Again, it seems that the IMF and EU review mission teams are diligently and quietly working away on the ground in Athens whilst all hell is breaking loose everywhere else.
First up, the European Commission seems to be getting exasperated at the lack of meaningful progress by politicians in Greece. “Time is running out” said our Finnish friend, the Commissioner for Economic and Monetary Affairs, Olli Rehn. What Olli was hoping for yesterday, was consensus amongst the main Greek political parties to the latest round of austerity measures and privatisation programme. Despite a three-hour (or five-hour, depending on your sources) extraordinary meeting of the heads of the main political parties in Athens yesterday, under the auspices of the Greek president, no consensus was forthcoming; indeed from this perspective, political relations in Greece seem to be fracturing with recriminations getting personal. What the EU wants is consensus to a road map of austerity and privatisation measures, it doesn’t want unpopular commitments unravelling a few months down the road as politicians jockey for advantage. Greece had its last elections in 2009 and the next ones are not due until 2013. The ruling PASOK party has 160 seats in a 300-seat parliament and it has additional allies in other parties but still the concern lingers that the €110bn bailout deal which was agreed in May 2010 may founder amidst political manoeuvres. If the EU was looking to early elections to provide a mandate for the bailout, then those hopes were dashed when the incumbent prime minister ruled out early elections after yesterday’s marathon meeting.
Next up, the IMF and their acting managing director, John Lipsky repeated the IMF’s mantra yesterday that restructuring is not foreseen as long as Greece adheres to the bailout terms. What we all want to know is whether or not the IMF will withhold its €3.3bn contribution to the next €12bn tranche draw-down by Greece from the €110bn bailout in June 2011, and if the IMF is demanding that the EU provide assurances to fund the remainder of Greece’s maturing debt in 2011 and possibly 2012. And we’re unlikely to get any comment from the IMF on this question before 6th June 2011 when the review mission in Athens is due to conclude its work.
There was a new voice adding shading to the debate yesterday when French president, Nicolas Sarkozy spoke in favour of bondholders sharing in the solution of Greek’s present woes. What he was calling for seems akin to the Vienna Initiative in 2009 where bondholders agreed to roll-over maturing debt. He specifically wasn’t talking about unilateral burning of bondholders. The national government perspective was backed up by Michael Meister, the CDU (Angela Merkel’s lot) finance policy spokesman who said Greece’s creditors may accept an extension of bond maturities if the Greek government adopts a more aggressive approach to cutting debt. With 10-year bonds trading at 55c in the euro and signs of growing turmoil in Greece, it’s hard to see bondholders being understanding.
The ECB has been silent on Greece in the past 24 hours.
So on Day 4 of GreekWatch what is the likely prognosis for the Greek patient?
(1) Greek politicians impose the austerity and privatization plans agreed with its creditors. This will certainly be attempted in early June in parliament but it seems messy without consensus. And unionists and protesters seem to be chomping on the bit to hit the streets during the hot summer months.
(2) Greek’s bondholding creditors agree to roll-over debt that matures in 2011 and possibly 2012. Seems unlikely given the likelihood of Greek default and Greece’s slow progress with complying with the bailout agreement
(3) The EU either picks up the entire tab for the next tranche or provides an assurance to fund the roll-over of Greek debt because the IMF won’t risk more funding and the immediate consequences of default will disproportionately affectEurope. This is messy because it may require an additional bailout (€60bn according to some estimates on top of the existing €110bn) and will require national parliament approval in Germany, Holland and Finland who all seem increasingly hostile towards Greece.
(4) Greece doesn’t get the next tranche at all and defaults which would probably lead to all Greek banks being nationalized and capital controls to prevent euros leaving the country/banking system. Given that Greece still has a primary budget deficit, it would need either immediately close that or else exit the euro.
(5) The IMF and EU provide the next tranche without receiving sufficiently tangible commitments from Greece, because the wider consequences of default outweigh €12bn.
NAMA Wine Lake 
We all know the answer will be (5). If it’s one thing bureaucrats know how to do, it is to avoid taking hard decisions and kick a can down the road. However, what’s going happen when we run out of road in the next few years?
Here we see again the method the EU is using to impose their so called austerity measures on the Greek people .By trying to get the local politicians to do the dirty work for them .This strategy was very successful in Ireland as the waved plumb jobs and money up to the noses of our politicians and they were falling over themselves to do the bidding of our now masters in Europe .Gone out are the shambolic democratic principals in favour of dictates from the EU and the IMF.
Memories of the Lisbon and Maastricht treaties are all gone and the true intentions of these con jobs are now apparent. The Irish political class have betrayed our people and we are now watching unfold before our ever eyes the tragedy that awaits us in Greece .We have a few more months before all of our own financial resources disappear down the black hole of bank bailouts and outrageous interest payments on private debts that have been foisted on to the shoulders of the ordinary people. Our national pension fund is all but disappeared (30 Billion) and when we reach the bottom we will find a change in tone from our new government as they realize that the mantra of no default hasn’t cut any ice with the international financial markets .Just declaring this mantras every so often doesn’t make any more believable ,in fact just the opposite is true .Last year we were constantly hearing from the previous Finance minster that “we had turned the corner” and his expression “Our plan is working “was met with outbursts of laughter from the backroom financiers and bondholders .This is now been repeated by Mr. Edna Kenny, who seems to believe his own totally unrealistic utterances that the Irish government will not default, will not need to extend the bailout term and will not need any more bailout funds .Edna why not come out and jus flatly deny that the IMF are in the country and declare that their presence is a figment of our collective imaginations.
Austerity we haven’t seen anything yet especially now that we know that this new government is set on staying the course Fianna Fail set before the last election.
We have been conned and the agenda to financial cripple the Independence of Ireland is about to get serious with the end result of enslaving the people of Ireland to the yoke of a United States of Europe governed by the German, French and our old colonial power England .
NWL
Great summary. I’d say (5) will be the immediate response with variations of (4) and (1), i.e. default+austerity, becoming inevitable once the consequences of (5) become apparent.
Are there any current statistics on Greek bank deposits? You would have to be out of your mind to leave Euros in a Greek bank or an Irish one for that matter. I would assume there is not a single Euro in Greece, except under the beds or buried in the back garden.
I think it is safe to say the Greek unions are not going to have any of this IMF “privatization” and see their standard of living drop 50% overnight. It is going to be very messy.
“And unionists and protesters seem to be chomping on the bit to hit the streets during the hot summer months.”
And why shouldn’t they? If someone is robbing you, why wouldn’t you fight back? The fact that basic human rights and dignities are seen as something you only acquire when your earning power is above a particular threshold and are being thrown overboard in favour of corporate interests, and that more and more people are realising that these bailouts are a massive swindle which only benefit the same shower that engineered the crisis, aided and abetted by our grossly overpaid political gimps; is it any wonder that people would be taking to the streets? And as supposed solutions (which are little more than transfers of wealth to the powerful) continue to fail, tensions will presumably continue to grow. I wonder if Paddy Power is giving the odds on when protesters will start being killed on those streets?
This is all brinksmanship. The ECB says Greece will get nothing if they default. The EU says that to get money the Greeks must make even deeper cuts, while a soon-to-be-completed audit will show they are in worse shape rather than improving. The Greeks have an obscure minister who is not part of the government say they might leave the euro. The IMF says they may not fund without further commitments from the euro members, which are going to be tough to get from Germany and Finland, at the least.
The German government has been proposing to fill Greece’s finance gap without providing more loans, by asking holders of Greek bonds maturing in the next couple of years to agree to postpone their repayments. That’s just not going to happen. What’s the quote about depending on the kindness of strangers.
The Wall Street Journal says:
“Analysts and officials say a political fudge will likely be worked out that won’t leave the euro zone hanging on a precipice on June 29. Since the IMF is providing only around a quarter of the funding, the euro zone’s existing commitments alone would tide Greece over for a few months as European leaders debate additional financing.”
However, short-term fixes won’t resolve the fundamental tensions around Greece’s debt that are putting the ECB, IMF and creditor governments at odds.
Many believe if something gives, it will be the ECB. ‘One of the sides will have to give way. I believe that the ECB’s threat of leaving Greek bonds out is not something it will actually carry through. I don’t think it’s a credible threat because it’s a nuclear option.
It’s just brinkmanship.
Look at a few graphs from a scathingly critical post in Der Spiegel about the central banks of the various countries in Europe (particularly and most notably Ireland’s) and the ECB itself, which show us why the ECB is so worried about a default. As it turns out, the ECB would be in worse shape than Lehman was in September 2008!
The article is at:
http://www.spiegel.de/international/business/0,1518,764299,00.html.
It is not pleasant reading if you are Irish. It is especially unpleasant if you are German – or if you pay taxes in Europe.
A sample:
“While Europe is preoccupied with a possible restructuring of Greece’s debt, huge risks lurk elsewhere – in the balance sheet of the European Central Bank. The guardian of the single currency has taken on billions of euros worth of risky securities as collateral for loans to shore up the banks of struggling nations.
“… Since the beginning of the financial crisis, banks in countries like Ireland, Portugal, Spain and Greece have unloaded risks amounting to several hundred billion euros with central banks. The central banks have distributed large sums to their countries’ financial institutions to prevent them from collapsing. They have accepted securities as collateral, many of which are – to put it mildly – not particularly valuable.
“Risks Transferred to ECB
“These risks are now on the ECB’s books because the central banks of the euro countries are not autonomous but, rather, part of the ECB system. When banks in Ireland go bankrupt and their securities aren’t worth enough, the euro countries must collectively account for the loss. Germany’s central bank, the Bundesbank, provides 27 percent of the ECB’s capital, which means that it would have to pay for more than a quarter of all losses.
“For 2010 and the two ensuing years, the Bundesbank has already decided to establish reserves for a total of €4.9 billion ($7 billion) to cover possible risks. The failure of a country like Greece, which would almost inevitably lead to the bankruptcy of a few Greek banks, would increase the bill dramatically, because the ECB is believed to have purchased Greek government bonds for €47 billion. Besides, by the end of April, the ECB had spent about €90 billion on refinancing Greek banks.” (Der Spiegel)
OF PARTICULAR INTEREST TO US SHOULD BE THE GRAPH SHOWING THE IRISH CENTRAL BANK WITH THE HIGHEST LIABILITY IN EUROPE.
What Happens if the Greeks Default?
Andrew Lilico, writing in the London Telegraph, gives the answer to that question with a series of short bullet points. You might not agree with all of them, but he may not be far off.
Quoting from:
http://blogs.telegraph.co.uk/finance/andrewlilico/100010332/what-happens-when-greece-defaults/
“It is when, not if. Financial markets merely aren’t sure whether it’ll be tomorrow, a month’s time, a year’s time, or two years’ time (it won’t be longer than that).
Given that the ECB has played the “final card” it employed to force a bailout upon the Irish – threatening to bankrupt the country’s banking sector – presumably we will now see either another Greek bailout or default within days.”
“What happens when Greece defaults. Here are a few things:
– Every bank in Greece will instantly go insolvent.
– The Greek government will nationalize every bank in Greece.
– The Greek government will forbid withdrawals from Greek banks.
– To prevent Greek depositors from rioting on the streets, Argentina-2002-style (when the Argentinian president had to flee by helicopter from the roof of the presidential palace to
evade a mob of such depositors), the Greek government will declare a curfew, perhaps even general martial law.
– Greece will redenominate all its debts into “New Drachmas” or whatever it calls the new currency (this is a classic ploy of countries defaulting)
– The New Drachma will devalue by some 30-70 per cent (probably around 50 per cent, though perhaps more), effectively defaulting 0n 50 per cent or more of all Greek euro-denominated debts.
– The Irish will, within a few days, walk away from the debts of its banking system.
– The Portuguese government will wait to see whether there is chaos in Greece before deciding whether to default in turn.
– A number of French and German banks will make sufficient losses that they no longer meet regulatory capital adequacy requirements.
– The European Central Bank will become insolvent, given its very high exposure to Greek government debt, and to Greek banking sector and Irish banking sector debt.
– The French and German governments will meet to decide whether (a) to recapitalise the ECB, or (b) to allow the ECB to print money to restore its solvency. (Because the ECB has relatively little foreign currency-denominated exposure, it could in principle print its way out, but this is forbidden by its founding charter. On the other hand, the EU Treaty explicitly, and in terms, forbids the form of bailouts used for Greece, Portugal and Ireland, but a little thing like their being blatantly illegal hasn’t prevented that from happening, so it’s not intrinsically obvious that its being illegal for the ECB to print its way out will prove much of a hurdle.)
– They will recapitalise, and recapitalise their own banks, but declare an end to all bailouts.
– There will be carnage in the market for Spanish banking sector bonds, as bondholders anticipate imposed debt-equity swaps.
– This assumption will prove justified, as the Spaniards choose to over-ride the structure of current bond contracts in the Spanish banking sector, recapitalising a number of banks via debt-equity swaps.
– Bondholders will take the Spanish Banking Sector to the European Court of Human Rights (and probably other courts, also), claiming violations of property rights. These cases won’t be heard for years. By the time they are finally heard, no one will care.
– Attention will turn to the British banks. Then we shall see…”
Or…… the EU can kick the can down the road one more time. The ECB will blink.
Some way will be found to find money yet again, and politicians everywhere will pray that something happens that saves the system – like the Greeks suddenly start to pay taxes and Greek and Irish GDP jumps up to 5%.
(For the record, there are reportedly massive bank runs in Greece, especially on large uninsured deposits.)
It is hard to understand how people can ignore what are clear warning signs.
Some people see the signs. Others do not. Some decide to get out while the getting is good. Others do not.
According to Dealogic, European banks have to refinance about €1.3tn of maturing debt by the end of 2012. This is the sort of pressure point capable of triggering a liquidity panic unless Euroland policymakers become much more proactive in the interim.
There are just so many risks in Europe that it is hard to make a list long enough.
(And we have not even got to the healthcare and pension crisis yet.)
The leaders of Europe think they can “contain” the risk. So did Bernanke in the summer of 2007. You cannot contain anything until you actually admit the problem.
Our European credit institutions are so intertwined that an escalation of the credit crisis is entirely possible. Who plays the role of Lehman? The candidates are Greece. Ireland. Portugal. Spain. The ECB. Any number of large European banks with massive Irish exposure.
The simple fact is that at some point, whether this year or the next or the next, depending on how long they can kick the can down the road and how long German voters are prepared to bite 27% of the cost (NOT a given), Greece is going to default.
Maybe the plan of the ECB is to keep financing Greek debt until it is off enough bank balance sheets and onto the back of the euro through the ECB balance sheet, before they pull the plug.
Whatever the plan is, right now Europe looks like a very dysfunctional family. The potential for a messy divorce is quite real. Can you see Greece or Ireland giving up sovereignty to Brussels? Really? Then you should buy Greek bonds at 24%. They are a steal.
@WSTT, a public thank-you for that comment. It’s a depressing read on a Sunday morning and would make you wonder how long it will be before we have our own real QE1 (Quantitative Easing) in Europe. Quantitative easing would be the printing of lots more euros which would drive up prices and inflation and wages but would help eliminate legacy debt. We had artificial quantitative easing with the ballooning of credit in the 2000s but given the legacy of debt, it seems hard to see any other way out of the hole, well-illuminated in the comment above, without rebasing our currency. Time to follow the USA?
I find it fascinating that such a small country as Ireland can be a detonator for so much calamity. Of course they are not alone, but pound for pound you have got some real action there. I live in Mexico, a periphery BRIC, and to give you an idea of proportion and which way the economic wind is blowing, everyday more people (around 5 million) ride the Mexico City Metro than the entire population of Ireland.
Europe truely is a dinosaur. But, instead of the giant Chicxulub Meteor quick kill, it is going to be a rather slow grinding process.
The following article was printed in this week’s edition of Barron’s (The Wall Street Journal’s weekly magazine). As it’s subscription only, I have reprinted it here in full.
How to Fix Greece
By VITO J. RACANELLI
It’s time for the devastated nation to face reality. The only way out is to restructure now, with bondholders taking a 50% hit.
Europe should make Greece restructure its debt — swiftly.
It would require delaying interest payments and an orderly reduction of the total debt by 50%. And with 327 billion euros outstanding, we don’t recommend this lightly. Usually, Barron’s staunchly advocates full repayment to bondholders. But the choice for Greece’s bondholders, as we see it, is to accept 50 cents on the euro now — or 30 cents or worse down the road.
Failure to restructure will also bring further societal and economic ruin. With Greece’s unemployment rate at 15%, biding time until an eventual default could throw the country into depression, incite more unrest and drag all of Europe into deep recession. It could even cause Europe’s common currency, the euro, to unravel, and shake the foundations of the European Union itself.
Except for a few brave European leaders who have whispered in recent weeks that Greece get debt relief, Europe’s official approach has been to muddle along and hope the problem will go away. It won’t.
Last week, in its latest Band-Aid attempt, the government announced new austerity measures that will extract a further €6.4 billion ($9.1 billion) from its reeling economy — through job and wage cuts, and new taxes — a desperate effort to make up for missed budget targets set in last year’s €110 billion bailout by the EU and International Monetary Fund.
Not only are steps like that insufficient; they’ll bring disastrous economic side effects. The austerity measures already imposed on Greece by its lenders have severely hurt the Greek economy, which shrank by 2.1% in 2009 and 4.5% in 2010, and which will probably contract by a further 3.5% this year. Greece’s bondholders are effectively stepping on the country’s neck, making the prospect of full debt repayment all the less likely.
Delaying a debt restructuring by even one to two years would mean that the amount to be recovered by bondholders could shrink from 50% to 30%, according to Citigroup. Delay a few more years, and the amount recovered could be next to nothing. Meanwhile, Greece’s economy would keep shrinking. That would bring dire human costs, says David Goldman, formerly Bank of America’s head of fixed-income research. Unemployment could approach Spain’s levels: 20% overall, with youth unemployment near 40%. Emigration would rise, Goldman says. Some public services could be halted, and protests could grow deadly again.
Another bailout won’t help. “Greece is bankrupt,” says Mark Grant, head of structured finance and corporate syndication at Southwest Securities. “To give Greece more money makes no sense. It just means they get more money they can’t pay back.”
The better course is to allow Greece to write down its debt now and try to get its economy growing again. Not that a write-down would be painless. With Greece’s public debt at €327 billion, a 50% write-down means roughly a €160 billion loss for creditors. Many of them are Greeks themselves, of course. Greek banks would need complete recapitalization, and the rest of the financial system would need huge injections of cash.
The European Central Bank, which is adamantly against a restructuring of any kind, holds an estimated €40 billion to €50 billion of Greek debt, and more in loans — so the ECB would need more capital to absorb the blow. The money would have to come from wealthier EU members like Germany and France. Such countries have a huge stake in avoiding a European recession, and in keeping the euro intact.
Since the common currency was adopted in 1999, companies in industrially advanced countries like Germany and France have found it far easier to export to European countries that are less competitive, including Greece, Spain, Ireland, Portugal and Italy—the very countries that now find themselves with serious debt problems.
LETTING THE EURO UNRAVEL would be an economic tragedy for Germany and France as well as for Greece, Ireland and Portugal. Short-term, a Greek restructuring could send the euro down sharply.
The market is already anticipating a restructuring of some kind. Depending on their maturity dates, Greek bonds are trading at just 45 cents to 75 cents on the euro.
A 50% write-down of Greek debt would cause losses of tens of billions of dollars at Europe’s commercial banks. But most of them could absorb the blow. If a few couldn’t, they could either look for new capital, or merge with stronger banks.
It’s likely that a Greek restructuring would increase speculation that similar moves would soon follow in other debt-laden European countries, such as Ireland and Portugal. And such write-downs could well happen. But those countries may not need such drastic action, and, even if they do, the write-downs required may not all be as much as 50%. One estimate showed that a 32% write-down of the debt of Greece, Ireland and Portugal would cost Europe’s commercial banks €200 billion. That would eliminate a year of the industry’s profits before provisions for loan losses, according to Credit Suisse.
By allowing Greece to keep limping along when it needs major surgery, European officials have propped up Continental banks that would have failed. That may seem laudable to some, and it may preserve bank jobs in the short run, but it has caused lingering uncertainty, and hurt long-term economic growth.
Contrast Europe with the U.S., where in the most recent financial crisis, the government allowed a surprising number of major financial players to fail or be bought in fire sales. Among them: Lehman Brothers, Bear Stearns, Washington Mutual, Wachovia and Countrywide Financial. Result: The U.S. now has a stronger banking system — and a stronger economy than Europe’s.
It can be argued that the EU would also help its economies by allowing weaker financial players to be winnowed.
In understanding a country’s financial health, analysts usually compare its government-debt level with its annual economic output. Economists generally believe that once debt rises above 90% of gross domestic product, a country’s resources go mainly to (unproductive) interest payments. What lies ahead could be economic disaster in the form of a constantly shrinking economy and a constantly rising jobless rate.
Greek debt stood at 143% of its annual economic output at the end of last year. But as the nation’s economy shrinks, the ratio only gets worse, creating a painful downward spiral. The country has no room for error. If Greece’s economy contracts as expected this year, its debt will rise to 160% of GDP next year. Even if Greece executes the bailout plan perfectly, slower-than-projected growth or higher interest rates could push the ratio towards 180% in a few years, say Citigroup and the IMF.
To cope with its crisis, Greece has had to cut spending sharply and raise taxes. Its value-added tax, the main sales tax, is headed for an average 20% increase. As a result of such moves, the budget deficit as a share of GDP dropped to 10.5% last year, from 15% in 2009.
Greece is also looking at €50 billion of privatizations, such as the Hellenic Post Bank (ticker: TT.Greece) and the Hellenic Telecommunications Organization (HLTOY). If it follows through quickly, that would be a big help, but that’s a big if.
Short of a restructuring, the only other solution would be a Eurobond, where Greek paper would effectively be swapped for bonds backed by the entire euro zone, akin to the way Brady bonds helped ease the Latin American banking crisis in the U.S. two decades ago. Yet the Germans and other countries, despite their talk of solidarity with Greece, won’t back Eurobonds. The political will isn’t there.
A wise lender would have to conclude that the Greeks have given just about all they can. The only choice left is restructuring — and if that doesn’t happen soon, a vast array of bondholders will be wiped out.
Sovereign defaults have been dealt with time and again. Bondholders know they’re going to take a loss. But by taking steps to relieve some of the debtor’s obligations, they can avoid total loss.
That’s the kind of help that Greece needs — right now.
@WSTT, interesting to read the WSJ view on Europe. Of course it’s easier for outsiders to suggest a solution which doesn’t impinge upon them. So the US and to a lesser extent, the IMF, are less concerned about burden sharing across Europe – they get a more stable trading partner without any real loss coming back to them. A 50% haircut on €327bn of Greek debt equates to €163bn which would have to be met by whom? The Greeks to an extent since they hold some bonds (€50bn by Greek banks alone according to figures published by Reuters during the week).
According to Der Spiegel “. At the moment, some €25 billion in Greek debt is held by Germany’s commercial banks and the so-called “bad banks” set up to take on toxic assets.” The same article claims that funds including German pension funds hold little Greek debt. However it also points out that some €50bn of Greek debt is held by the ECB to which Germany is a major contributor.
Irish domestic banks are understood to have very little exposure to Greece. Ireland lent (!) €345,702,000 to Greece last year as part of the bailout (http://www.finance.gov.ie/viewdoc.asp?DocID=6640&CatID=5&StartDate=1+January+2011) according to the year end Exchequer Statement. It is understood that our contributions to Greece are now suspended.
So a Greek default would be spread far and wide and would hit us to a limited extent. It would hit Greeks hard. The trouble is that the alternative, a 70% default in a couple of years will hit Greeks even harder. There are no easy choices here.
http://www.spiegel.de/international/europe/0,1518,765318,00.html
@WSTT
Your comments 11.46 are lifted from John Mauldin’s weekly letter without acknowledgement
@ barney Mostly that is correct, and apologies to John.
BTW, the same John Maudlin (who is an exceptional commentator) has written a timely book called “Endgame” that is a “must read” for anyone interested in the global economy and the debt crisis.