Greece, not again?

[ArtM72]

It seems there aren't many companies in the Dow that couldn't bail out Greece with their chump change. Hard to imagine a Greek default would be seen as much more than a blip on world money markets. On the other hand little snowballs can make mighty avalanches if conditions are right.

[admin]

It seems there aren't many companies in the Dow that couldn't bail out Greece with their chump change. Hard to imagine a Greek default would be seen as much more than a blip on world money markets. On the other hand little snowballs can make mighty avalanches if conditions are right.

Well, there are at least two reasons to worry:

1. Other euro country members are going to take substantial hits, most of the Greek debt is actually to them.
2. There is still the possibility of contagion, although the markets are remarkably sanguine about that. It's not as big a risk as it used to be now that we have some firewalls, a more active ECB and a recovering economy.

The (rather perverse, but most likely) outcome is that the euro is here to stay, whilst it has clearly failed and the benefits are remarkably insignificant.

[admin]

Pension and civil-servant pay packets are due at the end of the month, and based on this news Athens may struggle to pay them. Even if it does manage that, on June 5 the country owes another €305 million to the IMF.

The 'endgame' looms as Greece gets crunched on 2 fronts - Business Insider

European Central Bank policy makers will discuss Greek bank aid on Wednesday in a chore that is getting more uncomfortable every week. The Governing Council will meet in Frankfurt to debate whether to tighten rules on Greek access to Emergency Liquidity Assistance as the country veers toward default. Officials are well aware their decision could worsen the political crisis just as bailout talks show signs of progress.

The ECB's in a Tight Spot Over Greece - Bloomberg Business

Simon Quijano-Evans, head of emerging-markets research at the German bank, said that those worried Greece could be about to default on its debts should take note of EM crises in Latvia in 2008, Turkey in 2001, Argentina in 1999 and Thailand in 1997. Greece is actually in a worse position than those countries were when they faced a default, he argued.

History tells us how the Greek drama could end

German Finance Minister Wolfgang Schaeuble told Reuters the Greek government's optimism about clinching a cash-for-reforms deal with its lenders in days was not backed up by negotiations and he could not rule out Greece becoming insolvent.

Greek optimism about imminent deal not justified: Schaeuble | Reuters

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"I really think the notion that Greece exits with or without a shadow currency or a proper currency (is ridiculous). Greece has not, historically, been good at managing an independent currency. This time, if they were to move towards that from a situation of extreme weakness it would be havoc for Greece so I wouldn't recommend that."

Greece's new currency would be 'rubbish': Citi's Buiter

"A default would of course be serious for Greece and it would cause a re-awakening of sovereign fears throughout the periphery of the euro area but it's not the beginning of a Grexit necessarily." He believed that Greece would stay in the euro zone and should "have serious debt restructuring and serious structural reform in Greece."

Greece's new currency would be 'rubbish': Citi's Buiter

Germany is worried that any concession to Greece will set off political contagion and cause fiscal discipline to collapse across southern Europe

Europe faces second revolt as Portugal's ascendant Socialists spurn austerity - Telegraph

Total combined public and private debt is more than 370pc of GDP, the highest in Europe. This leaves the country badly exposed to the effects of debt-deflation and stagnant nominal GDP. William Buiter, Citigroup’s chief economist, said Portugal has many of the same economic "pathologies" as Greece, and is likely to be first in line for contagion if the sanctity of monetary union is violated by the ejection of Greece.

Europe faces second revolt as Portugal's ascendant Socialists spurn austerity - Telegraph

According to Eurodad, the coalition of civil society groups that campaigns on debt, there have been 600 sovereign debt restructurings since the 1950s – with many governments, including Argentina for example, experiencing one wrenching write-off after another. Many of these countries plunged deeper into recession as a result of the uncertainty and delay inherent in this bewildering process and the punishing austerity policies inflicted on them, with a resulting collapse in investor and consumer confidence.

Greece’s misery shows we need Chapter 11 bankruptcy for countries | Business | The Guardian

Since its first bailout in 2010, Greece has been forced by its creditors to cut spending by €28 billion — quite a sum in a €179 billion economy. A proportional dose of austerity applied to the United States, for example, would come to $2.6 trillion. During the past six months, a period during which Greece has had its credit line revoked over disagreements with Europe regarding economic overhauls, the state has been forced to wield an even sharper knife.

With Money Drying Up, Greece Is All but Bankrupt - NYTimes.com

Since he started work at the hospital in 2010, Mr. Giannaros has seen his salary shrink to €1,200 a month, from €7,400. His annual budget, once €20 million, is now €6 million, and the number of practicing doctors has been reduced to 200 from 250.

With Money Drying Up, Greece Is All but Bankrupt - NYTimes.com

[admin]

The ECB would then reconsider the acceptability of claims on the government (be they direct liabilities or guarantees) as collateral for its lending to banks. Haircuts would certainly be raised sharply. The ECB would find it particularly hard to lend against collateral supplied by a government that has defaulted to itself. The knowledge that default is imminent has already accelerated a run on the Greek banks. Without a deal, therefore, banks will soon be forced to halt withdrawals.

For Greece, a (temporary) post-dated cheque solution… | FT Alphaville

Under his scheme, people would be able to use claims on deposits, to be called “deposit receipts”, in place of the euro notes and coins they would no longer be able to obtain from their bank. This would sustain spending in such a cash-dependent economy. These deposit receipts would be established as legal tender. Within Greece, therefore, these deposit receipts would be money. Under this proposal there would be a limit on issuance, since receipts would be backed by existing deposits, one for one. Greeks would still have to make external payments in euros. The value of deposit receipts — a sort of Greek euro — would float against the euro as the demand for the latter rose and fell. Such a scheme could cushion the Greek economy against a total collapse. It could also be a precursor to full exit, should a workable deal not be reached. Given the current political impasse, such an expedient may soon be needed.

For Greece, a (temporary) post-dated cheque solution… | FT Alphaville

A "constructive" late night meeting in Brussels Wednesday between Greek Prime Minister Alexis Tsipras and senior European Union officials has opened a "window of time" to negotiate a bailout package, IMF Managing Director Christine Lagarde said Thursday. "It clearly opens a window of time during which we can hear in details from the [Greek] authorities their views" on the joint proposal put forward by Greece's creditors, the European Commission, the European Central Bank and the IMF.

Lagarde says late night talks on Greece were constructive, and open 'window of time' for deal - MarketWatch

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Greece should take the deal. The country’s creditors have tabled what has all the appearances of a final offer. Alexis Tsipras’s government should accept it. Athens will not achieve better terms and the alternative of default and likely exit from the euro would be worse for the Greek people.

An offer that Greece should not refuse - FT.com

Targets for the size of the primary surplus a year or two hence can be changed. What matters are the circumstances. The missing ingredient since Syriza’s election victory has been any confidence on the side of creditors that greater fiscal leeway would be accompanied by a serious commitment to overhaul the country’s governance. Mr Tsipras promised that, as an outsider, he would sweep away the corruption and cosy cartels. The impression he has given since is that one set of clients is being replaced by another. If Athens wants other leaders to take seriously its view that austerity is counterproductive, the only way to do it is to embark on the political and economic reforms needed to underpin a return to growth.

An offer that Greece should not refuse - FT.com

Greek stocks rose on Wednesday after reports of a compromise plan from its international creditors -- although Greece insisted it had not formally received any new proposals. The European Commission, European Central Bank (ECB) and International Monetary Fund (IMF) on Tuesday drafted the broad lines of an agreement to put to the Greek government, according to Reuters, in a bid to resolve months of tense negotiations over Greek reforms and debt.

Greek stocks up as compromise details emerge

Total combined public and private debt is more than 370pc of GDP, the highest in Europe. This leaves the country badly exposed to the effects of debt-deflation and stagnant nominal GDP. William Buiter, Citigroup’s chief economist, said Portugal has many of the same economic "pathologies" as Greece, and is likely to be first in line for contagion if the sanctity of monetary union is violated by the ejection of Greece.

Europe faces second revolt as Portugal's ascendant Socialists spurn austerity - Telegraph

[admin]

IMF has betrayed its mission in Greece, captive to EMU creditors

The IMF’s Original Sin in Greece was to let Dominique Strauss-Kahn hijack the institution to save Europe's banks and the euro when the crisis erupted, dooming Greece to disaster.

By Ambrose Evans-Pritchard

3:25PM BST 05 Jun 2015

555 Comments

The International Monetary Fund is in very serious trouble. Events have reached a point in Greece where the Fund's own credibility and long-term survival are at stake.

The Greeks are not withholding a €300m payment to the IMF because they have run out of money, though they soon will do.

Five key players in the radical-Left Syriza movement – meeting in the Maximus Mansion in Athens yesterday – took an ice-cold, calculated, and carefully-considered decision not to pay.

They knew exactly what they were doing. The IMF’s Christine Lagarde was caught badly off guard. Staff officials in Washington were stunned.

On one level, the “bundling” of €1.6bn of payments due to the IMF in June is just a technical shuffle, albeit invoking a procedure last used by Zambia for different reasons in the 1980s. In reality it is a warning shot, and a dangerous escalation for all parties.

Syriza’s leaders are letting it be known that they are so angry, and so driven by a sense of injustice, that they may indeed default to the IMF on June 30 and in so doing place the institution in the invidious position of explaining to its 188 member countries why it has lost their money so carelessly, and why it has made such a colossal hash of its affairs.

The Greeks accuse the IMF of colluding in an EMU-imposed austerity regime that breaches the Fund’s own rules and is in open contradiction with five years of analysis by its own excellent research department and chief economist, Olivier Blanchard.

• Greece's end game: timeline of key events
• What happens if Greece defaults to the International Monetary Fund

Greece’s public debt is 180pc of GDP. The loans are in a currency that the country does not control. It is therefore foreign currency debt. The IMF knows that Greece cannot possibly pay this down by draconian austerity – the policy already implemented for five years with such self-defeating effects – and the longer it pretends otherwise, the more its authority drains away.

It is has pushed for debt relief behind closed doors but only half-heartedly, unwilling to confront the EMU creditor powers head on. Objectively, it is acting as an imperialist lackey – as Greek Marxists might say.

Indeed, it has brought about the worst possible outcome. The Fund’s man on the ground in Athens – Poul Thomsen – has pushed the austerity agenda with a curious passion that shocks even officials in the European Commission, pussy cats by comparison.

This would be justifiable (sort of) if the other side of the usual IMF bargain were available: debt relief and devaluation. This how IMF programmes normally work: impose tough reforms but also wipe the slate clean on debt and restore crippled countries to external viability.

It is a very successful formula. On the rare occasion when the IMF goes wrong it is usually because it tries to prop up a fixed-exchange rate long past its sell-by date.

All of this went out of the window in Greece. The IMF enforced brute liquidation without compensating stimulus or relief. It claimed that its policies would lead to a 2.6pc contraction of GDP in 2010 followed by brisk recovery.

What in fact happened was six years of depression, a deflationary spiral, a 26pc fall in GDP, 60pc youth unemployment, mass exodus of the young and the brightest, chronic hysteresis that will blight Greece’s prospects for a decade to come, and to cap it all the debt ratio exploded because of the mathematical – and predictable – denominator effect of shrinking nominal GDP.

It is a public policy scandal of the first order. One part of the IMF has issued a mea culpa admitting that its own analysts misjudged the fiscal multiplier badly. Plaudits to them.

Another part of the Fund continues to push new variants of the same indefensible policies, demanding a combined fiscal squeeze from pension cuts and VAT rises equal to 1pc of GDP this year and 2pc next year even as the economy lurches back into recession.

Ashoka Mody, former chief of the IMF’s bail-out in Ireland, refuses to criticise his former colleagues on the European desk, but the meaning of the words I quoted last night are clear enough.

“Everything that we have learned over the last five years is that it is stunningly bad economics to enforce austerity on a country when it is in a deflationary cycle. Trauma patients have to heal their wounds before they can train for the 10K."

“I am frankly shocked that we are even having a discussion about raising VAT at all in these circumstances. We have just seen a premature rise in VAT knock the wind out of a country as strong as Japan."

“Syriza should recruit the IMF’s research department to be their spokesman because they are saying almost exactly the same thing as Syriza on the economics of this. The entire strategy of the creditors is wrong and the longer this goes on, the more is its going to cost them.”

The IMF’s Original Sin in Greece was to allow the urbane Parisian Dominique Strauss-Kahn to hijack the institution to prop up Europe’s monetary union and the European banking system when the crisis erupted in 2010.

The Fund’s mission is to save countries, not currencies or banks, and it certainly should not be doing dirty work for a rich currency union that is fully capable of sorting out its own affairs, but refuses to do so for political reasons.

It was of course a difficult moment in May 2010. The eurozone was spinning out of control. There were no backstop defences – due to the criminal negligence of Europe’s leaders and banking regulators – and fears of a euro-Lehman were all too real.

Yet leaked minutes from the IMF board meetings showed that all the emerging market members (and Switzerland) opposed the terms of the first loan package for Greece. They protested that it was intended to save the euro, not Greece.

It loaded yet more debt onto the crushed shoulders of an already bankrupt country, and further complicated the picture by allowing one large French bank and one German bank – no names please – to offload much of their €25bn combined exposure onto EMU taxpayers.

“Debt restructuring should have been on the table,” said Brazil's member. The loans “may be seen not as a rescue of Greece, which will have to undergo a wrenching adjustment, but as a bailout of Greece’s private debt holders, mainly European financial institutions”.

Arvind Virmani, India’s member, was prophetic. "The scale of the fiscal reduction without any monetary policy offset is unprecedented. It is a mammoth burden that the economy could hardly bear,” he said.

“Even if, arguably, the programme is successfully implemented, it could trigger a deflationary spiral of falling prices, falling employment and falling fiscal revenues that could eventually undermine the programme itself." This is exactly what has happened.

The Fund might have atoned later by acknowledging its special duty of care towards Greece and softening the terms. It did not do so. We should hardly be surprised if Syriza is now on the warpath.

The IMF needs to be careful. It has itself become an emblem of bad governance. Mr Strauss-Kahn was caught in flagrante delicto, only to be replaced instantly in a political stitch-up by another French finance minister (of quality and integrity – but that is not the point). Mr Strauss-Kahn’s predecessor was recently indicted in Spain for fraud.

The institution cries out for reform. There is no justifiable reason why the job of managing-director should go by divine right to a European, nor why the Europeans still control eight seats on the IMF board. You might make a parallel argument about the British, French, and Russian vetoes at the United Nations. I would not disagree.

These anomalies should have been sorted out at the time of the Strauss-Kahn debacle – along with quota reform blocked by the US Congress – all the more so since China and a host of rising reserve powers were already bursting onto the scene by then.

Leadership failed. The West disgraced itself. No wonder Asia is now going its own way with a rival set of bodies.

Greece’s firebrand government is bringing matters to a head for an institution already in trouble, but one with a superb staff and still worth saving.

Mrs Lagarde must stop playing the role of a diplomat. She must take off her European hat and speak instead for the organisation she leads and for the world.

She must confront the EMU creditors head on and in public. She must tell them, in blunt language, that they share much of the blame for the current impasse.

She must make it clear to them that Greece needs sweeping debt relief – as a matter of economic science, whatever the morality – and that the refusal of the creditors to face up to this elemental fact is now the chief impediment to a solution. And she should tell them that the IMF will no longer play any part in their deceitful charade.

If she does not do so, and if the lack of leadership by Europe’s political class leads to a catastrophic denouement on every level, then let it be on her head too.

[admin]

Mr Tsipras had misrepresented the EC's proposals to his parliament, Mr Juncker said, by suggesting they were offered on a take-it-or-leave-it basis, when he "knew perfectly well that I was willing to discuss the main points of disagreement". The European Commission is asking for further reforms to Greece's economy, including tax increases and cuts in civil servants' salaries and pensions, before the next €7.2bn (£5.2bn) tranche of bailout money will be released. But Greece has robustly rejected these proposals without some form of debt restructuring agreement in return. Earlier this week, Greece said it would delay making a €300m loan repayment to the International Monetary Fund, instead rolling up four scheduled payments into one €1.6bn payment to be made at the end of June. BBC economics editor Robert Peston said this move meant that "the risk of Greece defaulting on its debts - and leaving the euro - has substantially increased."

Greece's Tsipras 'failed' to deliver promised plan - Juncker - BBC News

Greece wants to restructure its huge public debt through cheaper refinancing, longer maturities, a write off of some principal and turning some debt into perpetual or GDP-linked bonds, but the plans have no support in the euro zone so far.

Greece's plans have no support from its creditors - Business Insider

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What will ensue is a renewed battle after almost five months of trench warfare. The beleaguered country requires a third bailout of about 30 billion euros, according to Nomura International Plc analysts Lefteris Farmakis and Dimitris Drakopoulos. Tsipras says any aid must be on his terms rather than those of governments whose taxpayers have forked out billions in the past five years to keep Greece in the euro. “Any plausible deal at this stage is unlikely to do enough and it’s unlikely to be the end of the matter,” said Simon Tilford, deputy director of the Centre for European Reform in London. “This could just play out again and again.”

If You Think Greece’s Crisis Will End Any Time Soon, Think Again - Bloomberg Business

A split between German Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble is widening over Greece as the funding standoff goes down to the wire, said people familiar with the matter. Merkel is ready to make concessions to keep Greece in the euro because of geopolitical concerns, while Schaeuble is willing to let the country exit the euro unless its government takes measures to ensure the country’s long-term survival in the monetary union, said the people, who asked not be identified speaking about internal party discussions.

Merkel-Schaeuble Differences Over Greece Approach Said to Widen - Bloomberg Business

The virtual evaporation of sovereign spreads between the core and the periphery reflected the common illusion that a fragile design would be sufficient to support a functional monetary union. In July 2007, Greece could borrow for 10 years at 4.9 percent, only 20 basis points higher than Germany’s equivalent yield, despite very different inflation and fiscal outlooks.

How to Fix the Euro Area Without Breaking It | Economics | Bloomberg Professional

Chancellor Angela Merkel’s government may be satisfied with Greece committing to at least one economic reform sought by creditors to open the door to bailout funds, according to two people familiar with Germany’s position.

Germany to Consider Offering Tsipras Staggered Deal on Aid - Bloomberg Business

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The International Monetary Fund dramatically pulled out of talks with debt-stricken Greece on Thursday after it accused Athens of failing to compromise over labour market and pension reforms. The Washington-based lender of last resort said its team of negotiators had quit talks in Brussels after reaching a stalemate and would be returning to Washington.

IMF walks out of Greece bailout talks | Business | The Guardian

While the government has shown resourcefulness to last as long as it has without defaulting, Tsipras's actions have taken a visible toll on Greece's economy, banking system and markets. An immediate gauge of the cost comes in plunging market capitalization of the Athens Stock Exchange.

Greece Counts Cost of One Man's Gamble - Bloomberg Business

With financial doomsday drawing ever closer in Athens, everyone from creditors and investors to depositors is increasingly focusing on what's next. Some things are clear: Greece owes the International Monetary Fund about $1.7 billion this month. In July and August, the European Central Bank is due almost 6.8 billion euros ($7.6 billion). The euro-area backed bailout program expires on June 30, with creditors refusing to release up to 7.2 billion euros in remaining funds before Athens complies with belt-tightening conditions.

Greece Crisis: What Happens if There's No Debt Deal - Bloomberg Business