Posted by: Dr Churchill | June 7, 2014

The Greek Experiment has Failed

It has become evident that the Greek Experiment after the much ballyhooed victory cries, and the showoffs of inconsequential silly numbers, as pronounced by the PM and his daft cohorts in this Greek government of intellectual dwarfs — has finally been revealed as a dismal failure. A giant failure and a smokescreen to disguise the greater European failure. The Euromelange sauercraut Policy, of Austerity, Recession, and imminent stagflation, is simply a failure of Economic policy. Yet it also represents a direct failure of Growth, a failure of Integration, and a distinct lack of human values and above all else an unchristian deficit of Compassion.


Greece’s recent triumphant sale of five-year bonds to hedge funds (1/3) and global investors – half based in London – tells us a great deal about the business acumen, as well as about the mental and emotional state of the Bond investors. They all agree that they like to get great returns without the risk these returns warrant…

The fanfaronic sale though, tells us very little about the state of the Greek economy, that of the Greek society, or the mindset of it’s people. We got a glimpse of that in the recent Euroelections where the government coalition got a shellacking like never before…

Thus contrary to government’s pronouncements, this sale of sovereign government bonds, certainly does not offer any  evidence that Greece is safely out of the woods. It just shows that once more Greece offers the “poor” Bond investors a far better deal and Midas style returns that they simply couldn’t pass up — same as you will stoop on the street and pick up a hundred dollar bill if one is laying around fluttering in the wind.

It is even less of a vindication of the German/EU/IMF Troika policies, that stand as an epic failure that will be studied years hence by scholars, economists, government leaders, and propaganda psychologists alike.  Why one might ask is this an exception to the rule?  Because ordinarily, when a country emerges from the trauma of an IMF austerity regime it has at least a tolerable level of debt, and if need be, it’s got a devalued currency to restore competitiveness. Tough reforms matched by condign relief. The country is supposed to have been put on a viable path towards recovery… That is the proper recipe for return to growth, employment and prosperity…

This has not happened in Greece.

Public debt is still 178% of GDP, despite a haircut of private creditors near 70% in effective terms, and despite (or because) serial EU-IMF loan packages – the “occupation loans” as they are known in Greece. This level remains untenable for a country without a sovereign central bank, and without native monetary policy, and currency.

Elementary students of Economics know this. White glove bond investors know this. Hedge funds know this. And methinks, markets know this too.

Now You might ask: So why are they snapping up Greek bonds at yields of 4.75% and better with a fair appetite?  Simply because we have returned to the pre-Lehman frenzy where the investors will buy up almost anything devoid of blatant risk, and these Greek bonds are all that’s left with such high yields and the ECB guarantee to vent the noxious fumes of the algorithm governing risk/reward/return over time. The investors are seriously betting that the EMU authorities will prop up Greece for the next five years by stretching out maturities and offering rock bottom rates.

In that equation, yet on a distant footnote — they are also betting that Greek politics will not blow up, or at least that the successor government of leftists will be just as daft, corrupt, & inefficient, as this one.

To add insult to injury, we hear that serious traders, like the Greek native Themistoklis Fiotakis from Goldman Sachs [Themistoklis (Themos) Fiotakis Senior Economist and an Executive Director within the Global Macro & Markets Group in London Goldman, Sachs & Co] said that various tricks have been used to cut the interest payments on the Greek debt to 4% to 4.5% of GDP, no higher than just before the crisis blew up the exchecquer, so the theoretical debt level is (for now) irrelevant.

In the back of a napkin calculation, we see that at this rate, over 80% of Greek debt will be in the hands of the German/EU/ECB and official creditors by 2016. Thus it is assumed for the true private bond investor the default risk is “low” because of the association with the big whales whose interests are “always” protected by the “Greek Occupation” forces ruling the country and the collaborateur local governments…

And although this is all true — the Greek 10-yield jumped 32 basis points, so these “safe” and derisked bond buyers are already nursing a loss. Seems the laws of the market knows best still hold because it is a crowdsourced wisdom that prevails no matter how skewed the game of Greek Bond Roulette is towards the “Bank”

And to top it all; whether bond investors really have a handle on Greek politics – or indeed European politics – is another matter. The coalition of Antonis Samaras is down to a one-vote margin in the Greek parliament. The radical Syriza movement refuses to fade away and puts on rouge to redy the “pig” for the next national elections hoping to win a majority that will allow them to run the country to the ground afresh. It is a likely scenario because Syriza topped the latest European Parliament elections same as it did the regional and mayoral elections. Third party came the neo-fascist nazi-criminal gang of Golden Dawn. Amazingly with it’s leadership in jail this party is in the high double-digits as electors flocked to them out of a stupid sense of combined comfort and fear. The Pavlovian carrot & stick unleashed against the Greek people as seen in political action…

So it’s a bloody mess.

Greek politics are also a sordid affair for anyone who has been involved. But the economic landscape is not all full of smoke and mirrors. It is indeed rather clear.

So if you think that we are in the early stages of a global liquidity cycle and a fresh expansion, then rising growth may offer enough of a tide to lift Greece and the Club Med bloc countries, off the reefs.

However, it is entirely another matter if you think that the G2 monetary tightening by China and the US suggest we may be nearer the end of a cycle that is already five years old, or if you subscribe to the Larry Summers view of secular stagnation – another way of saying that global savings are too high, and consumption too low, like the 1930s. In that case Greece will remain on the blocks with the wheels off it’s jalopy of an economy — for a very very long time. Another era of Greek famine is forecast much like the 1941-43

Professor Charles Wyplosz from Geneva University says EMU leaders have merely swept the sovereign debt crisis under the carpet. Debt ratios have been rising as a deflationary dynamic takes hold. The current debt levels in Greece, Italy, and Portugal are a “recipe for disaster” when the next downturn hits, he says.

Hedge funds holding Greek debt, believe they are agile enough to see any such storm coming, and will be able to offload their new bonds onto sleepy pension funds (mine and yours) in due time.

No doubt they are right.

The Greek economy has clawed back some competitiveness by the crude methods of “internal devaluation” which brought down salaries, pensions, and work payments, breaking the labour resistance to pay cuts by driving unemployment to criminal levels. Levels unseen by any nation at “peace” or even in war times.

The IMF said in its 4th Review last year that the current account deficit has been eliminated largely by “import compression”, not by rising exports. There is still a “structural current account deficit at about 6pc of GDP” implying a currency overvaluation of about 10pc.

In other words, Greece may be near trade balance now (though it still has a CA deficit), but that is after six years of depression. It takes a jobless rate of 27.5pc, or 58.3pc for youth, to achieve this. The implication is that the deficit will jump again if Greece ever recovers properly.

The economy has hit rock bottom after a 26pc fall in GDP. But as you can see from this IMF chart, investment has collapsed, and so have imports of capital goods needed to rebuild the country’s shattered industry:

As you can also see, the depression and debt-deflation have played havoc with household debt liabilities.

Greece was sacrificed for the cause of the euro, like the 300 Spartans, Thebans and Thespians cut to pieces at Thermopylae to save the Athens-Sparta alliance.

They were denied debt restructuring at the start – which is what much of the IMF board wanted, according to leaked IMF minutes – because this would have violated the sanctity of monetary union. This is the Major Crime unseen by the Greek People and one that nobody will likely have to answer for…

A set of policies was imposed upon the Greeks (with the collusion of their own leaders) that violated the IMF’s own lending rules and made no economic sense. It was chiefly intended to buy time for the eurozone to shore up defences elsewhere and avert contagion. (This too has been admitted by the IMF). Cynics would say it also bought time for northern banks to extricate themselves deftly and dump their toxic load on EMU taxpayers. And for the Greek Leaders at the time to make a pretty penny frontloading and thus stealing from the national kitty further impoverishing the people.

All the original estimates of the costs from austerity were wildly wrong. The EU authorities misjudged the fiscal multiplier by orders of magnitude. It was not 0.5 as supposed, but nearer 2.0.

They persistently blamed the Greeks for missing deficit targets when the chief cause of these breaches was the scorched-earth, pro-cyclical, and self-defeating ferocity of the fiscal squeeze itself (conducted without monetary anaesthetics), which caused tax revenues to collapse.

They accused the Greek authorities of failing to privatise fast enough when it was in reality impossible to sell anything into a collapsing asset and property market, especially at a time when politicians in Holland, Finland, Austria, and Germany were openly talking about expelling Greece from EMU, and therefore throwing currency risk into the bargain as well.

I think Greece would have recovered much more quickly with far less economic damage, and without blighting a whole generation, if it had left EMU immediately and adopted a classic IMF package.

It would be a miracle if the squalid and cruel saga the Creditors imposed upon the Greeks — does not leave a very bitter taste in Greece, or if it ended the political terms of the EMU creditor bloc in five years time or less.

One thing is certain: Greece has survived its ordeal without revolution or civil war. If that is a vindication of EMU debt-crisis strategy and the greater European Project, the bar is admittedly set too low. But if it is just a reflex of a resilient people stoking up their hate for the occupiers and biding their time to strike — it remains to be seen. Resistance is often unseen until it becomes a full blown conflagration.

So beware of the Blowback and not just of the karmic variety. Because perhaps these revolutionary eventualities are looming ahead for Greece and then the European Project in it’s totality will be doomed.




Shame Argives – for Bloody Shame.

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