Galbraith on Greece

[gnk]

Re: Pilger on Greece

Thanks for the links. I just read the Greek poll. Looks like a solid majority still prefer Tsipras to be Prime Minister, yet, judging by other questions, they want him to move to the center. I think that's a good development.

Another interesting fact - when people were asked if they had a negative, or positive opinion of current leaders:

Tsipras by far had the most support (58.8%), but there was only a 10% difference between him and the new (provisional) leader of center right New Democracy, which surprised me. Last on the list was Mihaloliakos with 88% of people having a negative rating (he's the leader of Golden Dawn - thank god, we Greeks are not as unhinged as I feared, but I do prefer to see 100% with a negative opinion) But so too was Lafazanis - 73.1% have a negative rating (leader of the extreme marxist element of SYRIZA), and get this, Yanis Varoufakis at 71.6 negative negative rating.

Varoufakis has been giving a lot of interviews lately, and in so many words, trying to shift blame on Tsipras. I saw the Tsipras interview tonight, and Tsipras basically said that Varoufakis is a great Professor/Economics thinker, but lacks the political skills that are necessary in government. He left it at that.

I think everyone here knows how I have felt about Tsipras since the election early this year. I do think he has the ability and support to transform Greece. If he does move in that direction, he has my support.

Tomorrow is a big day (and probably a long one at that) as the measures go through Parliament. Heads haven't rolled yet, but probably later this week or early next week.

[Thailandnotes]

Re: Pilger on Greece

Seems to being saying it's all about the bankers getting their money and not much about any real reform...

AMY GODDMAN: Can you respond to the issue of Goldman Sachs and hedge funds and their role in this?

MICHALIS SPOURDALAKIS: This is an old story. We all know the tricks and the corruption involved in the way that Greece met the requirements to enter the Eurozone. Corruption is the basis upon which the Greek economy, the Greek capitalism, flourishes and reproduces itself. And tackling corruption, tax evasion and the rest was the first reform that the Syriza government proposed to our country’s debtors back in the early February. And they didn’t really pay much attention to it. So, it seems to me that the bottom line of all this debate is that the country’s debtors wanted to humiliate Syriza, Tsipras, and the first democratic, left-wing response against austerity in the 21st century. That’s the bottom line. There is a lot of corruption in this country. This government has been committed to tackling the corruption. But the way that the proposals are imposed by our debtors, I don’t predict that they are very efficient moving towards that way.

[astonas]

Re: Pilger on Greece

Seems to being saying it's all about the bankers getting their money and not much about any real reform...

AMY GODDMAN: Can you respond to the issue of Goldman Sachs and hedge funds and their role in this?

MICHALIS SPOURDALAKIS: This is an old story. We all know the tricks and the corruption involved in the way that Greece met the requirements to enter the Eurozone. Corruption is the basis upon which the Greek economy, the Greek capitalism, flourishes and reproduces itself. And tackling corruption, tax evasion and the rest was the first reform that the Syriza government proposed to our country’s debtors back in the early February. And they didn’t really pay much attention to it. So, it seems to me that the bottom line of all this debate is that the country’s debtors wanted to humiliate Syriza, Tsipras, and the first democratic, left-wing response against austerity in the 21st century. That’s the bottom line. There is a lot of corruption in this country. This government has been committed to tackling the corruption. But the way that the proposals are imposed by our debtors, I don’t predict that they are very efficient moving towards that way.

He's a professor of Political Science, not Economics. Is it surprising that he sees no value in economic arguments, and instead treats the deal as a wholly political imposition, with no possible economic justification?

I mean, I actually agree that this isn't the best way to motivate reform, but his reasoning (that the goal was to humiliate and defeat Tsipras) is counterfactual nonsense. Tsipras came out more popular than before.

[touchring]

Re: Pilger on Greece

Thanks for the insight, but will the Greek parliament endorse the deal?

Thanks for the links. I just read the Greek poll. Looks like a solid majority still prefer Tsipras to be Prime Minister, yet, judging by other questions, they want him to move to the center. I think that's a good development.

Another interesting fact - when people were asked if they had a negative, or positive opinion of current leaders:

Tsipras by far had the most support (58.8%), but there was only a 10% difference between him and the new (provisional) leader of center right New Democracy, which surprised me. Last on the list was Mihaloliakos with 88% of people having a negative rating (he's the leader of Golden Dawn - thank god, we Greeks are not as unhinged as I feared, but I do prefer to see 100% with a negative opinion) But so too was Lafazanis - 73.1% have a negative rating (leader of the extreme marxist element of SYRIZA), and get this, Yanis Varoufakis at 71.6 negative negative rating.

Varoufakis has been giving a lot of interviews lately, and in so many words, trying to shift blame on Tsipras. I saw the Tsipras interview tonight, and Tsipras basically said that Varoufakis is a great Professor/Economics thinker, but lacks the political skills that are necessary in government. He left it at that.

I think everyone here knows how I have felt about Tsipras since the election early this year. I do think he has the ability and support to transform Greece. If he does move in that direction, he has my support.

Tomorrow is a big day (and probably a long one at that) as the measures go through Parliament. Heads haven't rolled yet, but probably later this week or early next week.

[gnk]

Re: Pilger on Greece

Spourdalakis is honest about the Greek economy, and he's right to point that out. But he doesn't say anything about the banks in that quote. He talks about the debtors wanting to humiliate SYRIZA. To a degree he is right, I'll give him that. The debtors fear that if they give Greece special treatment, left wing governments will sprout thru-out the EU and then the EU becomes Greece - free money for everybody!

You may disagree with that, but there is another issue that Schauble raises, which in my view is a very real threat. There are 19 nations in the EU. If every time there is an election in one of those nations, and the new government of that nation wants to change a prior agreement, can the EU really function? Agreements can't be challenged every two years or so by every nation. Otherwise, stability is gone.

So who are the debtors? The bank bailout story is old. They were bailed out a long time ago. And many also took a haircut on what they owed in 2012. The debtors are actually the nations themselves when they created funds to bail out the banks.

One could argue that the real victims in the EU are the nations that funded those bank bailout programs, and now hold sovereign debt, and had few, if any, of their own banks at risk. The German banking system of all other nations' banking systems was the biggest beneficiary of those bailouts.

That's the real story that isn't being told.

How-much-does-Greece-owe-graph.jpg

[gnk]

Re: Pilger on Greece

The votes are there, from SYRIZA, as well as opposition parties, so yes. The question is how does Tsipras and SYRIZA come out of it? Remember it's a Parliamentary system, and when such a significant set of measures are passed through Parliament, the governing party faces an existential threat if it is not cohesive in passing the legislation.

Some predict elections, some a shakeup of SYRIZA ministers. There are already a few SYRIZA members that will vote no and then resign. Varoufakis will vote no, not sure if he will resign. He loves the spotlight. SYRIZA's coalition partner Independent Greeks doesn't seem as supportive, so there may be a big shake up there.

So the real issue is what remains of the government after the vote. Greece needs a strong government to implement the reforms. Tsipras said he will not resign and will follow through. Tsipras has a lot on his plate right now. He looks exhausted, to say the least.

Since last night's interview, I now have some respect for Tsipras. Even though he screwed things up royally in terms of strategy these past 6 months, he is taking responsibility. He has admitted he made mistakes. He even said that whatever Varoufakis had done or said, ultimately, he has the responsibility. I think that gained him a lot of credit with the people, as now Varoufakis' credibility is severely damaged.

Is Tsipras a true reformer? Not yet in my view. But one can hope.

[touchring]

Re: Pilger on Greece

It appears to me the Greek PM, is again pushing the responsibility to the parliament in the same manner as responsibility is pushed to the people through the referendum.

If the parliament votes yes, and if anything goes wrong, it's the parliament's fault and the EU's fault. If the parliament votes no, whatever the fall out, it's not his fault.

I'm commenting as a bystander.

[gnk]

Re: Pilger on Greece

Tsipras has no choice, he has to pass it through the parliament, and at least a majority of his party must vote yes. A yes vote by his party means Greece still has a government. A no vote, or large defections, means uncharted waters - best case in that scenario is a temporary government of technocrats, or a national unity coalition, with new elections in the Fall.

Tsipras must move to the center. The extremist left of SYRIZA, led by Lafazanis, has already publicly stated that 22 billion should be taken from the Bank of Greece to fund Greece, nationalize the banks, and begin the drachma process.

It's down to the wire. Apart from SYRIZA, Greece has no political party that can get over 30% of the vote, let alone, possibly 20%, depending on which poll you look at. Over 30%, and a party can form a coalition. Over 40%, a party can likely form a government. The crisis produced one thing in Greece - a multitude of political parties covering all parts of the political spectrum, and only one party that so far can win (with a coalition.)

So, since December of last year, when the President of the Republic (a largely ceremonial role) retired which forced 3 legislative elections that ended in no New Democracy backed winner, Parliamentary elections followed, several wasted months later an ambiguous, and to my mind pointless referendum followed, along with (avoidable) capital controls, and ultimately, the worst unworkable Memorandum is now being voted on as the economy slowly collapses. Well, at least this memorandum has teeth when it comes to reforming government - something that has largely yet to be done by any administration.

Welcome to Greek Politics. So, is Greece in a position to govern itself, let alone tell Germany and others how the EU should be managed?

[astonas]

Re: Pilger on Greece

One could argue that the real victims in the EU are the nations that funded those bank bailout programs, and now hold sovereign debt, and had few, if any, of their own banks at risk. The German banking system of all other nations' banking systems was the biggest beneficiary of those bailouts.

That's the real story that isn't being told.

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There is a story not being told, but it's not quite the one you describe. It's true that taxpayers are picking up the tab for banking mistakes. But there's another, national, layer too.

Given the way the press covers it, it's an understandable error to make. The usual phrase you see in the Anglo Saxon press is "French and German banks were bailed out by their governments." But the assumption that German banks held the most debt is dead wrong. The opposite is true!

What people keep forgetting is that it was the French and Swiss banks that had the most bad Greek loans in 2010. Together they had almost four times the debt of Germany:

France and Switzerland have $79bn (£50bn) each of exposure to Greece, according to American-sourced data from the Bank for International Settlements analysed by the Swiss bank UBS. Germany's exposure is $43bn.

The UK also had very large holdings, as did certain key US banks.

Now look at your graphic again: Germany holds 56B in newly issued Greek debt, and France 42B. If German banks didn't hold even that much original debt, how can that be? Why would Germany hold more new debt, than its banks had as exposure in Greece?

That debt allocation is about who had to pay the biggest bill for the bailout (since Germany has the plurality stake in the EC and ECB, which is based on GDP, it has to contribute the most to such expenses). That ratio is not connected to whose banking system was helped most, but to who paid the most.

So the real story is that Germany was forced to bail out the mostly French, Swiss, US, and UK banks, some indirectly, that had made huge loans to Greece, and was in return allowed to hold corresponding amounts of the newly-issued Greek debt. Yes, German banks had some debt as well, but French and Swiss banks alone held almost twice as much apiece. The idea that this was not a fiscal transfer to France was predicated on the assumption that this new debt would be repaid. It would have been unconstitutional under German law, if that were not going to happen.

It is also worth noting that the terms on the debt of French banks was such that France clearly held the riskiest debt in the Eurozone, while German banks held the relatively safe debt. It was the Anglo-Saxon style, high-leverage, banking that had taken hold in France and Switzerland that had destabilized the system, as well, causing the banks everywhere to have to realize their losses. So not only did French (et.al.) banks have the largest pool of debt, they were also the ones who spread the contagion that triggered the bailout.

This explains Germany's extreme hostility to Anglo-Saxon banking interests. The modern (post Glass-Steagal) banking practices took hold in France and Switzerland in a big way, while Germany was still trying to fight them off. But when this high-risk system failed, it was boring Germany that was still stuck with the greatest bill, and hence the most (now probably bad) debt.

If a "debt restructuring" happens, it will NOT just be German taxpayers paying the bill for German banks' lending, and the French taxpayers paying for French banks', and so on. (That's the assumed narrative implied by the usual "French and German banks" wording.) If that were the case, German taxpayers would be outraged, but they might eventually swallow it.

But instead, Germany will also be paying down the much larger bill for French banks' risky lending, along with that for a host of other countries who also overindulged. That will never fly with voters.

And that's why there is such resentment every time France speaks of debt relief as a moral imperative of an ever-closer European Union. Germany is well aware that this is diplomatic language for asking German taxpayers to pay even more of the bill for the French government's past regulatory mistakes, under the cover of helping Greece. Solidarity with those suffering in Greece is a relatively easy hurdle to clear, by comparison.

It's also why Germany feels it really doesn't have to listen to lectures about debt relief from the western EU. The reason it is stuck holding most of that debt in the first place is that the other countries forced it to absorb their own banks' losses, giving some back as Greek debt. Now they also want Germany to absorb the loan write-offs as well, when that debt goes bad? By what logic does that make sense?

It would essentially amount to German taxpayers paying French banks and those of other (now perfectly stable) countries a hundred billion Euros, to reward them for messing up the European banking system to the point of collapse. It would be done in two steps, but that would be the net effect.

In short, one of the biggest reasons Germany refuses to write down Greek debt has nothing whatsoever to do with Greece. It has to do with the fact that most of the loans didn't originate within German banks, but were originally a result of other nations' failure to regulate their own banking systems, in the way that Germany had tried to regulate its own. The debt relief question thus conflates a discussion between Germany and Greece, with another between Germany and France (or more specifically, France's and other nations' anglo-saxon-style banks). It will be very hard to summon any sympathy for those banks, within Germany. And that means Greece will have a harder-than-before time of it.

While France has had some slight leverage so far, for example in stopping the Grexit language from being included in the EG's statement this last round, it is most likely that it will have no leverage at all when it comes to asking for a write-down of debt. A plurality of that debt held by Germany originated in France.

But Schäuble isn't stupid. Perhaps he'll suggest that for the French argument to hold, France would have to buy some of its old debt back first, and at face value, before devaluing it. While France may say it believes in the European Ideal, I suspect that belief lasts only as long as it is useful in extracting money from others, and will vanish the second it has to actually pay. And then other supporting arguments based on ideals will simply vanish too. Elected politicians are used to using ideals as cover to get money. But they seldom hold to them when they cost money.

The current deal, that the Greek parliament is voting on, is only to begin negotiations for a debt write-down. The next stage is the one that is REALLY hard. Any write-down would itself have to be bought with even more, probably far more painful, reforms. And in THIS negotiation, European Ideology isn't going to carry any weight, since write-downs directly pit creditor states against other creditors. Even if it's only in private, you can bet that Grexit will be coming up all the time, as the alternative.

I'm imagining an opening negotiating message that's something like this:

"If Greece wants debt relief on its own terms, it can have it, any time it likes. Just leave the Euro, and devalue. And if France or Italy want to keep interrupting with talk of this "disrupting the European ideal of an ever-closer union," they'll need to pay their own full share for that, this time around. The German constitution prohibits fiscal transfers, and clearing debt has been determined to qualify as such, by our Supreme Court. It is not only illegal, but unconstitutional, to do what you ask."

What does Tsipras have as a reply? What does Hollande?

The last negotiation was about whether Greece might have to leave. And that one's absolutely still on the table now, in another form. But this new negotiation would add the additional question of splitting Europe, East from West, along the Rhine. The illegal-fiscal-transfer-to-France issue has been simmering on the back burner for a long time, and this looks like this would finally have to be the meeting where it boils over, if a write-down is to happen.

Will it put out the fire of European solidarity entirely, and chill relations between Germany and France? Will "European Solidarity" be redefined to refer to a slightly smaller Europe (without Greece)? Or will everyone just punt again, and agree to a thirty-year postponement of all interest payments, with no principal write-down at all?

Given how fraught the first two possibilities are, I'd say a simple postponement is by far the most likely option, if even that is to be had.

[don]

Stockton Wrap-up

The Curse Of The Euro: Money Corrupted, Democracy Busted

The preposterous Gong Show in Brussels over the weekend was the financial “Ben Tre” moment for the Euro and ECB. That is, it was the moment when the Germans—–imitating the American military on that ghastly morning in February 1968——set fire to the Eurozone in order to save it.

Some day history will judge good riddance……..but that get’s ahead of the story.

According to an American soldier’s first hand recollection of the Vietnam event, it was a Major Booris who infamously told reporter Peter Arnett, “It became necessary to destroy the town to save it”.

After the massacre of Greek democracy in the wee hours Monday morning, Angela Merkel said the same thing—even if her language was a tad less graphic:

It reflects the basic principles which we’ve followed in rescuing the euro. It now hinges on step-by-step implementation of what we agreed tonight.”

Now no one in their right mind could think that lending another $96 billion to an utterly bankrupt country makes any sense whatsoever. After all, the Greek economy has shrunk by 30% since 2008 and is wreathing under what is objectively a $400 billion public debt already in place today.

That figure follows from the fact that on top of Greece’s acknowledged $360 billion of general government debt there’s at least another $25 billion loan embedded in the ELA advances to the Greek banking system. The latter is deeply insolvent, meaning that some considerable portion of the $100 billion ELA currently outstanding is not an advance against good collateral in any plausible banking sense of the word, but merely a backdoor fiscal transfer from the ECB to keep Greece’s financial shipwreck afloat.

Likewise, as I demonstrated Friday, given the even deeper deep hole into which the Greek economy has tumbled during the last six months, the fiscal targets extracted from Greece under this weekend’s demarche are utterly ridiculous. Indeed, even if the targeted primary surpluses of 1,2,3 and 3.5% of GDP are miraculously reached through 2018, upwards of $15 billion of budget deficits after interest accruals would be incurred anyway, and a lot more than that if there are material budget shortfalls, which is a virtual certainty.

So even before the latest dose of Troika economic punishment further debilitates its economy, Greece at this very moment has a de facto public debt of $400 billion sitting atop $200 billion of GDP.
Here’s the bottom line. Merkel has no better answer for how dropping $96 billion of new debt on a country with a 200% public debt ratio will save the euro than did Major Booris when he dropped approximately 10,000 gallons of napalm on Ben Tre in order to “save” the town. In both cases, a doomsday machine had been set in motion, and the designated officers of the state mechanically and blindly carried out a mindlessly destructive next step.

In the instant case, the doomsday machine is the Euro and, more precisely the rogue central bank in Frankfurt that stands behind it. In fact, the real ill is not a common currency per se—-something that Europe actually had on a de facto basis before 1914 under the fixed exchange rates of the gold standard. The latter, in effect, was a common currency because French francs, British sterling,

Dutch guilders and the rest were interchangeable at a constant rate—-an arrangement which helped produce a multi-decade spurt of prosperity that the old continent has not seen before or since.

No, the problem is the rampaging printing press of the ECB. The latter has fundamentally falsified the price of debt, and thereby unleashed throughout Europe a deadly brew of phony economic growth in the early years and then egregious fiscal profligacy when the growth bubble cratered after the 2008 crisis.

During its initial eight years, the ECB expanded its balance sheet at a torrid 14% annual rate. And that’s ironic because the original remit of the ECB was a Friedmanesque “price stability” single mandate.



That didn’t happen, of course, as the European consumer price level rose by 21% during the same eight years (2.4% per annum) in which the ECB’s printing press was running red hot. Uncle Milton would have been rolling in his grave, and, in fact, beforehand had pronounced the euro a disaster waiting to happen.

So rather than delivering consumer price stability, what the ECB actually did during that period was to create a giant artificial bid for euro debt, thereby driven the yields far below their true economic levels. That is, the ECB deeply subsidized newly issued Eurozone government borrowings.

Not surprisingly, Greece, Portugal, Spain, Italy and even France feasted heartily. But then Europe’s phony credit fueled growth stopped, causing the nominal GDP growth rate to decelerate sharply.
Since the eve of the financial crisis, nominal GDP in the Eurozone has crawled forward at a mere 0.9% annual rate. That represents a 75% reduction from the pre-2008 rate and is a reflection of the crushing burden of debt, taxes and the dirigisme of the Brussels superstate and national policies alike.

Accordingly, it quickly became evident that Europe was swimming naked as a fiscal matter, and that the ECB’s cheap money regime had eviscerated the 60% debt-to-GDP target of the EU treaty. Even after averaging in the fiscal rectitude of Germany and some of its northern compatriots, the EU-19 debt ratio has climbed steadily toward the 100% of GDP mark since the financial crisis.


What was needed all along was an honest bond market, and one which priced the debt of each of the 19 fiscal jurisdictions in the Eurozone based on their own budget facts, economic trends and governance records and risks. That requirement almost materialized when the original Greek debt crisis broke out in 2009-2010, and the yields on the so-called PIIGS debt soared.

But that proved to be the last gasp of a real bond market because in short order Brussels and Frankfurt shut it down in the name of defending the misbegotten euro. This bond market destruction effort took the form of a double whammy of falsification.

First, a false debt sequestration chamber (i.e. the various bailout funds) was erected by Brussels and the IMF and into it was stuffed hundreds of billions of the sovereign debt of Greece, Ireland, Spain and Portugal. This occurred during 2010-2012 when PIIGS debt was being dumped furiously, and appropriately so, by European banks, bond funds and financial speculators as the extent of fiscal breakdown in these states became sharply apparent.


In hindsight, this original euro bond crash was a gift from the economic gods. That’s because facing a closure of the public debt markets, each of the PIIGS would have had to work out its own internal fiscal solvency plan without edicts, mandates, inspectors, and meddlesome interventions from the troika apparatchiks, and without the incremental “bridge loan” debt that these bailouts entailed.

Stated differently, bond market discipline is fully compatible with national sovereignty and democratic fiscal governance. Indeed, it is a requisite in the European context.

As it happened, however, Merkel was hoodwinked into believing that the original bond sell-off was the work of the same malevolent Anglo-Saxon “speculators” who purportedly caused the great financial crisis of 2008. So the EU superstate, she was told, had to take on the job of “banker” to the fiscally weaker members of the monetary union in order to buy time, defeat the speculators and preserve the financial stability of the Eurozone.

Unfortunately, Merkel and her coterie are monetary ignoramuses and therefore bought this tommyrot hook, line and sinker. So doing, they were utterly blind to one glaring reality. Namely, that the crashing global credit bubbles of 2008 and the euro bond crash of 2010 and after had the same cause.

In both instances central bank financial repression had caused government bonds to be underpriced and global investors to desperately scramble for yield (including exotic securitized mortgage product in the first instance and PIIGS bonds in the second). It also enabled Wall Street and London speculators to surf these financial bubbles on the back of cheap carry from the central bank pegged money market. So doing, the speculators were able to buy hand over-fist those securities which were rising and then sell with a vengeance these same mis-priced securities when the various bubbles burst.

In short, the desperate need back then was to shutdown the heavy-handed Keynesian central banker intrusions in the debt and money markets; permit the issuing governments to default; require the imprudent bankers holding the impaired debt to take steep losses; and to thereby put the bond market vigilantes back in charge of public fiscal discipline—–one state at a time.

Needless to say, the troika bailouts had the opposite effect. By compressing bond spreads toward a German common denominator, they destroyed price discovery and national fiscal sovereignty. The troika bankers, therefore, had to become heavy-handed agents of fiscal governance, meddling in the minutest details of national budget accounts; and, also, self-appointed economic reformers intruding into the very warp and woof of domestic commerce and the labor and product markets and practices of the borrowers.

This massive intrusion was necessary in order to cover-up a Troika lie and delusion. The lie was that the debt of Greece and the other PIIGS was not being mutualized, and that the loans and guarantees issued by the bailout funds were first cousins to commercial bridge loans that the borrowers would in due course repay.

In the same vein, the delusion was that the market oriented “reforms” stipulated by the Troika would unleash higher GDP growth rates among the borrowers, thereby permitting them to grow out from under their Troika bridge loans after a period of externally enforced fiscal retrenchment.

This means that the Troika MOUs were not based on the assumption that “austerity” per se was a policy tonic. That charge is just a Keynesian canard that has gotten endless resonance in the financial press—–as in MarketWatch’s specious headline this morning proclaiming, “Greece offers evidence that austerity doesn’t work”.

Actually, it proves nothing of the kind. What it does prove is that superstate bureaucrats operating by dictate and remote control cannot reengineer national economies sufficiently to meaningfully elevate economic growth rates; and to thereby enable fiscally insolvent state borrowers to grow out from under their unsustainable debts. Indeed, that is just a variant of the supply side delusion of GOP orators in the US.

To some considerable degree this Europeanized form of the Laffer Curve was the subtext during last weekend’s Gong Show of political bullies, economic ignoramuses and superstate apparatchiks in Brussels. Here’s how they finally instructed the hapless Greeks to manage their crushing $400 billion of debt. Why among other things, their final missive required:

…….adopt more ambitious product market reforms with a clear timetable for implementation of all OECD toolkit I recommendations, including Sunday trade, sales periods, pharmacy ownership, milk, bakeries, [over-the-counter pharmaceutical products in a next step], as well as for the opening of macro-critical closed professions (e.g. ferry transportation)…….

If your weren’t aware of the Troika’s grow-your-way-out-of-debt delusion you would think this whole thing was some kind of giant hoax. After all, is it really possible that the assembled might of 327 million citizens of the Eurozone-18 are telling the 11 million inhabitants of Greece that they must open the restricted professions of engineers, notaries, actuaries, and bailiffs, and must liberalize the market for tourist rentals and ferry transportation?

Or that they are also being told exactly how to reform their utility capacity based payments system and other electricity market rules. And this is being ordered so as to avoid the deadweight economic losses which occur when electric power plants operate below their variable costs or netting of the arrears between power provides and the utility distribution system provides erroneous economic signals, among other things.

In the same vein, there are edicts to alter the operating specifications for running a bakery, the rules for owning a pharmacy, the methods by which milk is sold and marketed, and it get crazier from there.

The rationale for all of this mind-boggling meddling in local commerce and economic life, of course, is the Laffer Curve. The Greeks are to be jack-hammered into more market-oriented economic habits so that Greece can grow its way out from under its debt and thereby become a sturdier debt mule while under the Troika’s ministrations.

That’s all absurd of course. But it’s what happens when a superstate becomes a fiscal banker and lies to its constituencies about the financial costs and risks of underwriting what were plain old bad debts in the first place. Indeed, when you destroy honest bond markets you eventually end up with Stalinist governance in the name of the free market!

The implications of that truth are doubly ironic. First, the real policy of the Troika was not “austerian” as gas-bags like Professor Krugman constantly importune; as indicated, it is actually a European version of the Laffer Curve—–that is, fiscal redemption through supply side magic and a bigger denominator of GDP to generate incremental tax revenues and thereby shrink the ratio of debt to national income.

The second irony is that almost all of the labor and product market reforms advanced by the Troika are good free market concepts that would enable greater efficiency and productivity over time, and thereby stimulate a larger pie of national income. However, the skunk in the woodpile is that the crypto-communist labor laws of Italy and Spain and the crony capitalist product market cartels and restrictions which thwart efficiency in Greece and throughout much of Europe are for better or worse a product of the democratic process.

As free traders used to say about protectionist quota and tariffs, if some benighted parliaments abroad decide to fill their harbors with rocks in order to keep out cheaper foreign goods that is their right to be stupid; it does not warrant closing American harbors in response and thereby punishing domestic consumers and markets in retaliation.

Yet, by the same token, the domestic stupidity that causes the Greek parliament to hang on to retail trade restrictions that prohibit price discounting and competition except during specially designated winter and summer “sales periods” does not justify the preemption of domestic legislative sovereignty. If the Greeks wish to legislate themselves into a lower standard of living in return for the perceived social stability and benefits of dirigisme—-that is their democratic prerogative.

Stated differently, the Eurozone is fatally flawed monetary union; it is not a sovereign state with plenary Federal preemption. Therefore, the Brussels conceit that it can be a Laffer-Curve style banker to the PIIGS is fundamentally mistaken. If any sovereign state of the EU can’t pay its debts, those debts need to be written off or restructured. With the passage of time and the trauma of realized losses in the government bond markets, there would be less debt issued and more fiscal rectitude apparent even among social democracies of the old world.

Unfortunately, the Franco-German alliance that has driven the EU bailout regime has now dug itself into a deep corner of lies and delusions. What Greece does prove—-and Spain, Portugal, Italy, Ireland and France, too—-is that quasi-socialist welfare states in the contemporary European setting can never grow out from under excessive debt. Supply side reform is a snare and a delusion into terms of debt carrying capacity, and is political dynamite if coercively imposed from above via superstate preemption of domestic governance.

All of this should have been apparent from the get-go, but is surely evident now after a half-decade of failed Troika bullying. But the Troika bankers-cum-reformers are now trapped because they have continuously lied to their own parliaments about the risk of the PIIGS bridge loans and the prior bailouts of the private investors who originally held their debts.

Were France to seek funding for the EUR 72 billion of Greek debt it has underwritten (including its share of ECB advances) or Germany the EUR 95 billion or Italy the EUR 63 billion or Spain the EUR 44 billion——governments would fall in no time. The incipient nationalist-populist uprising that is already roiling European politics would erupt into a stampede of upheaval.



And this is where the second falsification——Mario Draghi’s “whatever it takes” ukase—comes into the picture. The Eurozone would have blown to bits during the original 2010-2012 crisis, and notwithstanding the extensive bailout facilities, had not the ECB committed itself to massive monetization of the PIIGS debt—-debts that real investors did not wish to hold even at the elevated rates which materialized during the crisis. These soaring rates were indeed the off-ramp to bankruptcy because these states were, in fact, bankrupt.

Yes, it took nearly two years for the ECB to actually get its big fat $70 billion monthly bid into the marketplace. But that was immaterial. The fast money gamblers bet that the ECB would eventually commence a massive bond buying campaign and were more than happy to front-run the resulting euro bond bubble.

That the speculators who rode the Draghi bubble made hundreds of billions of profits buying PIIGS debt on 95% repo, and were then positioned to sell their bonds back to the ECB at the first sign of a market break, is a deplorable consequence of the ECB’s version of bubble finance. But the real ill is that the weak-kneed, hypocritical and often corrupt politicians of the peripheral countries were enabled to falsely claim victory without significantly rectifying their own fiscal insolvency.

Spain is the poster-boy on this front. After the mid-2012 Draghi ukase, it did not significantly shrink its state budget or reform its tax and regulation addled economy. By the end of Q1 2015 its real GDP was still 6% smaller than during early 2008. Accordingly, its debt ratio rose sharply and is now pushing up against 100% of GDP.


Needless to say, the above blindingly obvious fiscal deterioration——under which Spain’s public debt has risen by a staggering $650 billion during the last three and one-half years of “austerity” administered by the blatantly corrupt and thoroughly dishonest Rajoy government——–had no impact whatsoever on the pricing of Spanish 10-year bonds after the Draghi ukase. By the end of March this year the debt of the quasi-bankrupt Spanish state was trading at 1.0%, reflecting a blatantly artificial stampede of Spain’s public debt first into the hedge fund parking lots, and eventually into the vaults of the ECB.


There is no possibility of honest fiscal governance in a social democracy like Spain when its debt price is blatantly falsified per the above. Indeed, at this very moment the Spanish government is back into the market with a massive $15 billion issue, attempting to surf on the debt market wavelet generated by Monday’s Greek bailout headlines.

To be sure, the Keynesian commentariat and ECB apologists are now proclaiming that Spain is fixed——perhaps just like Greece was last August when its government issued 10-year debt at under 5%. The point is, however, that the modest rebound in Spain’s current account and uptick in its employment and GDP figures is a rounding error in the scheme of things. Another recession is surely coming to Europe, and perhaps sooner rather than latter. Since Spain’s budget deficit in 2014 was still 5.8% of GDP, how in the world will its fiscal accounts survive another recessionary blow?

They won’t. The Troika bankers will be all over Spain like a wet blanket, extinguishing another European democracy and fueling radical popular movements like Podemos—just as it has already done in Greece.

And a cascade around the European periphery of that mode of Stalinist governance may not be too far down the road. In a few days it will be blatantly obvious that the Germans have occupied Greece in every meaningful sense of the word save the actual bivouacking of uniformed troops.

A German/troika agent will place a custody lien on every airport, train station, port, power plant, electrical distribution grid, ferry boat, bus line, tourist attraction and public park, forest and island for which the Greek state still holds title. Even then, it will not amount to close to the $50 billion of collateral demanded.

Likewise, within days the entire banking system of Greece will be taken over by the ECB, meaning that depositors—-especially those above the EUR 100,000 guarantee threshold —–will be given a goodly haircut.

In short, Greece will become an outright debtors’ colony and its government will function as page-boy legislators for the Troika occupiers. Needless to say, political and social upheaval will erupt when the full extent of the Tsipras surrender becomes evident, and the resulting political contagion will spread throughout the length and breadth of Europe as Greece implodes.

In due course, the euro will collapse and the baleful Keynesian money printers’ regime in Frankfurt will be repudiated and dismantled. But not before European democracy has a brush with death, and European prosperity is extinguished for a generation.

[gnk]

Re: Pilger on Greece

When I mentioned German bank exposure - I meant German bank exposure to the PIIGS overall, not just Greece. I just found one article I was referring to from memory (2011):

Italy’s contribution to the European Central Bank’s capital base, one measure of EU members’ commitments to the bloc, is 12.5%, compared with 19% for Germany.

But German banks account for around 37% of the impaired assets in Ireland, compared with less than 5% for Italian lenders. Insofar as the Irish rescue package boosts the value of Irish debt — which is its point — German banks benefit disproportionately.

Tremonti’s point holds for more than just German banks, which amid the huge current-account surpluses and austerity budgets at home had little domestic credit demand and instead shipped local savings to hot real-estate markets in hopes of better returns.

The latest BIS data, released in December and reporting claims as of June 30 last year, show that the combined exposure of French and German financial institutions to Portuguese, Irish, Greek and Spanish debt was $923 billion, while that of Italian lenders was $76 billion.

SOURCE

I don't know the breakdown on PIIGS exposure between Germany and France, but if I recall correctly, Germany was more exposed. I could be wrong.

Thanks for the excellent post.

[Southernguy]

Re: Pilger on Greece

And then from Bloomberg today: "
Hurdles remain, among them disagreement over how to finance Greece through the next few weeks. Next week alone, the Greece needs to pay 3.5 billion euros ($3.9 billion) to the ECB, with pensions and state salaries also needing to be paid.
“We are looking at all the instruments and funds that we could use and all of them seem to have disadvantages or impossibilities or legal objections,” Dutch Finance Minister Jeroen Dijsselbloem, who chairs meetings of his euro-area counterparts, said in Brussels.
Ratification must also be secured in six other parliaments, among them the German lower house, or Bundestag, which will be reconvened on Friday from its summer recess."

So what?

[gnk]

Re: Pilger on Greece

Greece needs a bridge loan fast because it can take up to four weeks to hammer out the agreement and fund Greece with the three year program. So far, the only viable option is through the EFSM. Britain wasn't too cooperative at first, but has since backtracked. This is the most likely scenario.

[thriftyandboringinohio]

Re: Pilger on Greece

Yanis Varoufakis recently resigned as Finance Minister in Greece.
Yes, he is a died-in-the-wool Marxist economist, but that does not mean he is stupid.
I kind of like his style.

He released a version of the Euro Summit program to save the Greek economy (Euro Summit Statement Brussels, 12 July 2015) with his own snarky annotations added in red.
I expected to read the thing and be amused by his cynical comments, but expected they would be wild, unjustified accusations and exaggerations.
Not so.
He seems spot-on, and the crowd in Brussels appears imperious, arrogant, and unrealistic to a frightening degree.

The document is short. Even with Varoufakis' cynical annotations included it's only six and a half pages.
You can read it for yourself here:

https://varoufakis.files.wordpress.com/2015/07/eurosummit-communique-terms-of-surrender.pdf

[astonas]

Re: Pilger on Greece

When I mentioned German bank exposure - I meant German bank exposure to the PIIGS overall, not just Greece. I just found one article I was referring to from memory (2011):

SOURCE

I don't know the breakdown on PIIGS exposure between Germany and France, but if I recall correctly, Germany was more exposed. I could be wrong.

Thanks for the excellent post.

The headline exposure varied from country to country, and the bailout of each was tailored to reflect that. But as you point out, the Greek situation was different.

The reason I keep harping on "Anglo-Saxon style banking" is that this is a massive multiplier for all the effects we're talking about. A good part of it comes down to credit default swaps.

We talk about them today like they were around forever, but they are actually relatively recent. Invented by JP Morgan in 1994 they quickly became the rage of the Anglo-Saxon banking world. But it was when Glass-Steagall fell that they REALLY took off, since now they could be used by any staid and solid retail bank. The Gramm-Leach-Baily act in 1999 repealed Glass-Steagall, and was supposed to make US banks more competitive. In practice it forced the export of the same loose regulation, along with massive bank consolidations worldwide, in a race-to-the-bottom of regulators. Each nation has since tried to reign this in, but with very different degrees of success. The US and UK have arguably failed completely, by watering down Glass-Steagall into the Volker rule, which in turn was watered down beyond recognition or utility. Germany was arguably pretty successful.

But to return to our story, in less than a decade, from 1999 to 2008, it became possible to place far more bets on an underlying debt than the debt itself was worth, on any debt, anywhere in the world.

In Greece, the bets were probably absolutely massive, but also almost entirely unreported. The BIS only collects information from banks on NET swap holdings. What this means is that ALL the numbers we've seen implicitly assume that there is exactly 0% counterpart risk. If a counterparty fails to pay, it is the GROSS value of the swaps defines the gain or loss for the holder. And those have been estimated as being on the order of 10x the underlying debt. What's more, those based in the City of London have managed to get seniority over all other debt (even the underlying issuance!). That means that the 10% of the swaps that are based in the UK could get 100% of the payments, even before all other lenders, including sovereign states. No wonder they liked them!

In sum, what this means is that even if the underlying debt that we have been talking about were perfectly distributed among creditor nations, in exactly the same ratio as the bailout percentages, one nation could still be a huge winner at another's expense in a bailout, if its banks held the most credit default swaps, or similarly, the riskiest tranches of debts. And since all the balance sheets did not have to be disclosed, no one has any good numbers on who the biggest players really were. We know the net numbers, but the gross is still proprietary. And we do know that the UK has worked hard to write laws that would make it first in line, even before the boring underlying debt-holders. The kind that German banks, in general, liked to hold.

Now, there were one or two major German bank that played the swap game, as well. Deutsche Bank, for example, had been more heavily influenced by the Anglo-Saxon banking style than most. But just by looking at the disclosed net values, ALL of the US, UK, French, and Swiss banks were in it -- big time. And far more CDSs were traded in dollars and Sterling than in Euros, so that gives us an idea that even if Germany was by far the most aggressive within Europe (hard to imagine) it still wasn't even close worldwide. This was first and foremost an Anglo-Saxon game. And the leaders are who you'd expect. Goldman. JP Morgan. The usual suspects.

Since the numbers that matter are secret, though, the real clincher in working out who holds the "dirty" debt is to watch how each nation is behaving. The ones that have banks holding massive, Anglo-Saxon-style, highly leveraged, naked CDSs, are the ones that are desperate to push away from default, at any price. They'd be screwed, to a vastly larger extent than they can even admit to their voters, in a legal default.

The US, UK, France, Italy, and Cypress.

The ones who are happy to move a nation toward default, toward an explicit recognition that such CDSs may actually be worthless, and that the counterpart risk is not 0, are likely the ones with banks who hold the least.

Everyone else: The ordoliberal states (including the newer eastern european additions) and those mediterranean states that have undertaken serious reforms.

Now look at Germany and France in the last negotiation. Which one openly wanted to make the situation explicit, through a Grexit? Which was desperate to extend-and-pretend at all costs?

France is the major party that STILL has banks that are screwing the rest of Europe over, Anglo-Saxon style. Even AFTER many of them have been bailed out once by Germany. Germany has been far more successful at cleaning house internally, to whatever extent that might have been necessary.

And that's why I'd say it's a pretty good bet that even though the actual numbers of CDSs are still industry secrets, German banks (and those in the other ordoliberal states) really don't hold the majority of either the riskiest debt, or the naked CDSs. They want to bring things to a head, to stop the endless bleed, not so much to the people of Greece, but more importantly to the French and Italian banks.

They want CDSs (along with other aspects of Anglo-Saxon style banking) recognized, in the markets if not in law, as the insidious and destructive influences that they have proven to be. Only a borrower default, not a restructuring, could achieve that.