The Greek saga has certainly seen inflation in the number of deadline days it faces! Nobody in authority in the Euro area seem to think through the consequences of this on economic expectations and prospects for the Greek economy. The effect can only be a bad one. Today’s has been driven by a piece of can-kicking which took place early in the Greek crisis. This was when under the “shock and awe” program so beloved of Christine Lagarde the European Central Bank was instructed to buy Greek government bonds. The plan if you can call it that was to stabilise the Greek bond market amongst others and then to sell the bonds back to private investors later. The program time span was supposed to be 3 years as according to the forecast Greece would be on the road to recovery rather than as it turned out the road to nowhere.
Back in June 2010 ECB Executive Board member Jose Manuel Gonzalez-Paramo told us this.
Even though the non-standard measures have served the economy well, we are fully aware that keeping them for longer than necessary would entail risks that should be avoided,
He even used one of the most popular words in my financial lexicon for these times “temporary”. Actually that does not sit quite so well on the day that one of the bonds bought by the ECB expires and it still owns it! That is about as permanent as you can get although as we will see in a moment actually we will get a new definition of permanent. Perhaps someone might like to ask him how this served the Greek economy well as 5 years later the Greek government does not have the money to repay it.
A rule of the Euro area crisis applied by the ECB has been that a Euro area country cannot default and hence all sovereign bonds will be repaid at par or 100. In its arcane world it was buying bonds at say 50 or 60 and then booking them at 100 and now is one of the occasions when it gets its 100 plus interest. If Greece could repay it then you might say it was a job well done but of course that is not the case.
Step forwards the European Stability Mechanism (ESM)
The obvious solution to an expanding balance sheet at the ECB for a Eurocrat was to create a vehicle which was off-balance sheet. After all we don’t want to scare the taxpaying horses do we? So we ended up with a Special Purpose Vehicle or SPV which is rather different from the one usually driven by Captain Blue although it may have as many lives as Captain Scarlet. After a debacle called EFSF we now have the ESM and it has stepped forwards this morning.
The European Stability Mechanism (ESM) approved the first tranche of financial assistance for Greece of €26 billion.
Some of it is arriving as a banking faster payment.
The Board also decided to immediately disburse €13 billion to Greece. Today’s disbursement is the first part of a sub-tranche of €16 billion, to be used for budget financing and debt servicing needs.
If we cut to the chase we see that The Euro area taxpayer backed ECB is being paid out by the Euro area taxpayer backed ESM. The only change is that the latter is an off-balance sheet although the attempt to stop it being recorded in national accounts was foiled by Eurostat. But there are problems here as there are clear Ponzi style elements to this and in fact debt monetisation especially if you believe that it will be an extremely long time before Greece is ever (if at all) able to repay this. From Hugo Dixon.
This loan will have a very long average maturity (32.5 years) and a very low interest rate which starts at 1%.
Thus the original 3 years became 5 plus and now we can add another 32.5 years to that in an “to infinity and beyond” type of way. I did argue at the beginning that these bonds would become perpetuals and for most if not all of those involved in the negotiations that is what they will be.
Care is needed with the interest-rate as it is not always a fixed rate but for now it is very cheap. With apologies to Middle of the Road the Eurogroup finance ministers view can be summed up by this.
Ooh we, chirpy, chirpy, cheap, cheap
Chirpy, chirpy, cheap, cheap, chirp
If we return to the issue of debt monetisation then the St.Louis Fed defines it thus.
a permanent source of financing for government spending
I will let readers decide for themselves whether what has been described above falls into that category.
Meanwhile the asset-stripping begins
From Keep Talking Greece.
A German company, airport operator FRAPORT won the bid to operate and maintain 14 regional airports, considered to be top of the top in Greece. With an offer of 1.23 billion euro, the consortium of Fraport -Slentel (a unit of Greek energy group Copelouzos) won the bid to lease the regional airports for 40+10 years.
The term of that seems rather permanent too doesn’t it?
What about Currency Wars?
Regular readers will be aware that I have argued that a devaluation and presumably a departure from the Euro was needed in Greece’s situation. In recent times the ECB has moved in that direction as its QE program has pushed the Euro lower. But the world is moving on including a neighbour and competitor with Greece for tourism business. From AFP.
Turkey’s embattled lira Thursday hit a new historic low in value against the U.S. dollar, breaking the ceiling of three lira to the dollar for the first time.
Also the Currency Wars drumbeat is being hammered out in Kazakhstan. From Bloomberg.
Kazakhstan’s tenge plunged a record 23 percent after the country relinquished control of its exchange rate,
Even the Swiss Finance Minister has popped up with a call for the Swiss Franc to return to 1.22 versus the Euro. As Snoopy would say “Good luck with that one!”
Fishing for a solution
The Wall Street Journal has looked at this.
And Greeks have earned a living from fish for eons. It is the country’s second-largest agricultural export, behind fruit and nuts but ahead of olive oil and cheese.
But sadly the news is grim.
A collapse in household buying power has demolished demand for fish, and with it fishermen’s income. Aquaculture companies, once a shining star in the marine economy, are drowning in debts. Fish processors are struggling with high costs for finance and relentless price pressure among strapped shoppers.
What especially caught my eye was the “high costs for finance” because if you look earlier in this article in official terms it is ever cheaper. Or if you like another example of my theme of the large gap between the finance sector and the real economy.
After five years of a supposed rescue that is about as big an indictment as you can get of what has gone on here.
The situation in Greece is one that can be described under the banner of round-tripping with most of it being corresponding debits and credits at different accounts backed by Euro area taxpayers. Whilst the statement below has been issued the fact is that the ESM in Luxembourg has paid the ECB in Frankfurt so some of the money has not really touched Greece at all!
Another 7.1 billion Euros repays the EFSM taking UK and other non-Euro members off the hook. You get the idea.
Meanwhile as Greece continues its economic depression and the refugees there live in squalor we have a let them eat cake style announcement.
@EU_Commission has made sure programme is socially fair & protects most vulnerable throughout. ( European Commissioner for Employment, Social Affairs, Skills and Labour Mobility Marianne Thyssen).
The International Herald Tribune is right.