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.
Emigrate While You Can... Learn More
Dear readers - we want to once again thank all of you who have supported us with donations.
To donate Bitcoins, use this address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
Thank you for your support!
10 Responses to “Greece – Economy Spirals Down the Drain, Violence Erupts”
Most read in the last 20 days:
- Why Do We Let Other People Tell Us What to Do?
Lame Theories of Government We have been disappointed with political ideas and theories of government. They are nothing but scams, justifications, and puffery. One tries to put something over on the common man… the other claims it was for his own good… and the third pretends that he’d be lost without it. Most are not really “theories” at all… but prescriptions, blueprints for creating the kind of government the “theorist” would like to have. Not surprisingly, it is a...
- Gold and Gold Stocks – Back to Tricky, but Interesting Signals Emerge
A Relentless Short Term Decline When we last discussed the gold sector, we noted that with gold approaching its 200 day moving average, a pullback had to be expected soon. In the meantime, a bit more than just a pullback has happened, as a severe sell-off started after the October FOMC announcement. Photo via genius.com However, as you will see below, this has most likely merely reset the clock a bit in terms of anticipating a medium term trend change (even if...
- The Long, Cold Winter Ahead
Not Immune Cold winds of deflation gust across the autumn economic landscape. Global trade languishes and commodities rust away like abandoned scrap metal with a visible dusting of frost. The economic optimism that embellished markets heading into 2015 have cooled as the year moves through its final stretch. Photo credit: David Byrne If you recall, the popular storyline since late last year has been that the U.S. economy is moderately improving while the...
- How Do People Destroy Their Capital?
There is no Santa Claus I have written previously about the interest rate, which is falling under the planning of the Federal Reserve. The flip side of falling interest rates is the rising price of bonds. Bonds are in an endless, ferocious bull market. Why do I call it ferocious? Perhaps voracious is a better word, as it is gobbling up capital like the Cookie Monster jamming tollhouses into his maw. There are several mechanisms by which this occurs, let’s look at one...
- Revisiting and Expanding the Laffer Curve
Extortion by the State The Laffer curve is about how much imposition or other types of trouble people are willing to tolerate from their fellows. Arthur Laffer, an economics professor at the University of Southern California, is supposed to have drawn a bell shaped graph on a napkin once to show that up to the peak point of it people are likely to put up with the burden of taxation. The peak isn’t the same for everyone, but everyone does have such a peak. Economist...
- The Greatest Racket of All Time
The Successes of the Global War on Terror One would think that the so-called “Global War on Terror”, which has been given fresh impetus by the Paris attacks, must be going swimmingly. What else could explain the great enthusiasm with which it is pursued? It may be recalled that it started in earnest after the WTC attack – also a declaration of war, as it was put at the time. As is often the case when Islamist fundamentalists strike, the actual attackers immolated themselves on...
- Junk Bonds Under Pressure
While the Stock Market is Partying ... There are seemingly always “good reasons” why troubles in a sector of the credit markets are supposed to be ignored – or so people are telling us, every single time. Readers may recall how the developing problems in the sub-prime sector of the mortgage credit market were greeted by officials and countless market observers in the beginning in 2007. Photo credit: Getty Images At first it was assumed that the most highly...
- US Economy – Not Getting Better
An Update in Light of Recent Data Releases Since our last updates on the manufacturing sector of the US economy (in chronological order: “Is the US Economy Close to a Bust?” and “More Ominous Data Points”), new data have been released and our friend Michael Pollaro has mailed us updated versions of his charts, so we decided to provide another update. So far, there is no sign that the emerging downtrend in manufacturing activity is stopping or reversing. The recent manufacturing...
- Angry Belgian Muslims and the Price of Welfare Statism
Ill-Tempered Mohammedans in the Socialist Paradise In the wake of recent revelations about the identities of the morons involved in the horrific Paris attacks (happily, most of them shuffled off the mortal coil as well, thereby improving the aggregate degree of moral clarity and intelligence in the world), a friend pointed us to an article at Unz Review that asks: “Why Does Belgium Have Such Angry Muslims?” Our instinctive, immediate reaction was to argue that the bland, boring...
- The Next Level of John Law Type Central Planning Madness
Cries for Going Totally Crazy are Intensifying What are the basic requirements for becoming the chief economist of the IMF? Judging from what we have seen so far, the person concerned has to be a died-in-the-wool statist and fully agree with the (neo-) Keynesian faith, i.e., he or she has to support more of the same hoary inflationism that has never worked in recorded history anywhere. In other words, to qualify for that fat 100% tax-free salary (ironically paid for by assorted tax serfs),...