Greece, not again?

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Virtually everyone now agrees that pushing Greece to pay its private creditors was a bad idea. The required fiscal austerity was simply too great, causing the economy to collapse. The IMF acknowledged the error in a 2013 report on Greece. In a recent staff paper, the fund said that when a crisis threatens to spread, it should seek a collective global solution rather than forcing the distressed economy to bear the entire burden. The IMF’s chief economist, Olivier Blanchard, has warned that more austerity will crush growth. Oddly, the IMF’s proposed way forward for Greece remains unchanged: Borrow more money (this time from the European authorities) to repay one group of creditors (the IMF) and stay focused on austerity. The fund's latest projections assume that the government's budget surplus (other than interest payments) will reach 4.5 percent of GDP, a level of belt-tightening that few governments have ever sustained for any significant period of time.

The IMF's big Greek mistake | Ashoka Mody at Bruegel.org

If Batista’s latest pronouncements are to believed — and for the moment there’s been no official denial from his Washington-based employer — they could represent a complete departure from traditional IMF policy on Greece. While he urged the new Greek authorities to “continue working with the Fund’s technical staff,” he also invited much closer collaboration with the Fund’s “political authorities.” When representatives of the Greek government come to Washington, he said, they should “present their view directly to the executive director of the Fund” and “perhaps even invite executive directors of the fund to visit Greece.”

Is the IMF About to Make Greece an Offer It Can’t Refuse? | Wolf Street

Following Germany's lead, IMF officials have placed their faith in “structural reforms” -- changes in labor and other markets that are supposed to improve the Greek economy's longer-term growth potential. They should know better. The fund's latest World Economic Outlook throws cold water on the notion that such reforms will address the Greek debt problem in a reliable and timely manner. The most valuable measures encourage research and development and help spur high-technology sectors. All this is to the good, but such gains are irrelevant for the next five years. The priority must be to prevent Greece from sinking deeper into a debt-deflation spiral. Unfortunately, some reforms will actually accelerate the spiral by weakening demand.

The IMF's big Greek mistake | Ashoka Mody at Bruegel.org

The International Monetary Fund "torpedoed" a recent attempt by European Commission chief Jean-Claude Juncker to offer Athens a compromise proposal in tortuous debt talks, a German daily reported. Citing a "negotiator" as its source, the Frankfurter Allgemeine Zeitung said there had been "tensions" between the EU Commission and the IMF in recent days as Greece and its creditors race against the clock to come up with a debt deal to avert a catastrophic default by Athens. The compromise that Juncker wanted to present to Greek Prime Minister Alexis Tsipras would have allowed Athens to postpone some 400 million euros in pension cuts in return for making similar savings on military spending, the newspaper said in its Sunday edition. But the IMF was opposed to any such "bartering", the source was quoted as saying in the report.

IMF 'blocked EU compromise proposal' in Greek debt talks — EU - European Union business news and information | eubusiness.com

First, despite the protestations of the Greeks that the demand for primary surpluses of 4 1/2 percent of GDP in the medium-term is extraordinary, until very recently the IMF “demands” on Italy were even more extravagant. And Ireland, also briefly, joined Greece’s elevated ranks in the October 2014 WEO. The point is, however, not that demands on Greece were or are “in line”, but that the entire edifice of IMFproposed macro-policies for the eurozone, as summarized in these numbers for peripheral primary surpluses, was (and is?) all-but-unthinkable.

Guest post: Do IMF-set primary surplus targets for the EZ periphery pass the smell test? | FT Alphaville

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For easy reference, two IMF papers acknowledging mistakes in crisis management:

GREECE EX POST EVALUATION OF EXCEPTIONAL ACCESS UNDER THE 2010 STAND-BY ARRANGEMENT

IMF.pdf

Growth Forecast Errors and Fiscal Multipliers Olivier Blanchard and Daniel Leigh

IMF.pdf

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The IMF's view is in any case complex. It has warned EU officials behind closed doors that it will not continue to take part in Greek loan programmes unless the creditors accept a serious reduction in Greece's public debt burden. While Greece's interest costs are just 2.5pc of GDP at the moment, they will jump to nearer 5pc in 2022 when the current debt deal expires. The country would then be bankrupt again with little to show for a decade of austerity and depression.

Syriza Left demands 'Icelandic' default as Greek defiance stiffens - Telegraph

Deposit outflows from the banks are running near €400m a day and could at any moment turn into a national bank run. This is alarming in one sense, but it has advantages for Syriza hard-liners. The immediate problem is landing in the lap of the European Central Bank, which has had to raise its emergency liquidity support (ELAs) for the Greek banks to €83bn. The ECB is ever further on the hook. While Greek citizens are hiding their money in mattresses or parking it in foreign accounts, the wealth still exists and could be used to replenish new banks in the future. "The more the deposit flight goes on, the easier Grexit will be," said one Syriza official. "It is a trump card," said another.

Syriza Left demands 'Icelandic' default as Greek defiance stiffens - Telegraph

Merkel would like Greece to remain in the euro. Not necessarily at any cost, but she's prepared to pay a high price. Schäuble is not. He is of the opinion that a Greek withdrawal from the euro zone is in Europe's best interests. Which of them is the more intransigent? Merkel, whose popularity serves as the backbone of the EU? Or Schäuble, for whom there is considerable good will among members of parliament, fed up as they are with having to approve one bailout package after another?

Finance Minister Schäuble and Merkel Tussle Over Grexit - SPIEGEL ONLINE

The status of negotiations between Greece and its official creditors – the European Commission, the ECB and the IMF – dominated headlines last week.  At the core of the negotiations is a simple question: How much of an adjustment has to be made by Greece, how much has to be made by its official creditors?

Greece: A Credible Deal Will Require Difficult Decisions By All Sides | iMFdirect - The IMF Blog

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Why insist on pensions? Pensions and wages account for about 75% of primary spending; the other 25% have already been cut to the bone.  Pension expenditures account for over 16% of GDP, and transfers from the budget to the pension system are close to 10% of GDP.  We believe a reduction of pension expenditures of 1% of GDP (out of 16%) is needed, and that it can be done while protecting the poorest pensioners.

Greece: A Credible Deal Will Require Difficult Decisions By All Sides | iMFdirect - The IMF Blog

"While some progress was made, the talks did not succeed as there remains a significant gap between the plans of the Greek authorities and the joint requirements of Commission, ECB and IMF," it said. These amounted to up to €2bn a year in permanent budget savings.

'Last attempt' negotiations over Greek debt fail - RTÉ News

Greek banks saw deposit outflows of about 400 million euros ($449 million) on Monday as the pace of withdrawals picked up from last week after talks with the country's creditors over an aid-for reforms deal broke down on Sunday, bankers said.

Greek banks see deposit outflow of $449 million on Monday: bankers - Yahoo Finance

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Hard though it is to believe sometimes, Alexis Tsipras does want to strike a deal. The increasingly abrasive language used by the Greek prime minister is a front for a politician who still thinks it is possible to negotiate his way out of the sticky situation he finds himself in.

Tsipras does want a deal, as the alternative is unthinkable | World news | The Guardian

With all the drama in the eurozone, there's been no shortage of  Greece-related questions for Wall Street's luminaries. Below is a round-up of what the big investors and banking luminaries have been saying . The takeaway; Wall Street seems pretty sanguine when it comes to Greece -- perhaps surprisingly so.

Here's What the Smartest People on Wall Street Are Saying About Greece - Bloomberg Business

Greece has said it will default on a 1.6 billion euro debt repayment due to the International Monetary Fund on June 30 unless it receives new funds from its creditors by then, in a move that could set off a chain of events that might eventually pitch Athens out of the euro zone.

Factbox: What happens next if Greece defaults on IMF? - Yahoo Finance

Suppose that Tsipras capitulated, and that he was able somehow to stay in power long enough to keep his promises -- or that the successor government was reliably conservative on fiscal policy. Would this be sufficient to put Greek public finances on the path to sustainability? The sustainability of Greek debt, you may recall, is Europe's main purpose in all this. The answer is no, it wouldn't -- and my authority here is the International Monetary Fund, one of Greece's main creditors and partner of the European Commission and European Central Bank in what used to be called the troika. The fund's chief economist, Olivier Blanchard, published an article on Sunday which said that for the new budget targets to achieve sustainability, significant new financing and debt relief would also be needed. But Europe won't discuss debt relief until Greece has put its public finances on a sustainable footing.

Europe Asks the Impossible of Greece - Bloomberg View

Tsipras already said he wouldn’t hesitate to reject the final deal offered by the Eurogroup and now even the central bank in Athens has released a remarkable statement. It says that it’s unthinkable Greece will stay in the European Union if no new agreement can be reached. That’s an obvious conclusion, but it’s surprising to see an official institution of Greece openly talk about a Grexit.

Greek Central Bank: "Greece will leave the European Union" | Zero Hedge

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Conventional wisdom holds that it would be an unmitigated disaster for Greece if it left the euro. This is, after all, why the country has continued to cling to the single currency despite the catastrophic decline in employment and output. But what if those costs have been grossly overstated?

Greece: it can’t get *that* much worse, can it? | FT Alphaville

Greece is, by this measure, the most fiscally responsible, indeed crazily austere, nation in Europe. So why is it in fiscal crisis? Because the economy is deeply depressed. Suppose that there were a way to end this depression. Then Greece’s fiscal problems would melt away, with no need for further cuts. But is there any way to do that? The answer is, not as long as Greece remains in the euro. It can pursue reforms that might make it more competitive, but anyone promising dramatic, quick results has no idea what he is talking about.

Does Greece Need More Austerity? - NYTimes.com

Introducing a currency in parallel to the euro could help Greece repay its external debt and resume economic activity. This second column in a two-part series evaluates the different options and their effects on aggregate demand and fiscal sustainability. The authors propose a tax credit certificates programme, which they argue could generate new spending capacity and avoid the adoption of new austerity measures.

A parallel currency for Greece: Part II | Credit Writedowns

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Prime Minister Alexis Tsipras’s government said there was an effort under way to spur capital flight, with Finance Minister Yanis Varoufakis later accusing the central bank of stoking fears. The scaremongering seeks to undermine the financial system and strengthen the position of the country’s creditors, a Greek government official said in an e-mail to reporters.

Greece Sees Plot to Undermine Economy, Spur Capital Flight - Bloomberg Business

The Greek Left thinks that if the Europeans hold out, the Greek payoff is higher if they too hold out and provoke Grexit. In other words: troika reforms are so bad that Grexit is better. They also think that the Europeans have far more to lose from Grexit than they do. In the event that the Eurogroup ‘sees sense’ and concedes, the Greek Left thinks they still do better by having held out, and not carrying out painful reforms.

Guest post: The Greek standoff is no Prisoner’s dilemma | FT Alphaville

How much has the Greece saga cost European equity investors? Try $897 billion, more than the value of benchmark indexes in Spain, Portugal and Ireland, combined. What had been a record year is in danger of turning sour, with the Stoxx Europe 600 Index going from its biggest quarterly gain since 2009 to the worst month, June, in two years. A third of this year’s rally has been lost as the gauge dropped 7.2 percent from its all-time high on April 15.

Greece Has Already Cost Investors $897 Billion This Year - Bloomberg Business

What that means is that the involvement of European governments has not helped Greece at all. With only IMF support, Greece would have suffered the same degree of austerity that has actually occurred. The additional money provided by the European authorities has been used to pay off Greece’s creditors, first through delaying default in 2010 and 2011, and then by only allowing partial default in 2012. (I’m not sure the two groups see the division that way, but if some of the IMF money was intended to pay off Greece’s creditors, you have to ask why the IMF should be doing that.)

mainly macro: The Eurozone’s cover-up over Greece

The key point is that the European authorities and the IMF were wrong. Contagion happened anyway, and was only brought to an end when the ECB agreed to implement OMT (i.e. to become a sovereign lender of last resort).This was a major error by policymakers - they ‘wasted’ huge amounts of money trying to stop something that happened anyway. If Eurozone governments had needlessly spent money on that scale elsewhere, their electorates would have questioned their competence.

mainly macro: The Eurozone’s cover-up over Greece

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Government members are putting together a plan they hope would achieve budget targets that bailout creditors want, while relying more on eliminating tax breaks and less on pension cuts than the lenders’ own proposal, the officials said. The Greek cabinet is due to discuss the proposal on Sunday morning. It isn’t clear whether the cabinet under Prime Minister Alexis Tsipras will endorse the plan, which was being prepared on the weekend by Deputy Prime Minister Yannis Dragasakis and others who are considered among the more pragmatic members of the leftist Syriza-led government.

The Greek government is scrambling to figure out a proposal its creditors will accept - Business Insider

In another weekend op-ed, this one in the Financial Times, economist Larry Summers wrote that without a deal, Greece might become a failed state — although at least one critic suggested that Summers' argument might be a bit hyperbolic.

The Greek government is scrambling to figure out a proposal its creditors will accept - Business Insider

But perhaps more importantly from a big picture perspective, Greece may have already breached the upper limit of its borrowing base. JPM calculates Greek banks’ eligible collateral at €121 billion (€38 billion in EFSF bonds €8 billion in government securities, and €75 billion in “credit claims”). With Friday’s ELA increase, the country’s total borrowings (that’s OMO plus ELA) amount to some €125 bilion. Why would the ECB allow this? Because it knows the breach will be promptly limited or reversed on Monday, or there will be a deal.

Meanwhile, Greece Is Quietly Printing Billions Of Euros | Zero Hedge

So, it is literally “deal or no deal” time, because if JPM is correct and eligible collateral was either exhausted two weeks ago or, in the best case scenario, is right at the limit, capital controls will need to be put in place as early as Tuesday at which point the ATMs will officially stop dispensing freshly-minted euros which, incidentally, brings up an important point. As Barclays notes, during the same period over which Greek banks lost nearly €30 billion in deposits, banknotes in circulation jumped by some €13 billion. In short, because Greeks are increasingly prone to stuffing their euros in mattresses, a large proportion of the deposit flight has come in the form of hard currency withdrawals, meaning the Bank of Greece is forced to (literally) print billions in physical banknotes

Meanwhile, Greece Is Quietly Printing Billions Of Euros | Zero Hedge

Eurozone leaders are offering Tsipras a form of debt relief - the key point for Athens - but not immediately. Greece needs to pay the IMF €1.6bn by 30 June. It is understood that the only way it will be able to make the payment is if the European Central Bank - one of its three creditors - raises the ceiling on the volume of short-term debt that the government can sell to the Greek central bank.

Greece and eurozone leaders in last-ditch scramble to reach deal | World news | The Guardian

The Greek finance minister, Yanis Varoufakis, said his country’s fate was in Merkel’s hands and told her she faced a stark decision. He said there would be no agreement that did not include the prospect of debt relief for Greece, something not on offer from the eurozone unless Tsipras commits to and proves he can implement the kind of austerity measures he was elected to reject.

Greece and eurozone leaders in last-ditch scramble to reach deal | World news | The Guardian

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Leaving the euro is not a disaster. If you follow my advice then, before too long, you will be able to tell the Bank of Greece to stop the Drachma from appreciating on the exchanges. What’s more, the investment bankers will be knocking on your door trying to lend you money. (Admittedly, if you don’t follow this advice, you and your countrymen could land up in an even worse mess!) You should think of Grexit as giving you the opportunity to make things better. D-Day approaches: D for Default, Devaluation and the Drachma. As you know, in our recent European history, D also stands for Deliverance. It can do so again for you. Within a year or two the gains may be so extensive that you (and they) will wonder why you didn’t make the move earlier.

Why D Day for Greece must stand for deliverance - Telegraph

The spectacle is astonishing. The European Central Bank, the EMU bail-out fund, and the International Monetary Fund, among others, are lashing out in fury against an elected government that refuses to do what it is told. They entirely duck their own responsibility for five years of policy blunders that have led to this impasse.

Greek debt crisis is the Iraq War of finance - Telegraph

Does anybody dispute that the ECB – via the Bank of Greece - is actively inciting a bank run in a country where it is also the banking regulator by issuing this report on Wednesday? It warned of an "uncontrollable crisis" if there is no creditor deal, followed by soaring inflation, "an exponential rise in unemployment", and a "collapse of all that the Greek economy has achieved over the years of its EU, and especially its euro area, membership". The guardian of financial stability is consciously and deliberately accelerating a financial crisis in an EMU member state - with possible risks of pan-EMU and broader global contagion – as a negotiating tactic to force Greece to the table.

Greek debt crisis is the Iraq War of finance - Telegraph

Personally, I am a Burkean conservative with free market views. Ideologically, Syriza is not my cup tea. Yet we Burkeans do like democracy – and we don’t care for monetary juntas – even if it leads to the election of a radical-Left government. As it happens, Edmund Burke would have found the plans presented to the Eurogroup last night by finance minister Yanis Varoufakis to be rational, reasonable, fair, and proportionate.

Greek debt crisis is the Iraq War of finance - Telegraph

Syriza said from the outset that it was eager to work on market reforms with the OECD, the leading authority. It wants to team up with the International Labour Organisation on Scandinavian style flexi-security and labour reforms, a valid alternative to the German-style Hartz IV reforms that have impoverished the bottom fifth of German society and which no Left-wing movement can stomach.

Greek debt crisis is the Iraq War of finance - Telegraph

It is widely accepted that a return to the drachma, involving a major fall in the exchange rate, would, on average, impose heavy costs on ordinary Greeks. This may indeed be widely accepted, but it happens not to be true. There is a serious lack of understanding of the economics of devaluation – even in some surprisingly high places. What passes for wisdom on the subject is heavily influenced by the experience with fixed exchange rates, which the UK, and most of the world, gave up in 1971-72.

Why is Athens still refusing the free lunch of a Grexit? - Telegraph

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Thousands of Greeks rallied outside parliament in central Athens to urge the government to reach an agreement with its creditors that will keep the country inside Europe’s monetary union.

Thousands Rally in Athens to Urge Deal as Default Threat Grows - Bloomberg Business

The Greek proposals are projected to save 2.7 billion euros ($3.1 billion) or 1.51% of gross domestic product in 2015, up from €2 billion in Greece’s initial proposal, according to Greek newspaper Kathimerini, which posted a copy of the official cost analysis of the Greek proposal late Monday. In 2016 the measures would save €5.2 billion or 2.87% of GDP, up from €3.6 billion in the initial proposal.

These are the 2 main points of contention in the Greek debt saga - MarketWatch

Europe is hatching an agreement to release 7.2 billion euros ($8 billion) in bailout loans to Greece, without which the country will default to the International Monetary Fund next week, and possibly tumble out of the eurozone. Markets like the latest Greek proposal because it would deal with the immediate crisis, but it could store up trouble for the future. Here are three big problems with the plan:

Greece's new rescue plan is deeply flawed - Jun. 23, 2015

Bailouts, austerity, riots and bond swaps - key events in the run-up to Friday's news that investors in Greece have agreed to write off 75% of their loans

Greek debt crisis: timeline | Business | The Guardian

Well, the current chaos in Greece – a chaos which has seen a proud country endure a slump worse than America’s Great Depression, with national income now barely two-thirds of its 2008 level and youth unemployment a heart-breaking 52pc – should make it respectable for mainstream analysts to end this charade and declare, unequivocally, that the euro is now more trouble than it’s worth and should be entirely broken up.

The future of the euro rests with unfortunate Greeks - Telegraph

In total, the Greek plans amount to around €7.9bn in fiscal measures. Of that, €7.3bn is in the form of tax increases and changes to the social security contributions. One of the most controversial areas of taxation has been VAT. Greece's creditors want the country to implement a simplified two-tier tax structure, rather than the three-level system currently in use. The biggest concession seems to be on the series of VAT exemptions, such as those imposed on food services (restaurants, for example). These are now set to jump from the middle band of 13pc to the highest rate of 23pc.

A Greek capitulation: Has Tsipras finally crossed Syriza's 'red lines'? - Telegraph