Post originally appeared on The Automatic Earth Blog.
Yes, more Greece, ever more Greece. Well, the focus is still very much there. It’s not the only topic, obviously, China warrants interest too, certainly with things like Tyler Durden quoting Cornerstone Macro as saying China’s true economic growth rate was just 1.6% in Q1 2015, not the official government number of 7%. Never trust anyone, especially a government, that consistently meets or beats its predictions. With housing prices falling the way they have, -6% or thereabouts, and over 70% of Chinese private investment in real estate, it’s hard to see how a 7% GDP growth number could pass scrutiny. Sure, there’s the stock market bubble, but even then.
But for now back to Athens. Or Washington, actually, where Yanis Varoufakis finds himself. From what we can gather on his schedule, Varoufakis has (or has had) meetings with Obama and Lagarde on Thursday, and with Mario Draghi, Jack Lew and Wolfgang Schaeuble on Friday.
Also on Friday, he’s meeting sovereign debt lawyer Lee Buchheit, who’s a partner at New York law firm Cleary Gottlieb [..Steen & Hamilton], and has helped restructure debt for various countries. The Guardian, back in 2013 (how times have changed!), portrayed Buchheit as the ‘fairy godmother to finance ministers in distress’:
This is the man who stands up to the vulture funds – so named because they buy up the debt of desperately poor countries in order to chase them through the courts for repayment. So it is something of a surprise to meet a slight, mild-mannered lawyer, with more than a whiff of academia about him.
He insists he does not make a moral judgement in choosing who he acts for, but rather enjoys working for the debtor nations. “It’s just more fun,” he says. “If you represent the lender, your client is tiresomely saying things to you like, ‘Why don’t they just pay us the money back?’ When you’re on the debtor side, you can say, ‘If you want to get it back, why did you give it to us?’“
In view of that last quote, it may be wise to once again reiterate that only about 8% of the bailout funds Athens is now on the hook for, actually went to Greece; the other 92% was used to save major European and American banks. As I said before, this has been a political decision, not an economic one. In that vein , we can take a look at the following from John Ward at the Slog, dated March 26:
At this link is an official EU release whose sole concern is the subject of ‘contingent liabilities’ entered into by EU member states. [..] the EU release in this instance contains some blockbuster facts….and adds another piece to the eurozone jigsaw of hypocritical mendacity. Contingent liabilities are often referred to as Shadow Debt: if you’re lucky, they won’t become an eventuality. But as the EU table shows, given the parlous nature of the ezone banking sector, every one of the liabilities is a racing certainty.
We’ve all been asking why Germany ignored the EC bailin directive last week and bailed out a small Bavarian Bank. The answer is simple: not to do so would’ve been illegal under BundesRepublik law, because Berlin had promised so to do. On this basis, while at first sight German national debt is a ‘mere’ 70% of GDP, add the promises it has made to its banks, and the number comes in at a horrific 222%. Not far behind comes the Netherlands with a similar ‘official’ national debt at 73% of GDP. But the contingent liabilities are 115%…making a pretty nasty mountain of 188%.
The Number One and Number Two top contingent liability millstones in the EU are – by miles – Germany and the Netherlands. Now let me see…who are the two chaps working hardest to stop the Greeks and their contagious banks from going their own way? Why, none other than German finance minister Wolfgang Schäuble, and Dutch finance minister Jeroen René Victor Anton Dijsselbloem. The third prong of Troika2 is of course the ECB’s Italian Mario Draghi. Without any contingencies at all, Italy’s national debt is 132.6% of GDP. Add its 45.5% of contingents, and this too adds up to 178.1% of GDP.
Before you know it, things are no longer what they seem. If you were Lee Buchheit, you might want to argue that Greece is being thrown to the lions and the wolves because Germany and Holland bailed out their bankrupt banking systems, and vowed to keep doing it.
That would make it very hard to imagine them saving Greece today, since to do that, they would risk their own banks, which they bailed out with trillions of their own taxpayers’ money. It would be political suicide. It’s much easier to tell those taxpayers that it’s Greece that’s at fault, not their own heroic leaders (I say heroic because that’s how Bernanke portrays himself in his ‘Courage to Act’ fictional fluff).
So when, oh when, could the Grexit come? Daniel Roberts at Raas Consulting thinks he might have part of the answer:
One thing in common for almost all of my Pinewood International Schools (TiHi to some) class of ’78 is that we left. Many still live in Greece and in Thessaloniki or have returned, and they are closest to the pain. The real pain of the past decade, that has destroyed wealth and hope. Unemployment is running at levels not see in Europe since after the war, and at levels that encouraged the socialist-fascist civil wars of the 1930s. Those did not end well.
But that does not explain why the Grexit is inevitable, and why it will happen very soon.
1) This is what the Greek people voted for. No, they did not vote to stay in the Euro, they voted for the party that said it would reduce the debt and meet pension obligations. The Greek people and voters are not stupid. They knew this could only happen by either the rest of Europe bailing out Greece again, or by leaving the Euro.
2) The Greek people know perfectly well that Europe is not going to bail them out, because to do so will only set everyone up for the next bailout.
3) The Greek people, and the rest of Europe, know full well that the debt will never be repaid, and that the Troika are now acting as nothing better than the enforcers of loan sharks.
4) Syriza knows that it had six months before the voters would throw them out, and once out, Syriza would never come back.
5) The Greeks needed to show “good faith” in actually attempting to negotiate a resolution with the Troika. This has now been done, and is failing.
6) The demand for reparations from Germany is designed not to actually extract the reparations, but to anger the Germans to the point that they will block any compromise that Syriza would have been required to accept.
The Greek government, elected by a battered and exploited Greek people, has been establishing the conditions that will give them the moral high ground (in the eyes of their voters) needed to actually leave the Euro. Having set the conditions, when will it happen? I’m still guessing May 9th. Why? Greece will leave the Euro, and they will do it sooner than later. They’ve made the April payment, but simply do not have the money for the May or June payments, and they cannot pass the legislation required by Europe and the Germans and stay in power. That gives us a late May or June date. So why earlier?
Capital flight. Imposing currency controls will be a fundamental element of any Grexit. Accounts will be frozen, and any money in accounts will be re-denominated in New Drachmas. Once the bank accounts are unfrozen, the residual, former Euros will now be worth whatever the New Drachma has dropped to, and the drop will be significant, over–correcting to the downside. Once it is accepted that the Grexit is coming and there will be no last minute deal, and with memories of Cyprus too fresh in every Greek’s mind, the money will flow out of the country. Not just corporate money (most of which is probably off-share already) but any remaining personal money in bank accounts. So Greece has to move before the coming Grexit is perceived as inevitable, and the money starts to flow out.
Weekend event. When the Grexit happens, it will be on a weekend. The banks will be closed, parliament will be called into emergency session, and a packet of laws will be passed. As this needs to be on a Saturday to avoid wholesale capital flight the moment that parliament is called into session, were it a weekday. This leaves only a few possible dates. And where there are few possible dates, I’m punting on the earlier date, so earlier in May. And looking at the calendar, that leaves us with May 2nd, 9th or 16th. My own guess is that the 2nd is too soon, and the 16th is too late. That leaves me guessing May 9th.
The top graph on the left side of my essay shows all Greek payments due until September. It comes down to about €13 billion in the next 5 months. The country is desperately waiting for a last €7.2 billion bailout tranche the lenders won’t pay out, but it wouldn’t even make that much difference. So when will the drama come to an end? Turning to the second graph, we see specifics. The next payments are:
• April 17 and 20: a combined total of €273.5 million in interest payments to the ECB.
• May 1: €195.1 million to the IMF.
• May 12: €744.9 million to the IMF.
It’s hard to see how Greece can even attempt to make that last payment. Let alone the €1.61 billion due in June (numbers on both graphs don’t add up exactly), or the billions after that.
The big questions concern not just the difference between on the one hand, economic issues and on the other, political ones. Syriza doesn’t have the mandate to take Greece out of the eurozone. That is a huge point. But neither does it have the mandate to give in to the troika’s insistence on pensions cuts. At a certain moment, it may come down to what can be explained to the Greek people, and how well it can be explained. This explanation will almost certainly have to come after the fact, since holding a referendum pre-Grexit would carry far too much potential risk of uncontrolled demolition of the entire Greek economy and banking system.
Tsipras and Varoufakis are not the most enviable people out there at the moment. They have hard choices to make. Still, in the end, running a society, a nation, or a union of nations, cannot be just a matter of balancing your books. That can never be your bottom line. You’re talking about real people, not mere entries in a ledger. Schaeuble and other European politicians keep bragging about the ‘success’ of Greek government policies before Syriza came to power, even as it’s been well documented that many Greek children go hungry and people have no access to health care. How is that a success?
That attitude may be the most valuable argument Syriza has available to it in its upcoming discussions with its voters. Whether these discussions take place before or after a Grexit is hard to say at this point. But Daniel Roberts’ reasoning towards a May 9 event certainly has some logic to it. We may still hope that the troika doesn’t put Syriza into a position of an impossible fork in the road, but right now it doesn’t look good, it looks like they’re getting ready to sacrifice Greece on their pagan altars.
To top off the cynicism involved Bloomberg runs an article today entitled Germany: Has Any Country Ever Had It So Good?. At the same time, a few hundred miles to the south east, children don’t have enough to eat. The European Union sure is a great place to be. What a success story! Pity it’s about to end.