Greek Citizens Vote “No” on a Bailout Offer that no Longer Exists

An exercise in futility has just ended in Greece, with its population voting down an offer that has expired almost a week ago already. Given the futility of the referendum, its outcome was actually irrelevant from a formal perspective – once the verdict was in, Greece and its creditors would be exactly back where they were half a year ago already: at square one.

In one sense the referendum’s outcome was of course not futile: It has solidified the current Greek political leadership’s grip on power. It merely hasn’t brought it any closer to a solution. Greek voters want Greece to retain the euro, but they cannot vote on how much money governments (or rather, taxpayers) of other countries should hand to Greece or under what conditions. They can also not vote on whether the ECB should resume lending to technically insolvent banks.


yes and noFutile exercise

Cartoon by Ilias Makri


There are of course powerful reasons why the EU is indeed interested in implementing another can-kicking agreement. For instance, as Carl Weinberg has pointed out in Barron’s, a Greek default is a very costly affair, as what were hitherto contingent liabilities will have to be reflected in government budgets:


Greece is on the verge of defaulting on 490 billion euros ($540 billion) in loans, bond obligations, central-bank liquidity assistance, and interbank balances. Who will bear those losses? Greece’s creditors, which are all public entities across the euro zone, and that are on the hook for some €335 billion in loan guarantees. How will those losses be covered? Bonds will have to be sold that will roughly equal the increase in annual debt purchases by the European Central Bank announced last January.


Consider the ESM, Greece’s biggest creditor. Under its previous name, the European Financial Stability Facility, it loaned Greece €145 billion. If Greece defaults, the ESM, a Luxembourg corporation owned by the 19 European Monetary Union governments, will have to declare loans to Greece as nonperforming within 120 days. Accounting rules and regulators insist that financial institutions write off nonperforming assets in full, charging losses against reserves and hitting capital.

Here’s the rub: The ESM has no loan-loss contingency reserves. Its only assets—other than loans to Greece—are loans to Ireland and Portugal. Its liabilities are triple A-rated bonds sold to the public. How do you get a triple-A rating on a bond backed entirely by loans to junk-rated sovereign borrowers? Well, the governments guarantee the bonds, and because they are unfunded off-balance-sheet liabilities, they aren’t counted in their debt burdens—unless borrowers default.

If Greece defaults hard, governments will be on the hook for €145 billion in guarantees on those loans to the ESM. We expect credit-rating agencies to insist that these unfunded guarantees be funded. After all, unfunded guarantees are worthless guarantees.


A hard default would produce other losses to be covered. The ECB would have to be recapitalized after it writes off the €89 billion it has loaned the Greek banks to keep them liquid. The ECB would need to call for a capital contribution from its shareholders—the governments.

And don’t forget that Greek banks owe the Target2 bank clearinghouse, a key link in the interbank payment system, an estimated €100 billion. The governments are on the hook to make good that shortfall, too. The cash required to cover these contingencies would have to be funded with new bond sales.”


(emphasis added)

This in short are the major reasons why the euro-group is undoubtedly prepared to bend over backwards to keep Greece aboard. Naturally there are other reasons as well, such as the fact that a Grexit would disprove the alleged “irreversibility of the euro”. The IMF seems to want to approach things differently though, as it has no doubt become extremely wary of ever having agreed to take part in the bailout. Evidently, it wants to improve its chances of getting paid back.

In the week before the referendum, it published a paper on the sustainability of Greece’s debt (pdf) that came to the conclusion that all previous calculations were no longer applicable in the face of the Greek economy’s downturn this year. Ironically, the paper seems to have strengthened Syriza’s hand in the referendum, but perhaps that is what the IMF wanted. While the paper publicly declared what everybody knew already (namely that the debt can’t be paid back, and yet another aid program will be necessary to keep the charade going), one point it makes seems to have been overlooked.

The IMF points out that significant concessions by the euro-group are necessary to make a new aid program at least theoretically viable, but also notes that if agreements regarding Greek budget surpluses are loosened or certain reform measures are not imposed, these concessions will have to be even greater. If Greece applies to the ESM for a new bailout program (this appears to be the plan), the European Commission and the ECB must certify the recipient’s debt sustainability before any new aid can be granted.

Not only that, the lenders and Greece would have to come to an agreement before Greece has to repay bonds held by the ECB on July 20. Before a new agreement can result in funds being made available, national parliaments in the EU have to approve the new package. There are less than two weeks to do all of this, as it is hard to see how the ECB can keep maintaining ELA funding even at the current level if Greece defaults on its debt to the central bank as well. Greek savers and depositors who have left their money at the banks may well end up deprived of a significant percentage of their deposit money.


Greece 2-Year Bond Yield(Daily)

Greek two year government note yields decline in early trading on Monday (!), via


As noted above, the incentives to do something are great – after all, the EU would still have to at least provide emergency aid if the Greek banking system were to become entirely insolvent. Since the lenders need parliamentary approval, their leeway is limited though. Admittedly, we have no idea what they will end up doing; possibly they will decide on implementing another stop-gap measure, while leaving Greece weighed down with capital controls so as to put further pressure on the Greek government.



A boat in stormy seas …

Cartoon by Martin Rowson


The Canary in the Coal Mine

Frankly, we are a bit tired of writing about the seemingly never-ending Greek drama. However, Greece is an important test case in many ways, and can be seen as a kind of canary in the coal mine. Mises was of the opinion that while it might be legitimate to issue short term government debt in an emergency, long term government debt was alien to a market economy. He also noted that:


“The financial history of the last century shows a steady increase in the amount of public indebtedness. Nobody believes that the states will eternally drag the burden of these interest payments. It is obvious that sooner or later all these debts will be liquidated in some way or other, but certainly not by payment of interest and principal according to the terms of the contract. A host of sophisticated writers are already busy elaborating the moral palliation for the day of final settlement.”


(emphasis added)

As we can all see, these days massive attempts to simply inflate all sorts of debt away are underway (in the process expropriating savers). This is done under the cover of “economic necessity”, but we should call a spade a spade. When central banks like the Fed, the BoJ and the ECB create billions from thin air every month to buy up government debt, they are ultimately attempting to inflate debt away.

The debt-financed welfare/warfare state system is coming to an end. Greece’s inefficient and corrupt bureaucracy and political class and its insane economic policies have merely brought about its downfall somewhat earlier.  We should however expect that most governments of industrialized nations will be able to “muddle through” for a very long time, at least as long as some extent of net wealth creation is still taking place in the economy.

Consider that it took even the Bolsheviks seven decades to consume the last crumb of previously accumulated capital before they folded – and they had to make do with a stunted, very rudimentary system of economic calculation, based on prices they were able to observe in the surrounding market economies (without that possibility, their economy would have imploded much faster). The “middle of the road” system should survive a lot longer, but its problems should become more and more obvious as time passes.

There are two possibilities when the end game arrives, and it is unknowable which one governments will eventually opt for: outright default (which would have deflationary consequences), or default via inflating the currency into oblivion. Prior to that they may try to implement more blunt wealth confiscation schemes than the ones currently in train, such as grabbing 10% of all private savings overnight (as the IMF has proposed in a paper last year, see: Is a Large Wealth grab on its Way? for details).


the crappen

The crappen has been released …

Cartoon by Nate Beeler


We all are creditors to the banking system and to governments , whether or not we have bought government bonds outright.  Every bank depositor is de facto a creditor of banks, who in turn are major creditors to governments. Through their share in pension funds and investment funds, most people are creditors to governments as well (many are so unwittingly). In other words, debt haircuts and government defaults, regardless of which shape they take, will redound on a large part of society in some way. When the time comes, government creditors will lose the bulk of their claims. Historical experience unfortunately indicates that even such catastrophes routinely fail to invite systemic reform.

It becomes ever more difficult to fund the basic promises of welfare states in light of demographic effects and economies severely impaired by a succession of boom-bust cycles of ever greater amplitude. Generational conflict is a certainty, as fewer people are enjoined to pay for a rising number of dependents and at the same time, a shrinking population also means that the economy’s knowledge base contracts. The more people there are who are focused on discovering market imbalances and putting them to profitable use,  the more the economy’s inherent “information deficits” decline to the benefit of all. In short, ever larger costs must be funded, while the economy’s ability to create wealth (that can be partly confiscated by taxation to fund welfare state promises) is under attack from many sides at once.



 The demographic problem illustrated – via



The Greek problem remains unresolved – the referendum couldn’t resolve it, although it may have influenced the ultimate outcome. However, Greece’s situation is a good reminder. Neither banks nor welfare state government can keep up the pretense of solvency without the backstop provided by the printing press. As long as there is wealth that can be redirected this seemingly works, but there is a limit to this. The events surrounding Greece are in this sense also a strong reminder that faith in central banks and their power remains the central issue for financial markets.



Just as we finished writing this, it was reported that Greek finance minister Yanis Varoufakis has resigned, apparently because he doesn’t want to jeopardize further negotiations with his presence:


“In a statement Varoufakis said: “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.”



 Slide show of Yanis Varoufakis’ career as Greece’s finance minister

Cartoon by Marian Kamenski



Emigrate While You Can... Learn More




Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.


Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA


One Response to “Greek Exercise in Futility”

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • US Stock Market: Conspicuous Similarities with 1929, 1987 and Japan in 1990
      Stretched to the Limit There are good reasons to suspect that the bull market in US equities has been stretched to the limit. These include inter alia: high fundamental valuation levels, as e.g. illustrated by the Shiller P/E ratio (a.k.a. “CAPE”/ cyclically adjusted P/E); rising interest rates; and the maturity of the advance.   The end of an era - a little review of the mother of modern crash patterns, the 1929 debacle. In hindsight it is both a bit scary and sad, in...
  • How to Blow $12.2 Billion in No Time Flat
      Fake Responses  One month ago we asked: What kind of stock market purge is this?  Over the last 30 days the stock market’s offered plenty of fake responses.  Yet we’re still waiting for a clear answer.   As the party continues, the dance moves of the revelers are becoming ever more ominous. Are they still right in the head? Perhaps a little trepanation is called for to relieve those brain tensions a bit?  [PT]   The stock market, like the President,...
  • Despondency in Silver-Land
      Speculators Throw the Towel Over the past several years we have seen a few amazing moves in futures positioning in a number of commodities, such as e.g. in crude oil, where the by far largest speculative long positions in history have been amassed. Over the past year it was silver's turn. In April 2017, large speculators had built up a record net long position of more than 103,000 contracts in silver futures with the metal trading at $18.30. At the end of February of this year, they held...
  • US Stock Market – The Flight to Fantasy
      Divergences Continue to Send Warning Signals The chart formation built in the course of the early February sell-off and subsequent rebound continues to look ominous, so we are closely watching the proceedings. There are now numerous new divergences in place that clearly represent a major warning signal for the stock market. For example, here is a chart comparing the SPX to the NDX (Nasdaq 100 Index) and the broad-based NYA (NYSE Composite Index).   The tech sector is always the...
  • Stock and Bond Markets - The Augustine of Hippo Plea
      Lord, Grant us Chastity and Temperance... Just Not Yet! Most fund managers are in an unenviable situation nowadays (particularly if they have a long only mandate). On the one hand, they would love to get an opportunity to buy assets at reasonable prices. On the other hand, should asset prices actually return to levels that could be remotely termed “reasonable”, they would be saddled with staggering losses from their existing exposure. Or more precisely: their investors would be saddled...
  • US Equities – Mixed Signals Battling it Out
      A Warning Signal from Market Internals Readers may recall that we looked at various market internals after the sudden sell-offs in August 2015 and January 2016 in order to find out if any of them had provided clear  advance warning. One that did so was the SPX new highs/new lows percent index (HLP). Below is the latest update of this indicator.   HLP (uppermost panel) provided advance warning prior to the sell-offs of August 2015 and January 2016 by dipping noticeably below the...
  • Return of the Market Criers - Precious Metals Supply and Demand
      Ballistically Yours One nearly-famous gold salesman blasted subscribers this week with, “Gold Is Going to Go Ballistic!” A numerologist shouted out the number $10,000. At the county fair this weekend, we ran out of pocket change, so we did not have a chance to see the Tarot Card reader to get a confirmation. The market criers are back in gold town [PT]   Even if you think that the price of gold is going to go a lot higher (which we do, by the way—but to lean on...
  • Good Riddance Lloyd Blankfein!
      One and the Same   “God gave me my money.” – John D. Rockefeller   Today we step away from the economy and markets and endeavor down the path less traveled.  For fun and for free, we wade out into a smelly peat bog.  There we scratch away the surface muck in search of what lies below.   One should actually be careful about quotes like the one attributed to Rockefeller above, even if it of course sounds good and is very suitable for the topic at...
  • Incrementum's New Cryptocurrency Research Report
      Another Highly Useful Report As we noted on occasion of the release of the first Incrementum Crypto Research Report, the report would become a regular feature. Our friends at Incrementum have just recently released the second edition, which you can download further below (if you missed the first report, see Cryptonite 2; scroll to the end of the article for the download link).   BTC hourly (at the Bitstamp exchange). Although BTC has been in a bear market since peaking in...
  • US Stock Market – How Bad Can It Get?
      SPX, Quo Vadis? Considering the Crash Potential In view of the fact that the stock market action has gotten a bit out of hand again this week, we are providing a brief update of charts we have discussed in these pages over the past few weeks (see e.g. “The Flight to Fantasy”). We are doing this mainly because the probability that a low probability event will actually happen has increased somewhat in recent days.   Robert Taylor and Deborah Kerr cast wary glances at their...
  • Yosemite Sam is Back!
      Dubious Picks Unless this is part of another cunning negotiation tactic, the Donald's recent cabinet nominations have to be considered highly dubious, to say the least. First he promoted Mike Pompeo from his CIA post to the position of Secretary of State – removing the eminently reasonable, and as we believe widely underappreciated Rex Tillerson. Pompeo is mainly known for sharing Trump's irrational dislike of the  nuclear deal with Iran, which was pretty much the only laudable policy...

Support Acting Man

Item Guides


Austrian Theory and Investment



THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts


Gold in USD:

[Most Recent Quotes from]



Gold in EUR:

[Most Recent Quotes from]



Silver in USD:

[Most Recent Quotes from]



Platinum in USD:

[Most Recent Quotes from]



USD - Index:

[Most Recent USD from]


Buy Silver Now!
Buy Gold Now!

Diary of a Rogue Economist