has been undermined: firstly, by the ECB agreeing to quantitative easing in defiance of the Bundesbank and Germany’s business establishment; and, secondly, by Syriza’s victory. Even though she is under international pressure to do so, Merkel can’t easily succumb to another defeat so soon after these setbacks for that would inflate the popularity of the new anti-euro Alternative for Germany party that is taking votes from her coalition to her right. The second reason creditor nations will stay stubborn is that if Greece were to be successful in negotiating a default, other indebted countries would demand the same kindness, especially as Italy, Spain and Portugal would lose taxpayer money on a Greek default. Lastly, a Greek default would boost support for the anti-euro and anti-EU populist parties that are already thriving in indebted countries such as France, Italy and Spain by promising similar solutions.

If Berlin and Brussels won’t budge during negotiations, then Athens must. The problem is that even a disguised default for Greece in the form of extended and less-onerous repayment terms may not pacify Greek voters and leave Syriza vulnerable to charges that it has broken elections promises within months of governing.

The EU and creditor countries, so far, insist that Athens stick to legal agreements with previous Greek governments that set a timetable for repayments and for reforms to be enacted in return for about 240 billion euros’ worth of loans from the ECB, the EU and the IMF. If Tsipras’ coalition misses payments or violates bailout conditions by fulfilling his election promises to halt privatisations, boost the minimum wage and rehire public servants, the EU could snap support for Greece. A reluctant Greek exit from the euro would probably result.

Hardline EU policymakers are acting in a way that presumes that Europe’s rescue fund and the ECB’s quantitative easing would protect the other 18 euro users from any jolts from Greek somehow readopting the drachma. Thus a game of bluff and brinkmanship is commencing in the Balkans that could spin out of control like the crisis in the Balkans did 101 years ago.

The drachma twist

One of Greece’s negotiating strength in default talks is that the government is now operating a budget surplus before interest payments (from a deficit of 19% of GDP in 2009) and the country is running a current-account surplus, two favourable preconditions for non-payment. Tsipras’ coalition appears to be betting that thunderbolts from Greece ditching the euro, the country’s pivotal geopolitical position on the edge of Europe and Germany’s long-term export benefit of keeping alive the euro (for any new Deutsche-mark would soar) will lead to an EU backdown during talks for new loans that Athens needs to meet repayments scheduled in coming weeks and then around mid-year.

The problem for the EU and Athens as they squabble, bluff and threaten each other is that a bank run appears underway in Greece that could prove fatal for Greek membership of the euro. It is likely to accelerate for what rational Greek wouldn’t try and send his or her euros to other European banks or stash them at home while there is doubt about whether their euros might be switched into less-valuable drachmas?

It is estimated that withdrawals from Greek banks by Greek residents ranged from between 10 billion to 20 billion euros in January, in a banking system that held 160 billion euros at the end of 2014.[5] All Greek banks can do in response is apply for emergency lending assistance from the central Bank of Greece, which can only meet these demands with ECB approval. It is estimated that Greek bank requests for such aid increased to 57 billion euros in January from 11 billion euros in December.[6] The problem is that the ECB can only agree to this aid if Athens sticks to its bailout conditions.

Any reluctance on the part of the ECB to help Greek banks – in essence, a mammoth political decision for the ECB to take – would only intensify the run on Greek banks. Without the ECB’s sanction for emergency aid, Athens would probably be forced to enact capital controls, nationalise its banks and print its own currency to keep its banking system alive.

It’s likely that the Brussels and Berlin, seeing that their austerity policies could trigger more political havoc across Europe, will yield to Greece via some fudge that appears to, but doesn’t, protect EU taxpayers – voters are more sensitive to losses from defaults than to lower or even imaginary returns from repayments endlessly extended. What, then, would the future hold for Greece, even if austerity was eased? Not much, according to many, for the Greek economy is uncompetitive and its banking system is unstable, being full of bad debts and vulnerable to self-perpetuating runs. While many warn that its birth would be catastrophic, a new currency would help solve both problems. A lower exchange rate would restore competitiveness and the Bank of Greece would be able to act as lender of last resort to the banking system (as well as run an independent monetary policy). Roger Bootle, the executive chairman of the UK-based Capital Economics, says it’s possible to paint an outcome where, under the new drachma, an export-led economic recovery could help mend government finances. “Even if there had to be a short-term hit to living standards, if the devaluation were well managed, after a couple of years people should be demonstrably better off,” he said.[7]

And that would pose a fresh danger to the euro. A thriving drachma-using Greece could spell the end of the euro for, oh so quickly, other indebted governments in charge of uncompetitive and deflating economies would take this path – especially as the next countries to ditch the euro would get the greatest competitive boost. If national leaders resisted, voters would soon dispatch them for anti-euro parties that are prepared to antagonise Germany and Europe’s political elite any which way they can.


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