A New Hope For Greece And Its Economy

For the second time in a couple of months voters in an election have delivered a result which has surprised the “experts” and pollsters. In the UK we saw the opinion polls misfire badly but yesterday’s events in Greece saw them in even more disarray. The referendum which was supposed to be neck and neck turned out to be as shown below. From the BBC.

The final result in the referendum, published by the interior ministry, was 61.3% “No”, against 38.7% who voted “Yes”.

Accordingly we are left again wondering as to the value and worth of opinion polls as rather than a close result we saw a decisive one.

Some care is also needed in considering what was decided as it was presented by both Euro area politicians and some sections of the media as a vote on the Euro. This was deliberately misleading as Prime Minister Tsipras was very clear on this point in his statement on the first of the month..

Sunday’s referendum is not about whether our country will stay in the Eurozone.

The vote was about a specific bailout package and the extra austerity measures it will pile onto an already struggling Greek economy. As time progresses the No vote does make it more likely that Greece will leave the Euro but as of this morning it is still there and has no immediate plans to leave. Frankly I consider that to be a shame as I have argued for several years now that Greece would be better off if it left the Euro. As to those on the other side of the argument they have created an economic collapse in Greece which some five years later shows virtually no sign of ending.

Finance Minister Varoufakis Resigns

An extra factor has been thrown into what was already a complicated mixture by the fact that the Greek Finance Minister Yanis Varoufakis has resigned this morning at what you might easily think was his moment of triumph! Here is his announcement.

Soon after the announcement of the referendum results, I was made aware of a certain preference by some Eurogroup participants, and assorted ‘partners’, for my… ‘absence’ from its meetings; an idea that the Prime Minister judged to be potentially helpful to him in reaching an agreement. For this reason I am leaving the Ministry of Finance today.

He had a chequered tenure but he was willing to stand up to the bullying and intimidatory tactics of the Euro area establishment and their media acolytes for which he deserves credit. Actually it looks to be the type of resignation where someone is given a push.

The issue of democracy

Perhaps the concept of democracy is not as dead as I have thought! Let us hope so. Although the Euro area tried its best to dampen such thoughts.

President Juncker is consulting tonight and tomorrow with the democratically elected leaders of the other 18 Eurozone members.

However as we recall the role of the European Central Bank (ECB) in all of this and let’s face it there have been periods where it has driven events this bit sounds profoundly undemocratic.

as well as with the Heads of the EU institutions.

Also as the other four European Union Presidents join him voters may wonder as to when they had the chance to vote for any of them?

What next for the ECB?

The next step in the Greek saga involves the ECB deciding what to do about its support for the Greek banking sector. This is crucial because its decision to freeze the level of help called Emergency Liquidity Assistance or ELA at 88.6 billion Euros led to the Greek banks closing their doors and restricting ATM withdrawals to 60 Euros per day for Greek residents. We know that in spite of such measures to restrict the size of deposit flight the theme has continued. From Reuters.

Greece’s central bank will file a request on Sunday that the European Central Bank raise the amount of emergency funding (ELA) for Greek banks, the country’s government spokesman said on Sunday.

Not for the first time in this saga the unelected ECB finds itself centre stage in the crisis which torpedoes somewhat the argument of President Juncker discussed above. However unless it wants to drive Greece out of the Euro which would be awkward to say the least for an organisation which considers it “irrevocable” it cannot cut ELA today. Should it raise it then that would be perceived as a victory for the Greeks against it and some sort of reward. Therefore logic points at an unchanged level for today.

Default Risk

This has risen considerably after the referendum result as frankly all roads lead to it now. Should Greece leave the Euro it is logical for a default to also occur and should it stay there will have to be what is euphemistically called a “debt restructuring”. Whilst some care is needed as these days that market is very illiquid Greek bonds have reflected this by plummeting in price.

DEALERS INDICATE GREEK 2-YEAR GOVT BOND YIELDS 13 PERCENTAGE POINTS UP AT 48 PCT BUT NO TRADING GOING ON – TRADEWEB (h/t @moved_average )

For those of you who prefer such matters in chart form here it is from Sober Look.

The moves when the referendum was announced and following the referendum result could hardly be more clear. However these days most Greek bonds are in official hands and they seem to be not only lagging events but also in some alternate universe far,far away.

ECB’s Noyer Says Cannot Restructure Greek Debt To Eurosystem (h/t @livesquawk)

As the International Monetary Fund considers itself to be not only a preferred creditor but the preferred creditor we now have both the main institutions dismissing what is obvious to everyone else. Or to be more specific both seem to want the other to take the pain! The body which is most devoid of reality on that front is the ECB because even if the IMF wrote off all of its debt it would barely scratch the surface of what is required.

The Debt Sustainability Analysis of the IMF told a very different story.

Coming on top of the very high existing debt, these new financing needs render the debt dynamics unsustainable.

It also confirmed one of the running themes of this blog which is that along the lines of to infinity and beyond the Greek debt is on it way to becoming perpetual debt.

the maturities of existing European loans will need to be extended significantly

Deadline Day

We have had a lot of d-days, final countdowns and even h-hours in the Greek crisis but I think that we finally have a day which will result in a clear change and that it July 20th. Why? It is when Greece has to pay some 3.5 billion Euros to the ECB because one of its sovereign bonds matures. As it does not have the resources to pay this then as David Bowie put it we will have to see.

Ch-Ch-Changes

In the meantime Greece has been making some payments since its default to the IMF. It made a payment on a Samurai bond (Japanese yen denominated) last week and plans to pay the coupon on its July 2018 bond today.

The Greek Economy

Contrary to the claims of the Euro area establishment and the institutions this remains in quite a mess. Their version of events that Greece was just about to turn a corner conveniently ignores the evidence of the collapse in previous years. RBS have captured the dire state of affairs in the chart below.

https://twitter.com/RBS_Economics/status/617971547693805568

Yes that is 1985 and it provides quite a counterpoint to Euro area apologists as Greece has indeed retraced to then. They of course forecast exactly the reverse which is why Greece joined.

Comment

I think that there are several hopeful factors in what has taken place in Greece over the weekend. Firstly an attempt by the Euro area establishment to bully and intimidate Greek voters has failed. By the way when did media organisations like the Economist and the Financial Times turn into such establishment lackeys? Secondly even such an establishment is likely to balk at actively pushing Greece out of the Euro it has told everyone is “irrevocable” so there is a good chance it will sweeten its offer. Thirdly Greece continues to edge nearer to a Euro exit and whilst it would have been much better if it had done so several years ago it remains the best out of an admittedly poor set of choices.

As to the two bargaining groups of the Greek government and the institutions then I feel that both sides now want this to be over but here is the catch. They both want to be able to blame the other or as Lily Allen put it.

It’s not me it’s you
Always has been you
All the lies and stupid things you say and do
It’s you
It’s not me it’s you
All the lies and pain you put me through
I know that it’s not me it’s you
You
You
It’s not me it’s you, you

Unfortunately the Greek people are also singing along to Stealers Wheel.

Cause I don’t think that I can take anymore
Clowns to the left of me, Jokers to the right,
Here I am, stuck in the middle with you.

Whatever happens next the Greek people look set to suffer even more

Last night at 11 pm British Summer Time saw an event which the last five years have been building up to. From the International Monetary Fund or IMF.

I confirm that the SDR 1.2 billion repayment (about EUR 1.5 billion) due by Greece to the IMF today has not been received. We have informed our Executive Board that Greece is now in arrears and can only receive IMF financing once the arrears are cleared.

Thus Greece finds itself in arrears to the IMF but I can confirm that the world has not ended!

However there are a lot of implications which in the IMF has implicitly admitted by the use of the word “arrears” as it avoid the word default. Some have argued that this is like missing a credit card payment but there are quite a few differences to that. For example penal interest-rates on the whole sum and missed payment fees and so on. Also credit card companies like you to run into arrears because as long as you actually repay they can rub their hands in anticipation of making a substantial profit out of you. The longer you take to repay the more money they actually make.That is not the business model of the IMF which lest we forget is supposed to put a country back on its feet so that both it and the individual country concerned can live happily ever after.

The IMF

The IMF’s leadership now finds itself facing a problem I have warned about since June 2010.

Politicians should stop implying that the help provided by the IMF is in effect free. For example US Treasury Secretary Geithner suggested that moves to expand the IMF “wouldn’t cost a dime”. This is one of those superficially true statements that are very dangerous. If you are liable for something it does not cost anything until it goes wrong.

There is of course a supreme irony that the current head of the IMF Christine Lagarde is an ex-politician.

Whilst this may suit politicians, taxpayers and voters should in my view be concerned about the moral hazard of one group of politicians voting to increase funds available to help another group of politicians which may include themselves.

She now heads an organisation facing the largest non-payment in its history as a direct consequence of the way that she and her predecessor Dominique Strauss-Khan twisted the organisation into helping with Euro area fiscal problems.

We also face the consequence of some recent can-kicking as several IMF payments due earlier this month were bundled up in the hope that “something wonderful” might happen by the end of the month. Right now the IMF is left wondering about the 32 billion or so Euros it has lent in total. Due to the economic recession which of course was turned into a recession by a plan supported by the IMF it is unlikely to be able to repay those funds either.

So let is leave the IMF mulling how it is going to explain is largest ever arrears to its shareholders. In case you are wondering the UK is a little over a 4% shareholder.

Preferred Creditors

The IMF is a “preferred creditor” in that it is supposed to be repaid first. As it has not been in this instance that poses questions for the vehicle the Euro area uses to loan to Greece called the European Stability Mechanism or ESM. Not so stable looking today is it? Theoretically it is also a “preferred creditor” which seems now a bit like tilting at windmills.

European Central Bank

It now has an extra problem as it mulls the amount of Emergency Liquidity Assistance or ELA it has given to Greek banks. It imposes a haircut on the collateral it receives from the Greek banks in return for this and the obvious consequence of last nights default is that it should increase the haircut. Here we see an example of a rock meeting a hard place as there is not only doubt about whether Greece has enough collateral for current ELA levels its banks would like more of it.

Greece

There were all sorts of strange stories yesterday. Perhaps the most bizarre was a claimed offer of help from Turkey! The Greek government also got in on the act as Prime Minster Tsipras made a new proposal to the Euro area. According to the Financial Times he has taken this a step further today.

Mr Tsipras’ letter says Athens will accept all the reforms of his country’s value-added tax system with one change: a special 30 per cent discount for Greek islands, many of which are in remote and difficult-to-supply regions, be maintained.

On the contentious issue of pension reform, Mr Tsipras requests that changes to move the retirement age to 67 by 2022 begin in October, rather than immediately. He also requests that a special “solidarity grant” awarded to poorer pensioners, which he agrees to phase out by December 2019, be phased out more slowly than creditors request.

So it appears that he has blinked first but as I pointed out only last Thursday there is a problem with such a move.

However its analysis of the impact of a fiscal consolidation has a chilling implication for the austerity package which the Greek government has just proposed. The impact will be to reduce GDP by 1.5% to 2% this year and to reduce it by 3-4% next year!

So we return to a problem which so far in the Greek crisis has failed to find a solution. In return for the loans and credit Greece needs the creditors always want more austerity which shrinks its economy and makes it ever less likely the loans will be repaid. It also leads to more demands for austerity in a cycle which so far has been endless.

The Eurogroup

If the media wires are any guide this body seems to be singing along to Tom Petty and the Heartbreakers.

Well, I won’t back down
No, I won’t back down
You can stand me up at the gates of hell
But I won’t back down

No, I’ll stand my ground, won’t be turned around

They are formally meeting at 5:30 pm Brussels time but it is hard not to wonder why? After all they show no sign of changing their position. It does not seem to bother them that its very nature is not only destructive it is self-destructive.

Comment

This saga continually plumbs new depths. On the one side we have the institutions or creditors insisting on programs which will further shrink the Greek economy. They of course do their best to deny this and are willing to rewrite history to do so. From the head of the ESM Karl Regling.

Due to the economic policies adopted under the EFSF programme, the country was on a good path towards strong growth until the second half of 2014. The many sacrifices which the Greek people had to make were paying off…… According to the OECD and World Bank, Greece was a reform champion until 2014, with encouraging growth prospects.

“Reform champion”? “Encouraging growth prospects”? That is before we consider his omission of what the “economic policies” have done to Greece’s economy. They will do it again.

As to the Greek government it now faces the problem of people wondering exactly what its modus operandi is? It badged itself as anti-austerity but now is willing to give a lot of ground on that front.

The losers yet again are the Greek people who I feel dreadfully sorry for as this shambles will affect them materially and they have already suffered on a grand scale. Let us hope that Tom Petty was right below.

Baby, even the losers get lucky sometimes
Even the losers keep a little bit of pride
They get lucky sometimes