Greek Government's Plan Rejected
It has turned out that the latest Greek plans in connection with the second bailout have essentially been rejected by the eurogroup. This hasn't kept the Greek government from claiming the exact opposite:
“Greek political leaders said they had clinched a deal on economic reforms needed to secure a second EU bailout, but euro zone finance ministers demanded more steps and a parliamentary seal of approval before providing the aid.
The EU and the International Monetary Fund are exasperated by a string of broken promises by Athens and weeks of disagreement over the terms of a 130 billion euro ($172 billion) bailout, with time running out to avoid a default. Finance ministers of the 17-nation euro zone meeting in Brussels warned there would be no immediate approval for the rescue package and said Athens must prove itself first.
Jean-Claude Juncker, who chairs the Eurogroup, set three conditions, saying the Greek parliament must ratify the package when it meets on Sunday and a further 325 million euros of spending reductions needed to be identified by next Wednesday, after which euro zone finance ministers would meet again.
"Thirdly, we would need to obtain strong political assurances from the leaders of the coalition parties on the implementation of the programme," Juncker told a news conference after six hours of talks in Brussels. "Those elements needs to be in place before we can take decisions."
"In short, no disbursement before implementation."
It should be no surprise that the eurocrats are now playing hardball with Greece. Too many promises have been broken over the past two years.
Meanwhile, Bob Pisani not unreasonably wonders what exactly it is the Greek government is supposed to be agreeing to. The official release reads like a product of the – a random compilation of completely meaningless gibberish:
"The government's discussions with the troika were concluded successfully this morning on the issue which had remained open for further elaboration. The political leaders have agreed on the result of these discussions.
Thus there is general agreement on the content of the new program, in view also of this evening's Eurogroup meeting. This program accompanies the new loan agreement to finance Greece with 130 billion euro."
"The political leaders have agreed on the result of these discussions … thus there is general agreement on the content of the new program…"
The Economic Contraction Deepens
Meanwhile, the Greek economy has descended further into the abyss in January. First it became known that tax revenues came in 7% below expectations, with VAT collections light by high double digits – a shortfall of about € 1 billion.
Then a series of economic data releases painted a picture of a 'death spiral' as the Telegraph's Ambrose Evans-Pritchard puts it:
- “Greece's manufacturing output contracted by 15.5% in December from a year earlier.
- , compared to minus 7.8% in November.
- Unemployment jumped to 20.9% in November, up from 18.2% a month earlier.
We have a feeling that by the time the April elections come around, the political situation in Greece will change dramatically. The hard left will likely grab the majority of the votes – not an absolute, but at the very least a relative majority. We are slightly surprised there is no open revolt already, although this may actually be about to change as we write these words, see further below. Any agreements the current coalition government makes won't be worth the paper they are printed on. A hard default remains a highly likely outcome, the main question seems to be whether it happens sooner or later.
CDS May Pay Out After All
Meanwhile, CDS traders are reportedly increasingly confident that CDS on Greek debt will be triggered by the restructuring:
“Credit default swaps traders are increasingly sanguine that a deal to restructure Greek debt will trigger CDS and lay to rest a year-long debate that has undermined the value of sovereign CDS in the eyes of many investors.
“Our baseline scenario is collective action clauses will be inserted into the Greek-law bonds, and when these are actioned the CDS will trigger,” said one head of European credit trading at a US bank.
“The market will breathe a sigh of relief and you’d hope this will mitigate the speculation around sovereign CDS, but there’s been damage done to the product in the past few months and I don’t think it’ll be cured overnight,” he added. The value of sovereign CDS as a hedging tool came into question last year when authorities seemed intent on avoiding a CDS trigger when restructuring Greek debt. According to a Fitch survey of European investors managing US$7.1trn of assets, 28% planned to reduce their use of sovereign CDS, although only 10% said the decrease would be material.
Dealers conceded a huge amount of uncertainty remained over the plan to cut Greek debt, which is thought to be unveiled by European officials imminently. At the same time, traders believed CACs will be inserted into Greek-law bonds (which make up around 90% of Greece’s outstanding debt) presuming the restructuring actually goes ahead.”
So at least sovereign CDS may remain valuable as hedging tools when everything is said and done. With only € 2.8 billion in notionals on Greek debt outstanding, there won't be any great effect on the financial system if the CDS contracts are triggered. Besides, presumably sufficient margin collateral has already been posted by the writers of the contracts.
Violent Protests Break Out, Government Crumbles
The protests and demonstrations in Greece have turned ugly. Meanwhile, more and more ministers are resigning from the Papademos cabinet in a bid to save their own political hide.
(Photo credit: reuters/yiorgos karahalis)
“Greece's future in the euro grew increasingly precarious Friday as violence erupted on the streets of Athens during a general strike and five politicians resigned from the government after European leaders demanded deeper spending cuts.
Hours after Greece claimed it had reached an agreement among its squabbling party leaders on new cutbacks, European officials dashed any hopes that the country was close to getting its bailout. Finance ministers said more austerity needs to be agreed and set a deadline for the middle of next week.
If Greece's government fails to meet Europe's demands, the debt-ridden country faces a chaotic debt default next month that would send shockwaves around the world economy and could doom a generation of Greeks to even deeper hardship.
If it does deliver those demands, Europe has committed to give it a €130 billion ($172 billion) lifeline that would at least postpone Greece's day of reckoning.”
Altogether six ministers have resigned by now (the five mentioned above resigned today alone). The AP report continues:
“Thousands of people marched through the streets to protest the cuts, which include a 22 percent drop in the minimum wage at time when the unemployment rate is over 20 percent and the economy is in a fifth year of recession. Clashes broke out, with demonstrators hurling fire bombs at riot police shooting tear gas.
Resistance was also growing in Athens' halls of power, with six members of the 48-strong Cabinet leaving the government over the past two days because they could not agree to the new demands.
The five were Deputy Foreign Minister Mariliza Xenogiannakopoulou, a majority Socialist lawmaker, the transport minister and the deputy ministers of defense, merchant marine and agriculture — all members of the rightist LAOS party, a junior coalition member. On Thursday, Deputy Labor Minister Yiannis Koutsoukos, a Socialist, also quit.
"They are trying to impose measures that will make the recession worse and drive the country to despair," Xenogiannakopoulou said in a letter, adding that she would vote against the cutbacks in parliament.
LAOS leader George Karatzaferis said he was withdrawing support for the measures agreed a day earlier, describing the country's treatment by its European partners as "humiliating."
Though LAOS is a small party, its action underscores the growing discontent, both among political leaders and households — nearly one in two young people are out of work.”
As the LAOS leader put it, he doesn't want to be 'under the German jackboot'. He may be surprised to learn that this statement is probably welcomed in Germany. As Mish pointed out yesterday, the Germans are seemingly trying to push Greece out of the euro area, while officially proclaiming that this is the last thing on their mind.
As a side effect of the above, the Athens stock market fell by nearly 5% today. In short, a pullback that could produce a buying opportunity is underway. As Baron Rothchild reportedly once said, the 'time to buy is when there is blood in the streets' – a condition that seems fulfilled as of today.
A videos documenting the clashes between protesters and police in Athens .
It is understandable that Greece's citizens are frustrated and angry at the recent developments. They are the ones now condemned to shouldering the burdens created by an unconscionable political class. The economic situation remains more or less hopeless at this point, so there is not even a light at the end of the tunnel that might create a bit of motivation and make it psychologically easier to go through the retrenchment.
Alas, the question remains what would happen if Greece were to default and leave the euro. People don't want the government to cut back, but without the bailout funds it will have to cut back far more dramatically, as it will then be forced to spend no more than what it actually takes in.
While this would be a salutary development in the longer term, it would be the opposite of what the protesters presumably want or expect. In addition, the main reasons for Greece to return to the drachma would be the ability to finance government debt with the help of the printing press and a devaluation to help narrow the current account deficit. In that case, the country would likely soon experience hyperinflation given the track record of the government in terms of spending discipline.
Meanwhile, prosperity can not be attained by means of devaluation. In the short term it may boost export earnings and tourism income, but it should be obvious that this type of prosperity is a complete illusion. In reality, it means an accelerating impoverishment. This becomes clear by once again looking beyond the veil of money. If a certain widget for instance costs € 10 both in Greece and Germany today, and Greece were to devalue the new drachma by 50% so that it could now offer the widget for € 5, it means that it would ceteris paribus effectively be paying with two widgets for for one widget. After all, what is exchanged between Greece and the rest of the world it trades with are goods and services – money only facilitates these exchanges.
Or putting it differently: what Greek exporters would gain by dint of being able to offer their goods at lower prices, importers would lose by dint of having to pay higher prices. Any perceived advantage gained by devaluation is therefore ephemeral on a society-wide basis.
It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
10 Responses to “Greece – Economy Spirals Down the Drain, Violence Erupts”
Most read in the last 20 days:
- Insanity, Oddities and Dark Clouds in Credit-Land
Insanity Rules Bond markets are certainly displaying a lot of enthusiasm at the moment – and it doesn't matter which bonds one looks at, as the famous “hunt for yield” continues to obliterate interest returns across the board like a steamroller. Corporate and government debt have been soaring for years, but investor appetite for such debt has evidently grown even more. The perfect investment for modern times: interest-free risk! Illuustration by Howard...
- US Economy – Something is not Right
Another Strong Payrolls Report – is it Meaningful? This morning the punters in the casino were cheered up by yet another strong payrolls report, the second in a row. Leaving aside the fact that it will be revised out of all recognition when all is said and done, does it actually mean the economy is strong? Quo vadis, economy? Image credit: Paul Raphaelson As we usually point out at this juncture: apart from the problem that US labor force participation has...
- Investing in Gold in 2016: Global Paradigm Shifts in Politics and Markets
Crumbling Stability In the past few months, we have witnessed a series of defining events in modern political history, with Britain’s vote to exit the EU, (several) terror attacks in France and Germany, as well as the recent attempted military coup in Europe’s backyard, Turkey. Global stability continues to be undermined Uncertainty over Europe’s political stability and the future of the EU keeps growing. These worries are quite valid, as geopolitical...
- Trump's Tax Plan, Clinton Corruption and Mainstream Media Propaganda
Fake Money, Fake Capital OUZILLY, France – Little change in the markets on Monday. We are in the middle of vacation season. Who wants to think too much about the stock market? Not us! Yesterday, Republican presidential candidate Donald Trump promised to reform the U.S. tax system. This should actually even appeal to supporters of Bernie Sanders: the lowest income groups will be completely exempt from income and capital gains taxes under Trump's plan. We expect to hear...
- The Great Stock Market Swindle
Short Circuited Feedback Loops Finding and filling gaps in the market is one avenue for entrepreneurial success. Obviously, the first to tap into an unmet consumer demand can unlock massive profits. But unless there’s some comparative advantage, competition will quickly commoditize the market and profit margins will decline to just above breakeven. Example of a “commoditized” market – hard-drive storage costs per GB. This is actually the essence of economic...
- Bank of England QE and the Imaginary “Brexit Shock”
Mark Carney, Wrecking Ball For reasons we cannot even begin to fathom, Mark Carney is considered a “superstar” among central bankers. Presumably this was one of the reasons why the British government helped him to execute a well-timed exit from the Bank of Canada by hiring him to head the Bank of England (well-timed because he disappeared from Canada with its bubble economy seemingly still intact, leaving his successor to take the blame). This is how Mark Carney is seen by...
- Why Americans Get Poorer
Secular Stagnation OUZILLY, France – Both our daughters have now arrived at our place in the French countryside. One brought a grandson, James, now 14 months old. He walks along unsteadily, big blue eyes studying everything around him. Put to sleep by monetary lullaby! This is what children look like approximately five minutes into a rant on the Fed's policy mistakes. It never fails! Photo credit: Jack Weid He adjusted quickly to the change in time zones. And...
- An Old Friend Returns
A Rare Apparition An old friend suddenly showed up out of the blue yesterday and I’m not talking about a contributor who had washed out and, after years of ‘working for the man’, decided to return for another whack at beating the market. Instead I am delighted to report that I am looking at a bona fide confirmed VIX sell signal which we haven’t seen for ages here. Hello, old friend. Professor X and Magneto staring each other down in the plastic...
- The Fabian Society and the Gradual Rise of Statist Socialism
The “Third Way” “Stealth, intrigue, subversion, and the deception of never calling socialism by its right name” – George Bernard Shaw An emblem of the Fabian Society: a wolf in sheep's clothing The Brexit referendum has revealed the existence of a deep polarization in British politics. Apart from the public faces of the opposing campaigns, there were however also undisclosed parties with a vested interest which few people have heard about. And...
- Retail Snails
Second Half Recovery Dented by “Resurgent Consumer” We normally don't comment in real time on individual economic data releases. Generally we believe it makes more sense to occasionally look at a bigger picture overview, once at least some of the inevitable revisions have been made. The update we posted last week (“US Economy, Something is Not Right”) is an example. Eager consumers storming a store Photo credit: Daniel Acker / Bloomberg We'll make an...
- The Fed’s “Waterloo” Moment
Corrupt and Unsustainable James has been a big help. Trying to get him to sleep at night, we have been telling him fantastic and unbelievable bedtime stories – full of grotesque monsters... evil maniacs... and events that couldn’t possibly be true (catch up here and here). He turned his head until his gaze came to rest on the barred windows of the main building. Finally, he spoke; as far as I was aware these were the first words he had uttered in more than five years....
- Good Money and Bad Money
Confidence Gets a Boost OUZILLY, France – Last week’s U.S. jobs report came in better than expected. Stocks rose to new records. As we laid out recently, a better jobs picture should lead the Fed to raise rates. This should cause canny investors to dump stocks. Canny investors at work (an old, but good one...) Cartoon via Pension Pulse But the stock market paid no attention. It follows logic of its own. Headlines told us that last Friday’s report “boosted...