Greece, not again?

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A referendum on bailout terms that has morphed into a plebiscite on Greece's future in Europe has created the first real splits in Prime Minister Alexis Tsipras' ruling coalition. Four members of the right-wing Independent Greeks, uneasy bedfellows whose 13 votes Tsipras' left-wing Syriza party needs for a majority, defied him in the space of 24 hours by urging Greeks to accept more austerity in return for cash.

Tsipras loses 4 allies ahead of Greek referendum - Business Insider

No one quite knows how a Grexit would be engineered, but the case for it runs like this: with 11 million people, Greece represents 3.2 percent of the population and 1.8 percent of the output of the 19-nation euro zone’s 10.1 trillion-euro ($11 trillion) economy.

Greece Tugs at Euro’s Heartstrings Amid Economic Case for Exit - Bloomberg Business

By now it should be clear to all that the only reason why Germany has been so steadfast in its negotiating stance with Greece is because it knows very well that if it concedes to a public debt reduction (as opposed to haircut on debt held mostly by private entities such as hedge funds which already happened in 2012), then the rest of the PIIGS will come pouring in: first Italy, then Spain, then Portugal, then Ireland.

Did The IMF Just Open Pandora's Box? | Zero Hedge

It is exactly the case that only a "No" vote at this point would allow Greece to continue a negotiation which has already seen one of the three Troika members side with the Greek position. Should Greece vote "Yes", it will make any future negotiation with the Troika impossible, and while the country will get a few months respite the resultant bank run after the bank reopen with the ECB's blessing will mean that all Greece will do is buy itself a few months time. Only this time all the debt will still be due.

Did The IMF Just Open Pandora's Box? | Zero Hedge

In this way, while the outcome of the Greek situation is currently unknown, it has also become moot, because at this very moment, politicians from Spain's Podemos to Italy's Five Star movement are drafting memos demanding that the IMF evaluate their own debt sustainability. Or rather unsustainability. Perhaps more importantly, these same politicians will now dangle the prospect of an IMF admission that they, too, deserve a haircut as the catalyst to be elected into power.

Did The IMF Just Open Pandora's Box? | Zero Hedge

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Urging a "Yes" vote, European leaders and their supporters in private institutions claim more austerity would reinvigorate the Greek economy and permit Greeks to keep the euro as their currency, but such claims simply contradict the facts. Already, the Troika, led by Merkel and IMF Managing Director Christine Legarde, has imposed five years of budget cuts, higher taxes and labor market adjustments. The Greeks have endured a 25 percent contraction in GDP, 25 percent cut in private sector wages and 25 percent unemployment. Greece’s debt to GDP ratio has soared from 130 percent to 180 percent of GDP, and that is an impossible burden to repay. The only solution is for Greece to replace existing bonds with securities having longer maturities and paying lower interest rates, and with reduced face value — essentially, a haircut for creditors.

Peter Morici: The Greeks Should Vote 'No!'

Any scheme that can result in such a crisis – to say nothing of the stagnant growth, unemployment and poverty that have plagued much of the eurozone since the crash – is bound to be branded an unambiguous failure. What’s more, it is now acting as a repellent for the European idea itself: witness the rise of populist anti-EU parties in Spain, Italy and beyond.

This euro is destroying the European dream | Jonathan Freedland | Comment is free | The Guardian

As for the rich countries, the euro has been a marvel. Germany gets to trade in a currency that is sufficiently weak to make its exports internationally competitive, all the while selling its cars and washing machines into a captive market of near-neighbours who cannot devalue their own currencies against it. If Berlin had stuck with a too-strong Deutsche Mark, it would have seen its goods become prohibitively expensive.

This euro is destroying the European dream | Jonathan Freedland | Comment is free | The Guardian

Greece’s economy is on the brink of collapse after the capital controls imposed ahead of Sunday’s referendum left the country with food and drugs shortages, the tourist industry facing a wave of cancellations and the banks with barely enough money to survive the weekend.

Greek economy close to collapse as food and medicine run short | World news | The Guardian

“Imports, exports, factories, firms, transport, everything is frozen,” said Vasilis Korkidis, who heads the national Confederation of Hellenic Commerce. “The only sectors in demand are food and fuel.” Read more Korkidis said the economy had suffered losses worth €1.2bn in the past week and that the cost would have to be added to any fresh bailout deal. “Even in the best-case scenario, it is going to take months to recover from the shock of closed banks and capital controls,” Korkidis said. “Now that they are in place, capital controls may last for a year.”

Greek economy close to collapse as food and medicine run short | World news | The Guardian

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The following scenarios are based on conversations with officials working on how to handle the Greek crisis, along with investors and economists.

Greece Referendum: What happens if it's a “No”? - Bloomberg Business

However, the critical point is that the IMF now requires debt-relief before it engages in a new programme, which confronts Europeans with a tough political decision. Many in Europe, including Germany, considered OSI as a future carrot in exchange for reforms today following good programme execution. Debt relief was conceived as a part of a third programme to be negotiated possibly with a new Greek government. At the same time, Germany has been adamant about the importance of IMF involvement in any financial support programme for Greece. Thus, Germany will now be confronted with a tough choice: to deliver on the IMF's demand, ie to engage in OSI negotiations in the form of NPV debt relief, or give up on IMF involvement. We believe that there is mounting support across other member states for the OSI discussion, therefore, we believe that Germany may not be able to resist such discussions any longer.

What It All Comes Down To On Sunday | Zero Hedge

Euro zone countries tried in vain to stop the IMF publishing a gloomy analysis of Greece's debt burden which the leftist government says vindicates its call to voters to reject bailout terms, sources familiar with the situation said on Friday. The document released in Washington on Thursday said Greece's public finances will not be sustainable without substantial debt relief, possibly including write-offs by European partners of loans guaranteed by taxpayers. It also said Greece will need at least 50 billion euros in additional aid over the next three years to keep itself afloat.

Exclusive: Europeans tried to block IMF debt report on Greece: sources | Reuters

Finland, which couldn’t be more different from that corrupt, irresponsible country to the south. Finland is a model European citizen; it has honest government, sound finances and a solid credit rating, which lets it borrow money at incredibly low interest rates. It’s also in the eighth year of a slump that has cut real gross domestic product per capita by 10 percent and shows no sign of ending. In fact, if it weren’t for the nightmare in southern Europe, the troubles facing the Finnish economy might well be seen as an epic disaster.

Europe’s Many Economic Disasters - The New York Times

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a "No" vote might persuade the ECB to demand additional collateral from banks to cover the risk of losses on the 120bn euros in emergency lending it and the Bank of Greece have already provided. This would be very painful for the banks. Right now they have unencumbered assets sufficient to borrow an additional 17bn to 20bn euros from the Bank of Greece, if the ELA ceiling were lifted. But if the ECB decided these assets - such as loans to Greek companies - are intrinsically less valuable than it currently thinks, and imposed a bigger so-called haircut on these loans, that 17bn to 20bn of possible additional credit could shrink to zero or a negative number.

A referendum that will sink or rescue the Greek economy - BBC News

A report released Thursday by the IMF said the European Union may need to take losses of 53 billion euros on money it has lent to Greece. At loggerheads with its international creditors, Greece jumped at the opportunity, at the risk of relying on the recommendations of an institution it loathes. Embracing key proposals in the report, Greek Prime Minister Alexis Tsipras demanded Friday that creditors forgive a third of the country's debt and allow delayed repayments for the rest. Much is at stake for Greece's EU partners. They are the main contributors to Greece's successive bailouts, and hold 211 billion euros out of a total of about 280 billion euros that Greece owes. Of all Greece's creditors, the Europeans are the most heavily exposed to losses.

IMF gives Greece something to mull over - Business Insider

In 2012, the IMF obtained a promise from the Europeans to take Greece's debt levels substantially below the level of 110 percent of GDP by 2022.  But this commitment was never kept, and Greek debt these days is close to 180 percent of economic output.

IMF gives Greece something to mull over - Business Insider

€50 billion The amount of revenue Greece agreed with its creditors in 2011 it would generate as it privatized state assets. €3.2 billion The amount of revenue Greece generated through the privatization of assets through 2015.

Greece’s Debt – The Numbers - WSJ

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Having previously insisted that a No vote on the lenders’ last terms would see their country forced out of the euro, Schäuble told the Bild newspaper that the choice before them on Sunday was between holding on to the euro and being “temporarily without it”. It was far from clear what Schäuble had in mind, but economists have mooted the notion of a period in which Greece might go back to its national currency, the drachma, while its economy recovered. With pharmacists in Athens reporting that the government had rationed the distribution of drugs, and fears being raised of food shortages within weeks, the finance minister of Europe’s biggest economy said: “It is clear that we will not leave the [Greek] people in the lurch.” What effect Schäuble’s last-minute intervention may have on the vote is impossible to gauge. But it appears to favour the No camp. His remarks seemed to endorse the claims of the Greek government, which has called for a No vote, to the effect that a majority in favour of rejection would not lead to the country’s exit from the euro (“Grexit”).

Greek referendum: Germany says it won’t leave Greece in the lurch | World news | The Guardian

The Oxford Economics thinktank warned that the closure of Greece’s banks and the imposition of capital controls last weekend would be difficult to reverse. “Cyprus was able to gradually loosen capital controls because of a decisive and credible commitment to reform. This is not possible in Greece,” it said. “Our latest scenario analysis suggests an exit probability of around 67%.” In a reference to the 2008 collapse of Lehman Brothers – the spark that detonated global recession – Megan Greene, chief economist of the Canadian asset management firm Manulife, said: “Grexit would be a Lehman-type event, but with a much slower fuse.”

Greek referendum: Germany says it won’t leave Greece in the lurch | World news | The Guardian

She added: “The immediate impact might be relatively muted in the markets. But the next time there is a cyclical downturn in Europe, bigger countries like Spain and especially Italy may decide they’d like to benefit from a devaluation to return to growth and leave the eurozone themselves. This would ring the death knell for the common currency.”

Greek referendum: Germany says it won’t leave Greece in the lurch | World news | The Guardian

But the divide that is now opening up in Europe also has something to do with Merkel's leadership style -- and with her idiosyncrasy of allowing things to drift for extended periods. This method works when it comes to negotiating a compromise, and when everyone involved is interested in a favorable outcome. But it reaches its limits when someone like Tsipras is determined to carry things to the extreme. It has long been clear that Greece is a special case in the context of the euro crisis. It is a country in which neither the taxation system nor the land registry system works, a country that is so deeply in debt that no reasonable economist still believes that it can ever repay what it owes. In addition, parties that habitually plundered the state ran the country for years. Then came Syriza, a movement that, at least in its radical quarters, dreamed of toppling the system.

Merkel's Leadership Has Failed in the Greece Crisis - SPIEGEL ONLINE

To understand Merkel's policies, it is worth turning back the clock to 2003. She had only been head of her party for three years and was in the midst of writing a new agenda for the CDU. There were four-and-a-half million unemployed in Germany, social security coffers were empty and employers were groaning about an excessively high tax burden. Germany wasn't nearly as badly off as Greece is today, but it was in urgent need of restructuring, and Merkel began to prescribe a strict reform program for the country. The McKinsey management-consulting firm provided the numbers to support her bitter message of austerity.

Merkel's Leadership Has Failed in the Greece Crisis - SPIEGEL ONLINE

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We would expect ECB’s GC to shut down ELA at the latest by 20 July. Assuming that all of the pledged collateral at the ECB is recorded at (close to) par on Greek banks’ balance sheets and that current average haircut on collateral is 50 percent, then retention of the collateral by the euro system would translate into a more than 30 billion-euro loss for the banks. This alone would wipe out shareholders’ equity. The Greek central bank will eventually need to print its own currency in order to inject new liquidity and capital.

How Bad Is ‘No’ for Greek Banks? Analysts Split on ECB Lifeline - Bloomberg Business

The ECB may not want to see the Greek banking system go down in flames overnight -- before some sort of smoothing exit arrangements can be made that could enable Greece to have a decent survival chance outside the euro. Maybe a 30-day line of credit to enable the banks to reopen, and to see for sure whether Greece is going to leave the euro or not. I don’t see how the troika can continue to work with Greece, but I do see a willingness to help them leave as gracefully as possible.

How Bad Is ‘No’ for Greek Banks? Analysts Split on ECB Lifeline - Bloomberg Business

it suggests that a 1 point rise in the primary surplus, which requires austerity that causes a 3-point fall in real GDP, will reduce inflation by about 0.7 percentage points (3*0.23). And if you start with debt of 170 percent of GDP, this raises the debt ratio by more than a percentage point each year. That is, the attempt to reduce debt by slashing spending actually raises the ratio of debt to GDP, not just in the short run, but indefinitely.

Paul Krugman - Austerity Arithmetic - The New York Times

German Chancellor Angela Merkel will take pains to appear she is extending an olive branch to Greece, but she has little room to negotiate after Greeks voted "no" on economic austerity, former Dallas Federal Reserve President Richard Fisher said Monday. "Ultimately, people report to their own people, and [Merkel] has to be supported by the German parliament and the German people," Fisher told CNBC's "Squawk Box." "There is a limit of tolerance, and she knows what that limit is."

Why Germany won't back down on Greece: Ex-Fed's Fisher

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Citi’s Willem Buiter-headed team of economists provides an interesting external solution for the Greek debt crisis in an opinion piece late on Monday: bail out Greek banks but not the Greek government. Remember, the problem for eurozone banks is part of their core capital is supposed to be made up of liquid instruments like government bonds, but in the case of Greece these bonds are as toxic as subprime securities and depreciating quickly. Even if the ECB continues accepting Greek bonds as collateral for Emergency Liquidity Assistance, the terms would no doubt involve much larger haircuts, bringing us back to a 2011 capital hole scenario very quickly. So, it actually makes more sense for Greek banks to start swapping government bonds into different types of assets.

A radical idea to bypass the Greek government | FT Alphaville

An internal review in 2013 would conclude that the IMF should have pushed earlier for a restructuring of Greece’s debt, which would have eased austerity and limited the economy’s contraction. As it turned out, Greece plunged into a much deeper recession than anticipated, with unemployment surging to about 25 percent in 2012. The IMF now recognizes that an earlier restructuring of Greece’s debt would have helped the country’s recovery, said a person familiar with the fund’s program in Greece. IMF officials also accept that their assumptions underestimated the extent to which spending cuts would impede growth, according to the person, who asked not to be identified.

Kinder, Gentler IMF Austerity Stance Came Too Late to Aid Greece - Bloomberg Business

Mrs Merkel also stresses that there can be no question of a "debt haircut" for Greece, saying it would be illegal under the EU treaty.

Greece debt crisis: Latest updates - BBC News

RBS puts the direct financial losses for the eurozone from a Greek default at €227bn, compared with €140bn if they bite the bullet on an IMF-style debt restructuring.

Europe is blowing itself apart over Greece - and nobody seems able to stop it - Telegraph

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Citi points out that the path to a Greek exit could still be long and bumpy, rather than a single spectacular event. There could be some kind of short-term loan that allows Greek banks to re-open soon, but falls far short of the hundreds of billions of euros Greece needs to pay its bills for the next several years. That could lead to a slow-motion Grexit that lasts for months. In Citi’s new base case, the process takes two to three years.

Markets are beginning to write off Greece - Yahoo Finance

Thomsen: First, let me be clear that Greece has made enormous progress in restoring fiscal sustainability. The fiscal adjustment in Greece has been extraordinary by any international comparison. Having entered the crisis with a deficit in double digits, Greece has not only achieved a primary surplus in just four years and ahead of schedule, but also now has the highest “cyclically-adjusted primary balance” in the euro area, that is, the highest underlying primary balance after accounting for the effect of the business cycle on revenues.

IMF Survey : Greece: Grounds for Cautious Optimism

One Greek jeweler even rejected a customer who wanted to buy approximately $1.1 million worth of merchandise because "he was more comfortable holding on to the jewels than having money in Greek banks," according to The Times.

Greek life during euro crisis - Business Insider

However, as the primary surplus targets are rising to 3 percent of GDP in 2015 and to 4.5 percent of GDP in 2016 and beyond in order to bring down the very high levels of public debt, additional efforts are needed. Simply relying on the projected economic recovery would not by itself be sufficient to achieve these targets.

IMF Survey : Greece: Grounds for Cautious Optimism

This is the sum of investments minus depreciation over time, taking 2000 as the starting point. We do not see structural weaknesses in Greece holding back the development of the capital stock. It grew rather more rapidly than the euro area average until the crisis, expanding by almost a quarter, and far faster than in Germany (where it started from a higher absolute level). Since the crisis the capital stock has shrunk, indicating that new investment has not kept up with depreciation.

Excessive Austerity Not A Lack Of Structural Reform Is Holding Back Investment In Greece » Social Europe

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Any move by Greece to introduce a new drachma - if it is called that - could struggle just for recognition, Hargreaves Landown's financial analyst Richard Hunter tells Reuters. "Computer codes, access to international settlements systems and legal issues relating to financial contracts are all potential obstacles," he says.

Greece debt crisis: Latest updates - BBC News

The irony has not been lost on anyone - even though governing MPs are making light of it - that after the Greeks’ resounding rejection of further biting austerity at the weekend, prime minister Alexis Tsipras has with lightning speed now agreed to put his name to the most punitive austerity package any government has been asked to implement during the five years of economic crisis in Greece.

Greek crisis: Government agrees reform measures - live updates | Business | The Guardian

"The new proposals that are made by the Greek government are demonstrating a real will to have an agreement," he told CNBC's "Squawk Box." "We will see. I remain very, very prudent myself, but clearly we have something which is very different from what was the position at the moment of the referendum."

Greek proposals show 'real will' for agreement Trichet

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Unfortunately, Greece is a rare case of a small quasi-closed economy. Exports now account for about 30 per cent of gross domestic product, but a large part of this consists of oil and global maritime transportation services. Since Greece is not an oil producer, oil exports are in reality just re-exports with little domestic added value. Similarly, global maritime services do not employ Greek sailors and also have no connection with the domestic economy. This means that the part of exports that is really sensitive to domestic prices and wages is rather small. This particular composition of Greek trade explains why the two adjustment programmes failed to deliver. It was not because wages and prices did not adjust. Wages have already fallen by more than 20 per cent, but exports have barely moved. The Greek economy is thus unlikely to benefit much from a further devaluation.

The Greek economy is unlikely to benefit from further devaluation - FT.com

The differences start to emerge when we look at fiscal policy. Chart 5 shows that the fiscal correction started in a much sharper way in Greece than in the other troika countries.

What went wrong with Greece? | Money matters? Perspectives on Monetary Policy

The same phenomenon is seen in investment: In Ireland, Spain and Portugal investment decreased as a per cent of GDP, with respect to 2007, by some 40 per cent, in Cyprus by 50 per cent and in Greece by 60 per cent.

What went wrong with Greece? | Money matters? Perspectives on Monetary Policy