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 post-modernism essay generator – 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.
  • Industrial output fell 11.3%, 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)



As the AP reports:


“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 can be seen here.

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.




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10 Responses to “Greece – Economy Spirals Down the Drain, Violence Erupts”

  • juergenwahl:

    Back in October, the New York Times ran an article by Bill Marsh who summarised some B. I. S. data concerning net exposure of banking systems by country. Around that time, Greece owed the French banking system US$ 54 billion, the Germans US$ 19 billion, the Americans US$ 3 billion, and the Brits US$ 1 billion. France appears to be the potential big loser on the Greek default now in progress, with Germany deserving at least a bloody nose as a fruit of their participation. The really surprising thing about these numbers was the enormous, net exposure of the French banking system to the problem children of Euroland. The troubled exposures are from Italy, US$ 366 billion, Spain US$ 118 billion, and others, all totalling US$ 581 billion. Germany’s net exposure to this slobbering crowd is US$ 159 billion, while that of the Brits is US$ 80 billion, and the Americans only US$ 17 billion. If this presently unfolding Euro-mess cannot be adequately papered-over, the French banking system could be the next victim of the insane march towards one world government, and the futile attempt to resurrect the Tower of Babble (remember Esperanto?). Should France fall, she owes the Brits US$ 22 billion, and the Brits owe the Germans US$ 321 billion, etc., etc., etc. No wonder that the US is still considered a safe haven for capital flows!

  • worldend666:

    I still think it would be a screaming buy at that point though Cinquero, even if the Greeks fail to capitalise on their competitive edge and put crazy tariffs on all imports.

    After a 95% to 97% peak to trough drop in the Athens General Index, failing a shut down of the stock market it has to be a buy. The question for foreign investors is whether we be allowed to buy in.

  • Eddy:

    Nobody defends devaluation as the road to riches. But if it stops the destruction of the productive apparatus and stops the downward spiral ¿why not?. The alternative (within the euro) is years of contraction until internal prices fall into line…at which point Greece would have lost a great amount of productive capital.

    • Cinquero:

      What “productive capital”? I’d suggest Greece has no such thing — not in sizes that matter.

      Devaluation helps to prevent imminent, unexpected destruction due to massive deflation/uncontrolled fear/balance sheet propagation. That’s the advantage of fiat currencies and central banks. Unfortunately, it looks like we haven’t learned yet how to use that additional power in a useful way: we gave Greece more time, but Greece failed to use it. And again, we (the Eurocrats incl. national politics) were too optimistic — which is a requirement for happy-times-conventions like the EU. The central problem is: who wants to say that mankind consists largely of a bunch of morons? That’s not exactly what holds happy-times-societies together.

  • SavvyGuy:

    It is clear that financial “event horizons” are rapidly approaching in most CB-governed economies worldwide. The time for phase-change is getting uncomfortably close.

    How do we cleverly preserve assets so they survive the oncoming financial singularity and emerge relatively unscathed on the other side? Not an easy question, for sure…

    • picomanning:

      From past economic announcements we should be near a full recovery by now.
      So what happened? Not being in recovery, how should we objectively assess our faith in government economists who seem to suggest they just need a few more years to get this right?
      What are the flaws in the current economic steering system that we are not yet in obvious recovery?

      Time is debt. The sophistries of central bank bus drivers offer nothing more than speeches of conniving psychopaths. If you’ve ever known a psychopath our economic leaders would seem eerily and frighteningly familiar.

  • I think about what you say about the Greek stock market. I am suspecting the government might seize the whole thing if they were left out of the Euro. Hard to buy nothng cheap. As far as the rest of it goes, they would have to round up a few dollars and Euro’s to buy anything. At least for now. The rate the ECB and Bernanke are going, these units might be done as well, though i suspect the grip of debt is going to keep this mess trading for awhile.

    • worldend666:

      Hi Mannfm11

      I agree with you. In any case as I have often mentioned in the comments section a return to Drachma would probably make the current stock market levels look like Nirvana. This is when there will be blood in the streets.

      Buying now makes no sense in my opinion for 2 reasons:

      – the likelihood of a stockmarket panic upon an exit from the euro.
      – the possibility of seizure of foreign assets by a hard line Greek government following devaluation.

      Waiting for the devaluation and to see how the political landscape lies seems the sensible strategy to me.

      • Cinquero:

        Yeah, I second that. It is probably much too early. Usually, the onslaught of devaluation also devaluates the assets. Only after the first currency devaluation onslaught, it should make sense to step in. But that’s just my personal opinion.

      • Cinquero:

        And, btw, the Greeks have demonstrated exceedingly well how imcompetent they are regarding their economy. Do we really think they will open their economy in response to the devaluation? They are not attacking German on an economic level now, why should they suddenly make a U-turn? It is much more likely that they will fuck up their economy even more.

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