Exactly how will the privatisation or asset-stripping programme for Greece work?

What an extraordinary weekend that was! The ball was batted from one side of the net to the other even more often than managed by Federer and Djorkovic although the latter two managed a lot more class and style. Late on Saturday it was leaked that a sizeable minority of Euro area countries were against more bailouts for Greece and that Germany’s Finance Minister Herr Schauble had suggested a 5 year “temporary” exit for Greece from the Euro. This morning we wake up to discover that there is a deal but that even the abasement and some may consider the debasement offered last week by Greek Prime Minister Tsipras was not enough. Indeed he and his advisers must be mulling the last five months as all that has happened on his watch is that Greece’s position has gone backwards in very respect. As well as wondering how they can explain this to the Greek people who only a week ago voted against a more favourable deal.

The Greek banking system

This has turned out to be the keystone for the whole episode. The way that deposits have left and then flooded out of the Greek banking system left the Greek government with what turned out to be an insoluble problem. Whilst the implementation of capital controls slowed the flow to an estimated 100 million Euros a day the catch was that this was on top of the amounts which had already departed meaning that the Greek banks were engulfed by the jaws of quite a cash crunch. As the gears of the Greek banking system crunched the Greek economy was dragged downwards too as stories emerged of barter and other currencies (Bulgarian Lev) being used.

A proper “Lender of Last Resort” would never have allowed this and UK readers in particular will recall Bank of England Governor Mervyn King promising that the ATMs would not be allowed to go empty in the Northern Rock crisis. The problem for Greece is that is national central bank handed over such powers to the international ECB. It operated a different system where it first offered as little liquidity as it felt it could get away with to the Greek banking system and then finally froze it at 89 billion Euros. Not for the first time in the Euro area crisis it became not only politicised but also a weapon promulgating bullying and intimidation.

The ECB

After what happened above the ECB will take centre stage later today when it decides what to do about its ELA (Emergency Liquidity Assistance) programme for Greek banks. If it really wants to stamp its boot on Greek banking it will freeze it at current levels. Should it wish to offer something of an olive branch the ultimate insider Robert Peston has leaked that an additional 2 billion Euros of ELA will allow Greek banks to open tomorrow.

The new agreement has been published and in it is something rather odd.

The ECB/SSM will conduct a comprehensive assessment after the summer

I rather suspect that the Greek banks cannot wait until then don’t you? On such a time scale Greeks  can expect capital controls to be reduced but not eliminated for some time yet.

Of Privatisations and Asset-Stripping

This has been one of the most contentious issues. On one side the Euro area establishment has felt with some reason that the Greeks have not pushed this forwards with the necessary vigour. On the other side the Greeks have grounds to feel that this is a type of asset-stripping when for obvious reasons asset prices and values are low. Thus the progress so far on this front has been very small which contrasts considerably with the grand designs below.

valuable Greek assets will be transferred to an independent fund that will monetize the assets through privatisations and other means.

This is potentially like adding nitro-glycerine to the mix as we consider what may take place here and the detail is even more troubling.

The monetization of the assets will be one source to make the scheduled repayment of the new loan of ESM and generate over the life of the new loan a targeted total of EUR 50bn of which EUR 25bn will be used for the repayment of recapitalization of banks and other assets and 50 % of every remaining euro (i.e. 50% of EUR 25bn) will be used for decreasing the debt to GDP ratio and the remaining 50 % will be used for investments.

This is all rather extraordinary and as ever there are questions about not only the process but also the arithmetic used. If we look at the Greek banks they have received some 45 billion Euros of restructuring so far. Thus if we add another 20 billion or so we get to around 65 billion Euros. More than the 50 billion of Greek assets used here! What if the Greek banks are still not worth much when they are sold on?

Also I do hope that the French banks are not allowed to repurchase the Greek bank subsidiaries they have sold, other wise they will be completely round-tripping both the Euro area and Greek taxpayers for quite a potential profit.

This is likely to turn-out to be the most contentious issue of all.

The debt just keeps increasing

It was only on Friday I was analysing a Greek proposal which suggested an extra 53.5 billion of bailout money or debt. Over the weekend this has expanded quite substantially.

The Euro Summit takes note of the possible programme financing needs of between EUR 82 and 86bn, as assessed by the Institutions.

So another 30 billion Euros in a single weekend. Care should be taken in simply adding this to Greece’s existing debt as some of this will be a refinancing of the existing debt as highlighted below.

The Euro Summit takes note of the urgent financing needs of Greece which underline the need for very swift progress in reaching a decision on a new MoU: these are estimated to amount to EUR 7bn by 20 July and an additional EUR 5bn by mid August.

These involve purchasing a Greek bond maturity off the ECB next Monday which will be debt monetisation in all but name and repayments including arrears to the International Monetary Fund (IMF). However there will be a substantial amount of new borrowing and if we also factor in a shrinking economy the debt to GDP ratio which if you recall we were promised in 2010 and again in 2012 was “on track” to fall to 120% will instead push over 200%.

What about debt restructuring?

As we consider a debt burden that will be going “Higher and Higher” as Jackie Wilson put it even the Euro area establishment have figured out that something (again) needs to be done. Except the quote about points out that the ECB is going to be repaid in full next Monday which is not exactly an auspicious start!

There are serious concerns regarding the sustainability of Greek debt.

What is left? More of the same and the emphasis is mine.

the Eurogroup stands ready to consider, if necessary, possible additional measures (possible longer grace and payment periods) aiming at ensuring that gross financing needs remain at a sustainable level.

My original suggestion that the Greek debt would be to infinity and beyond is well on its way to coming true or to be more specific it to be reclassified as a zero coupon perpetual bond.

Comment

It is symbolic that President Hollande of France has described this as a “courageous choice” by Prime Minister Tsipras. Viewers of the television series Yes Minister will realise that this is the worst epithet the apocryphal civil servant Sir Humphrey Appleby could muster.  He finds himself having to go to the Greek Parliament with a long list of economic reforms some of which have to be voted in favour of by Wednesday. Even worse some of them require a u-turn on the legislation that this government has passed. Then we get to the increase in austerity of which there are few precise details right now but we know are coming. The Syriza election campaign was based on a no to more austerity which was reinforced by the Oxi result of just over a week ago.

We are left reviewing ever more debt, an ongoing recession and potential asset-stripping. Let us hope that the saying “it is darkest before the dawn” comes true.

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39 thoughts on “Exactly how will the privatisation or asset-stripping programme for Greece work?

  1. As usual you have nailed it.

    A German banker talked on CNBC today of the Greeks staring into the abyss this last week and learning their lesson. I think the they have actually been wandering around the bottom of the abyss for many months. That attitude does not bode well for the Greek people.

    At the election I bet on the SNP getting less than 56.5 seats. No way in this universe could they get more…

    I bet the Conservatives would get more than 272 seats. Would have put the house on that one if I could.

    Missed the Greek referendum for a bet. Ask any Greek person about ‘Oxi Day’ and you will understand why Tsipras wanted a no-vote to support his position.

    The only bets I can get about a Grexit go until the end of the year. Taking your advice that things last a lot longer than you can possibly imagine I wonder if they have done enough to keep the façade in place to year-end? Nothing I can see in the proposal does anything to fix the problem. I expect Tsipras to get off his plane at Athens airport with not a stitch of clothing on. Just a matter of more time and more suffering if you are Greek.

    • Hi chrisrick and thanks

      As to the Greek situation it seems that both sides still want to blame the other for any break down and Grexit. So whilst the new terms for Greece are very harsh it seems that Tsipras will try to get them through the Greek Parliament. If the Greek people reject the terms then Tsipras if he is still in charge will blame the Euro area establishment and maybe that will be his chance. But otherwise we seem to keep going on….

  2. My experience is that it is always darkest just before it goes totally black!

    The Greeks may shortly have a view on this……

  3. Hi Shaun
    So subject to the Greek Government’s further
    submission,which is a very big ask, this is not the
    beginning of the end but a continuance of lunacy but to
    what end ?
    The Foo Fighters
    Keep you in the dark
    You know they all pretend
    Keep you in the dark
    And so they all pretend

    Spinning infinity,boy
    The world is spinning me
    It’s never-ending, never ending
    Same old story!

    JRH

    • Hi JRH

      It would appear that the Euro is in Lord of the Rings terms another “precious” which the Greek and Euro area establishments are in thrall too. It was Margaret Thatcher who became associated with “There Is No Alternative” but it would appear they wish to outdo even her.

  4. Hi Shaun

    Your obvious scepticism over this “deal” says it all. One cannot see growth resulting from this; merely a depressing continuation of the downward spiral that will make a fourth bailout request inevitable and then a fifth….. The debt dynamics will continue to get worst, and this even if the Greeks go willingly into the night – which, if they have a shred of sense, they won’t. Do we have to see a military coup d’etat and soup kitchens before TPTB realise that something is amiss?

    Is it that the Eurocrats can’t see this idiocy or that they do see it but can’t admit it, not only to the outside world, but also to themselves? One theory in cosmology is that there are parallel universes which we cannot see but nevertheless exist; with the EU and its shenanigans it seems we are able to get a glimpse of this in our world.

    • Hi Bob J

      Yes I remember watching a documentary on BBC 4 where physicists were suggesting that there are strings of alternate universes. Mind you I am starting to get the feeling that the Euro bailout plan would fail in all of them!

      The essential problem is that there will be yet more debt without the economic growth to pay for it. In fact with the Greek economy having contracted recently the situation has gone backwards. Five years in what a shambles…

  5. This is awful. There will be nothing left of Greece except debt obligations for generations. I was praying that the Greeks would have had the cojones to tell the assembled dignitaries where to stick their proposals and opt for Grexit. Tsipras should hold another referendum spelling out the ‘offer’ or an alternative of leaving the Euro. My bet is he would win a mandate for exit. Opinions have changed recently.

    • My anecdotal information is they want to stay in the Euro but get out of the EZ but they think it has to be both. Someone needs to explain to the Greek people they exit the EZ but keep the Euro….

  6. Alexis Spitroast is a coward and a traitor to both the Greek people and to working people throughout EU.

    Union? It is now the European Empire.

    • Hi therrawbuzzin

      What do you think this will do to views in Scotland of the EU? The yes camp put it forwards as in a way an alternative to being formally linked to rUK, do you think that will go the way of the Euro being the Scottish currency?

      • The Euro was originally mooted as the post-Independence currency, but after its problems became obvious, the decision was made to keep the pound, preferably in a formal, but if necessary in an informal, Union.
        I have already e-mailed the SNP asking for its views on the goings-on with Greece.
        I await reply.

  7. Hello Shaun ,

    “…valuable Greek assets will be transferred to an independent fund that will monetize the assets through privatisations and other means.”

    1, valuable Greek assets :- are there any left now ?

    2, an independent fund – as determined by who ?

    3, through privatisations and other means – asset stripping , what again ?

    Will this solve the economic conditons in Greece and make the country profitable ?

    or are they again sitting in a train after the war deciding on who pays reparations ?

    we know where that ended up!

    Forbin

    • Hi Forbin

      The level of the Athens Stock Exchange General Index reinforces your point 1. Even after a 2% rally today it closed at 797 which compares to the above 5000 it was at in the latter part of 2007. For the banks of course it is even worse…..

      As to “independent” we know what that means from the behaviour of the ECB and the Bank of England don’t we?

      I remember Max Keiser making the asset stripping point 2/3 years ago, they took their time but they got along to it eventually.

  8. Hello Shaun,

    So can they really make Greece leave the Euro zone , or just make it so hard that they have to ?

    Forbin

  9. Hi Shaun,

    Greece reminds me of the perils that Mr Micawber warned us about in 1850 in David Copperfield.

    I think a major problem is that borrowing money from banks and other institutions is largely based on past record, trust and confidence and Greece now scores anywhere between nothing and zero on all three. Finland and several poorer EU countries (especially the ones that have been through painful Eurozone adjustments like the Baltic countries and by harsh reforms while suffering severe austerity depressions they have successfully come out the other side and recovered with much stronger economies) are not prepared to throw anymore good money after bad. At the very minimum they will like Finland will require Greek assets as security.

    Austerity and reform in Greece have been total failures and I can’t see this changing as we know austerity has been the dog chasing it’s tail syndrome and successive Government’s vested interests means that reforms like making tax mandatory rather than optional have not happened and are unlikely to ever happen! From what I have read, tax enforcement is largely non-existent and therefore an aggressive, efficient, investigative, tax enforcement system would raise significant amounts of extra revenue. Having statistical analysis by sector (like the Inland Revenue uses) and spot checking suspect businesses for actual turnover in person and if found to be significantly higher, an assessment is made for the last x years for unpaid tax, would raise rather large sums of money. Especially if after a few high profile cases a 3 month tax amnesty was called for people to get their undeclared taxes up to date with no penalties and after that any evasion found will incur a minimum 100% surcharge with this on a sliding scale up to 1000% depending upon the amount evaded.

    The one country that could do more but it is politically impossible for them to do so is Germany. Many Germans seem to have short memories as the allies gave them massive debt write-offs after WWII to help them with their recovery! Long term Germany cheating on an EU agreement on inflation and wage settlements may have given them a competitive advantage and large surpluses but I think this is going to rebound in the not too distant future and bite them hard. Each time I think of this, for some reason, Greece and TARGET2 borrowings from Germany come to mind.

    All in all I think the Greek disaster has much further to run where all the Eurozone countries are going to have to agree to another can kicking bailout, so Greece does not come back for more money for another three years. As this will involve the IMF and loans to them that the UK have booked as 100% safe, this and the eventual losses are also going to include us. My understanding is that the IMF has $28bn from interest payments as a buffer, but I think they are eventually going to need to write off rather more than this.

    • This idea that, “We had it hard, ergo so should you.” is both mean-spirited & perverse.

      it is also the “reasoning” which will be used to justify Italy’s, Spain’s, Portugal’s and our very own turn for the turning of the screw…”Well the Greeks put up with it…”

    • “Especially if after a few high profile cases a 3 month tax amnesty was called for people to get their undeclared taxes up to date with no penalties and after that any evasion found will incur a minimum 100% surcharge with this on a sliding scale up to 1000% depending upon the amount evaded.”

      Are you doing your own bit to assist the Troika in it’s clear objective of trying to annihilate Greece?!

      • If widespread corruption and lawlessness is allowed in a country then it quickly ceases to work for the majority but just a controlling, very wealthy small minority.

        How are a country, government and public services going work when tax evasion is a national sport?

        I don’t think anybody wants to annihilate Greece, but they are going to have to live within their means if they wish (and 80% do) to stay in the Eurozone. My preferred option for Greece would be to bring back the Drachma and default as there are many examples in defaulting history, with the most recent being Iceland, of this leading to a quick recovery. However, if 80% don’t want this then they are going to have to suffer the painful adjustments required through deflation and increased taxation to fit the Eurozone straightjacket. Tax evasion, corruption and political favours and vote buying has got Greece where it is today with a 180% deficit.

        Never forget that one person’s tax evasion is another person’s tax increase, if the Government is going to balance the books.

        • Tax evasion is reasonable if the revenues are not for the benefit of the nation.
          Tax evasion is reasonable if it is the only way to support elderly relatives or unemployed (50%) young relatives.
          Tax evasion is reasonable if you are ill and worried about how you will pay for your medical care.
          Tax evasion is JUSTIFIED if fakelakia are required at every turn.

          Root out the corruption, allow basic living guarantees, THEN hammer tax evasion, but do it on ALL fronts.

    • I agree Greece needs to stamp out or significantlyreduce it’s corruption , it is your Draconian measures I disagree with where you fine a business/individual up to 10 times their tax bill will make things worse as businesses and individuals file for bankruptcy putting more people out of work and failing to get a jobv with a bankruptceorder on their record. As I keep saying, whether a system works depends upon the implementation of the general idea.

  10. Tsipras decides to renege on referendum. This looks like possible a Maiden square moment, a poll tax protest time – we might see civic protests in Athens aimed at toppling politicians who renege on their referendum.

    Default and devaluation will initially hurt, but historical experience suggests that recovery quickly follows. In Iceland’s case – it was heartening to see the bankers prosecuted.

    Shaun, you say it would be sickening to see French banks round-tripping the bailout. But that is a risky investment made under Greek law, where charges could be laid and banking assets seized.

        • Mere speculation about Greek public opinion. Predictions about the future are hard.

          Someone has to pay taxes to support current Greek spending. Tsipras thought he could milk the EU, but the Dutch, Finns, Eastern Europeans & Germany called his bluff. So he can either default or implement austerity.

          If Greece didn’t borrow and balanced it’s budget – it would be happiness as recorded by Micawber.

  11. Hi Shaun,
    A concise and forensic analysis (as alwaysl) This is a disaster for Greece and its people. I can only hope that the dawn will not be “Golden”

  12. When the Euro was launched the politicians wanted as many countries as possible to join, even though it meant bending or even ignoring, the rules of entry. Greece, never prudent or solvent, was allowed in. The folly of this has now been exposed and everyone can see the dire consequences of this all to clearly, especially the Greek people.
    Another fudge has been agreed, to defer the evil day and save face. But unless the Euro members recognise that one common currency, produces one common debt, that all are responsible for, the Euro and political union are dead in the water.

    • Hi Foxy

      The Eurobond concept emerges every now and then usually to find that a latter day version of a Focke Wolf 190 shoot sit down! Ironically there was an implicit belief in this pre crisis as spreads narrowed but moves at the moment involve ECB QE.

      In this sense it is Germany saying nein whilst in other areas it pushes for more integration and involvement.

  13. Sean if sovereigns are now to stand alone when in debt what does this mean for borrowing costs? Surely on the next big debt sale Spain et al have to pay more than say even France. I know the bonds are sold per country but before we had this underlying understanding that all countries were backed by the “gold standard” of the EU/ECB.

    Not the exact point of your article but I see this as the potential big event post-Greece.

    • Hi Benfitzg

      Eventually yes and the likely next candidate in my view is Portugal. But for now (until September 2016) this is being covered up by the ECB QE operations. As of the end of last month the Bank of Portugal had bought some 4.5 billion Euros worth which keeps the wolf from the door to some extent.

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