Bleeding Edge

This is the Top Ten List of the European Debt Crisis and it includes, Sharks, Jaws, and People too…

What’s not to like?

1) GET TO THE TRUTH: Let’s call the Spade a Spade. Greece’s Debt is not the problem. Facing Reality is. And if the German bureaucrats and their Nazi ordoliberal wannabes, occupying Brussels really thought that they can get away with the way they do things as they were taught by the willy European bankers — they’ve got another thing coming.

Truth seeking, and only Truth telling is the case here … so pay attention.

Still the Truth might, or at least will at some point in the future — set them all Free. Greece wasn’t the problem until the Germans along with the French helmed IMF decided to bail out the European Banks via Greece… and blame the Germans banking like sharp Loan Sharks, and the French wanking like professional wankers, and both piling up the blame onto the poor hapless Greeks that happened to provide a convenient scapegoat.

Karl Otto Pohl, former head of the German central bank observed, at the time we want to Save the German and the French Banks with a Bailout — Why do we call it Greek Bailout?

Karl Otto is an honest man and he correctly observed that since the overwhelming majority of that Bailout Capital directed to Greece never left the European Banks since it was digital money that was used to repay the obligations owned by the French and German banks — and crucially it never even left the German Central Bank…

But still the Greeks were blamed for this… soft cucumber too.

Imagine how different the political dynamics in Europe would have been if the German and
the French banks had been explicitly bailed out, and we had set the European Economy back on track to growth — same as we did in America when we clearly, openly, and fiercely, chose to bail out the banks and institute a general program of Financial Capital Quantitative Easing, in order to help the whole of the economy and the World at large. And it was in America where we simply elected to not fix the Blame on anyone passing by… and you can clearly see how well things turned out by the fact that America became the World’s Economic Engine all over again.

Yet there might till be a ray of Hope for Europe. And that Hope is called Greece — because the Greek people’s NO vote on the Referendum today, gave the country the power to take control of it’s monetary policy, and it gave the country’s leader the capacity to shape the future of Greece’s economy. Yet it also gave Greece the power to blow up Europe’s Wall of Lies, and reveal how naked the Eurozone monetary union truly is.

Indeed this newfound strength of Greece is evidenced through the hastily released new IMF debt analysis that sheds additional light on the grave situation facing Greece and allocates the blame on itself. Amazingly the IMF offers a Mea Culpa about it’s own faults in seeing the real picture of the long suffering crisis. The mistakes the IMF made are so humongous and clearly onerous, that both the head of it Ms Christine Lagarde has got to go; and also the country desk head Mr Poul Thomsen who as a friend and close party confidant of DSK, as an unethical Overseer of the Greek Crisis on behalf of the Troika, and as a fancier of the Nazi Germans — has got to go. These two and a bunch more bureaucrats at the IMF have got to fall on their own swords — if the International Institution of Monetary Policy ever wants to recover it’s lost Honour.

2) ACCOUNTING FALSITIES BEGET FINANCIAL WOES: For proper and just accounting we need to show some of the blame that Greece carries, because from the mid-1990s until last year, it was constantly spending more than it was collecting in tax revenues. For most of this time, the country’s initially reported numbers showed small differences that were subsequently found to have been much larger. The revisions tended to be most substantial right after elections when a new government would find that its predecessor was much more profligate than had been reported. Because of these deficits, the country borrowed to cover the shortfalls and its debt burden was steadily rising.

In the fall of 2009, the then newly elected government reported that the deficit for that year was going to be 13.6 percent of economic output and that the deficits in 2007 and 2006 were also larger than had been reported. From that point onward, the world began to wonder if Greece really could pay the debt that it had issued or needed to default. Its borrowing costs rose sharply and the country began looking for ways to reduce its required debt payments and end its borrowing addiction.

By the spring of 2010 the excessive debt problem became unbearable and there was open speculation that Greece would default. The country had done this on four occasions previously since 1800. Much of the government debt was owed to banks outside of Greece, with the largest amounts in France and Germany. So if Greece had stopped paying, the French and German banks would have suffered substantial losses.

Greece was lent new money in 2010, but as Karl Otto Pohl, former head of the German central bank observed, at the time much of that money was used to repay the obligations owned by the French and German banks. The new lending was advertised by the politicians across Europe as a rescue for Greece. But it was at least as much a deal to buy time for the banks and other owners of Greek debt to avoid a default. Greece did avoid default, but the support came with requirements designed to make sure that the country end its chronic deficit spending.

To justify the new lending, the lenders had to be assured that the deficits would end and that the country would grow enough to be able to service its debt. In May of 2010, the International Monetary Fund (IMF), led at the time by Dominique Strauss Kahn, who had ambitions of running for the presidency of France, conducted an analysis to see if such a scenario was realistic. The report at the time concluded that if Greece undertook drastic reforms it could close its deficits and begin growing so that over time the debt (including the new lending that was being provided) would be manageable.

This analysis was later shown to be deeply flawed by the IMF itself. The Greeks did actually cut their deficits substantially, but many of the reforms that were supposed to support growth did not occur and the economy contracted substantially. So the debt, relative to the size of the economy, did not improve. Importantly, no debt was written off in 2010, even though many analysts, including some on the executive Board of the IMF, at the time believed that it was necessary and that the banks and other private sector owners of the debt should have taken some losses.

The new lending in 2010 came from two sources, a fund that was raised from European governments and the IMF. The bailout fund was overseen by the finance ministers of these governments. The European Central Bank also provided support to Greece in two ways. First, it allowed banks in Greece (and everywhere else) to borrow from it by posting bonds guaranteed by Greece as the collateral. Second, it bought some Greek government bonds in the open market. So all three of these organizations were now exposed to losses in the event that Greece ever defaulted. As such, they had representatives that met regularly with the Greek government to make sure that the reforms were on track. Initially the three were called the troika. Subsequently, they have also been referred to as “the institutions.”

By late 2010 it was already clear that the debt burden might prove to be unsustainable. So discussions began over reducing the debt. The Greek government was supposed to sell some assets to retire some of the debt. That never happened and as the recession continued it was clear that the 2010 plan was not going to be adequate. So in March 2012 a second bailout program with revised terms was undertaken.

The IMF lent additional money, but the main conditions that accompanied the funding were largely the same. Once again, the cornerstones of the plan continued to be steps to make tax collection more efficient, to reduce spending promises, and to undertake reforms to encourage hiring and business expansion that would support growth. It was not clear why this plan would be more successful than the first one.

The European Central Bank meanwhile became more deeply committed to stabilizing financial markets. ECB President Mario Draghi famously said in July 2012 that “within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” Draghi’s statement immediately led to a drop in borrowing costs for governments across Europe and the pressure on Greece temporarily subsided.

By continuing to allow banks everywhere to use Greek debt as collateral, the ECB also created conditions that supported the trading of Greek debt. By this time the French and German banks had shed their exposure to Greece so that they would no longer be directly harmed if there was a default.

So the stealth rescue of the German, and French Banks, along with the other non-Greek banks, that were bailed out with the Money ostensibly given to Greece, was completed. And this whole travesty and charade was done with the full knowledge of the IMF and the EuroZone Leaders, who exercised the all too criminal deception with little or zero public attention from the friendly Media Barons of Europe and America. And instead the Major Media focused on the scapegoating, and the fixing of the blame on poor Greece and the insouciant Greek people.

This became the constant propaganda and the main Media narrative — that all the problems were self-inflicted by the Greeks. Then the public assaults by the simplistic Morons of the Media became even more pronounced. A vicious cycle of blame ensued. The banker wankers of Europe earned exorbitant bonuses and bought overpriced homes in London, Berlin, Frankfurt, Brussels, Paris and Bonn.

3) PLAYING MUSICAL CHAIRS CAN REALLY HURT YOU: In the time since Draghi’s statement three important things happened in Greece. First, Greece made further substantial progress on closing its deficits. By late 2014, Greece was finally spending less than it was collecting, although the interest payments on debt meant there was still an overall deficit. So for the first time since Greece adopted the euro it had budget position that was solid.

Second, the economy contracted for two more years as the reforms failed to deliver higher growth. Certainly the higher tax collections and reduced government spending contributed to the weak performance, but the degree to which the planned reforms, if fully implemented, could
have offset that remains controversial. It is important to also recognize the massive collapse was
preceded by a very large debt-fueled boom.

Austerity notwithstanding, the economy seemed to have reached bottom and was finally beginning to recover in late 2014. A very interesting counterfactual scenario is to contemplate what would have happened if the political situation had allowed this progress to continue.

The third major development, however, was that the public lost confidence in the incumbent government and its lenders. Unemployment in Greece has remained above 25 percent for years and
was much higher for young people. So the citizens were fed up. Hence, in 2015 the public voted
for a new government that insisted on deviating from the past playbook.

The major party in the new Greek Government, Syriza, is often referred to as a coalition of the radical left — when in fact it is simply a government of National Unity of the Centre, having both Right and Left wing elements within. So in January 2015, the newly elected Prime Minister Alexis Tsipras sought to reopen negotiations with Greece’s creditors.

The Greek government now wants three types of changes. First, it wants to restore some of the spending cuts that have been enacted and that have damaged the Social Net. Second, it wants to reverse some of the revenue hikes that the past German leaning Greek governments have instituted. These first two requests would widen the deficit and also reorganize priorities within the budget. In fact, once it became clear that the coalition Syriza party was going to win the election, tax revenues began shrinking as the public stopped paying some unpopular taxes.

Finally, Greece wants outright forgiveness of some of the debt that has accumulated unjustly.

Since taking office, the new Greek Government under Prime Miniter Mr Alex Tsipras has been negotiating with the creditors over for a new set of agreements. The creditors have made some modest concessions but are largely insisting on a continuation of the same Austerity plans that sunk the country’s economy and dismissed any economic future…

When Greece failed to secure these changes, the Government through the Prime Minister Mr Tsipras, announced that he would have the Greek people vote on a referendum on July 5th over whether Greece would vote yes to accept the creditors latest offer or vote NO [OXI] in order to reject it.

4) TROIKA’S FOIBLES, OR HOW THE LITTLE PIGLETS FOILED THE BIG BAD WOLF: One has to wonder why do the Troika member institutions disagree with the Greek government Economic plans to usher in some growth and bring a measure of hope in the country’s economic horizon.

Because mainly there are two sources of objections that the Troika shark loan creditors have with Greeces’ requests for relief…

First, and probably most importantly, countries such as Italy, Portugal, Spain, and Ireland, had all had to undertake similar types of adjustment as in Greece — but none had to enter into such a “Pound Of Flesh” extractive usurious austerity. Mainly because none of them saw their economies collapse to the extent of Greece, but their unemployment especially among the young is also high in all these countries.

Hence, the banker-wanker logic goes — if there are substantial concessions to Greece, then these countries will insist upon getting similar treatment. The existing governments in these countries all realize that if electing a radical government in Greece is seen as being rewarded, then voters elsewhere will do the same.

The money needed to save Greece could easily be found. Greece is a small economy, so even though their debt is large when judged relative to Greece’s economy, it is small relative to the overall capacity in Europe. In contrast, the money needed to forgive debt in the other countries, especially Italy and Spain, is not affordable for Germany (and all the other Northern European countries that would have to foot the bill).

Second, even if there was some way that Greece could be helped without setting a precedent, the officials do not trust the Greeks to carry through with any plans. The fact that Prime Minister Tsipras is asking for a public referendum to accept a continuation of prior policies was the straw that broke the camel’s back. The Prime Minister of Greece is arguing that the public should reject the plans. The institutions doubt that he could reverse his position and suddenly begin taking steps which he has campaigned against for years. They also are infuriated that he believes his mandate to get better terms supersedes the ones that other elected governments had from their citizens that wanted no more bailouts.

Another consideration is that IMF, the ECB and the other European leaders believe that unlike before, if Greece defaults the spillovers can be managed.

5) THE CHICKEN COME HOME TO ROOST — ALWAYS: The IMF loan that came due June 29th and the non payment of the instalment by Greece is the important point that triggered the Country’s Default. Still this whole crisis thing could have been avoided if the IMF had simply rearranged the arrears for a later principle rollback.

Of course the IMF made loans in 2010 to Greece that no private lender would have been willing to make, yet it did so under the presumption that it would be first in line to be repaid subsequently.

For failing businesses in many countries, there is analogous arrangement where in a bankruptcy situation a judge can decide that a business is worth more if it can continue to operate with some new funding, than if it was closed and sold off immediately. In that case, the new funding gets highest priority for repayment (otherwise no one will lend) and a judge will make sure that is the case. For countries, enforcing this priority is a problem since there is no court or other authority that can compel a country to pay.

Greece did not pay the IMF the €1.55 billion that it was owed on Tuesday. Now that it has defaulted, Greece has become an international pariah. To preserve its own ability to operate in future crises, the IMF must insist on being repaid. If it ever accepts the idea that a country can default if things go south, then it will never get repaid in the future. So the IMF will continue to seek repayment, no matter how flawed the analysis that led to the lending in the first place.

That is until Christine Lagarde goes back to McKenzie to ply her faulty trade. You’ve got to remember that Greece did make a small payment to the European bailout fund, so it will not be in default to that lender even if it does fall behind with the IMF.

6) IS IT AN EMERGENCY OR AN ASSISTED SUICIDE? THE ECB FORCED GREECE’S HAND: The ECB decided last weekend to not extend any more credit to Greece’s banks and that is why Greece closed its banks.

The ECB decided it could no longer keep accepting additional collateral from the Greek banks that was guaranteed by the Greek government. This means no more extraordinary lending will be extended. The ECB was worried that Greece might not honor the obligations and hence it could be left with collateral that would be insufficient to cover the loans it extended already. This is in keeping with Draghi’s promise of staying within the ECB mandate; lending when losses are expected would be clearly illegal.

However, the ECB has not completely cut off its support to Greece. The ECB could have recalled all of its loans, or demanded even more collateral for the existing loans. But for the Greek banks this removed the only viable option for obtaining more cash. They do not have assets that they can sell to come up with more cash. So without the ECB’s full support, they are in serious trouble.

Greece has closed the banks so that depositors cannot take out all of their money. There are now limits on how much depositors can get from ATMs and limits on wire transfers. So depositors are nervous and scared about what is going to happen.

7) LIFESAVER: This is what can Greece do to save its economy now:

Greece must either find a new lender, which seems very unlikely, or survive with very little credit for a while; Russia will not step in to offer support, since doing so would likely wind up with some of the resources transferred to other creditors and Russia has its own big fiscal problems.

With the NO vote triumphing, Greece will now likely stop payments on all debt. Being cut off from credit markets, it will now be forced to match its spending to the revenue it is receiving. To ease the burden, the government will likely distribute IOUs of some form to government employees, vendors and pensioners. It may even have to use IOUs to fund the referendum. These IOUs will likely circulate as a form of money alongside the euro. People will strongly prefer euros to the IOUs, so the IOUs will trade at a discount.

Some people and businesses may resort to bartering, because the country cannot easily bring back the drachma… and it has to resort to IOUs. Naturally the public will have little confidence in the IOUs that the government issues. Probably they will exhibit even less confidence if Greece opts to officially introduce a new currency.

And even if they decide to do this — reintroducing the drachma would be totally illegal under European law and it might present the basis of a lawsuit to force Greece out of the European Union (EU).

That will be negative because as part of the European Union, Greek citizens can travel freely and work anywhere within Europe. Greek goods are also allowed to be sold without being subject to tariffs or border controls and customs duties.

Therefore a Total Expulsion from the European Union would be devastating for trade… but not for Tourism or Shipping that are the two main industries of Greece.

Still, issuing IOUs which are not officially touted as a currency is a better option for Greece for now.

8) IS THE VIRUS CATCHING? Will the Greek crisis spread?

It depends largely on what citizens make of the impending chaos in Greece. If people believe that their governments also might default on debt, they could also try to get money out of the banks. Likewise, investors could refuse to buy newly issued debt.

The ECB is likely to be able to head off both these problems. It is already buying debt and can do more of that. It also can lend against the collateral guaranteed by these governments. The ECB can probably contain the immediate fallout.

The political contagion is much harder to assess. Perhaps if Greece emerges in better shape in the medium term, then other countries will follow. The Greek PM is betting that this concern would be so powerful that Europe would never take this risk.

9) WHAT THE FUTURE HOLD FOR US?

So what is likely to happen next in Greece?

The outcome of the referendum now becomes critical. If the public voted “yes,” then perhaps the existing government will likely get reorganized, and they will be able to reopen the banks and conclude a new deal with the European creditors that halves the blame…

But, as the public sides with the government, and votes NO, there will be a catharctic and very sharp recession over the next few weeks, if not couple of months, and then things will improve suddenly and immediately thereafter. Tax collection is likely to further collapse for the moment but it will recover soonest. The Greek government is likely to survive the temporary economic collapse, if they attend to the Social net and nationalize all the banks forcefully. The Greeks will survive and thrive because this government is the most popular Greek Government since the one that gave them Victory during the Second World War against the Italians.

But then again the People are resourceful and committed to change the course of their country today and are unafraid to get on with the job.
And as the NO wins and carries the day — the post-referendum government opts to proceed with the default, with the only unknown number in the equation being how long before the economy stabilizes, and starts growing all over again.

After all at this point in the Summer, Greece is a very attractive tourist destination, and its goods that are no longer priced in euros, will be far more competitive, so this is the point where the economy will begin to turn around. Whether this takes weeks, months, or even a couple of quarters will depend on many decisions that are difficult to forecast now — but above all else it will depend on the sentiments and the feelings of the Greek people.

Greece is far better outside the Eurozone because the Euro is a very expensive coin and only applicable to the rich nations of Europe but not to the South and the periphery.

It’ too dear to tread — as the smart City traders ay all too often.

10) TROIKA & THE INSTITUTIONS SUCK BIG TIME: So what happens to the IMF, the ECB, and to the Brussels and Berlin Axis of Evil bureaucrats — if their loans are not repaid?

From a historical perspective they will continue to pursue their claims against Greece. Greece will not be able to borrow internationally until it makes peace with the IMF and the ECB. So the IMF will eventually be repaid albeit like with Argentina and Turkey at a steep discount. And of course this could take years. But most likely an Amnesty from Debt will be declared as soon as the current head of the IMF goes back home to her French kitchen to make pastiche, and Poul Thomsen goes back home to Copenhagen to join the Danish NeoNazi bicycle party.

Surely, the new incoming IMF chief will declare a Debt Jubilee for Greece immediately upon assuming the Office…

The IMF is likely to receive the majority of the blame and to be criticized further for the actions it took and for the recommendations it made, and for the faulty structuring of the International Bailout for Greece — particularly in 2010. Perhaps it will be reformed to limit its discretion in lending through German and French partners and it will learn to call the Bailout of the European Banks exactly what it is.

So what happens to the ECB if Greece defaults?

The loans made to Greece are extended by the Greek central bank, which in turn borrows from
the ECB. So the ECB will have a large claim against the Greek central bank that is likely to turn into a significant loss.

Can the ECB survive if Greece defaults?

The ECB can definitely continue even if Greece defaults. The ECB has provisions set aside to cover some losses. It also is making lots of profits on the bonds it owns, that it pays for with money that pays no interest for. So the Greek losses per se are not a problem.

And what happens to Mr Juncker the Belgian German bomb of a President of Europe now that He has revealed his Nazi sympathies like another Dr Strangelove?

Nothing.

So everybody will walk away and be totally Alright … after this severe case of the “Jaws”

German Loan Sharks, Frenchies, Belgians, and All — will all recover quite nicely….

Except there is one little something that goes awry.

It is the only thing that gets broken.

And that is the German ideology of “haftung”

Well, stump that.

A default by a larger country such as Italy or Spain would be very different.

Yours,

Dr Kroko

PS:

The better Question to ask now would have been this:

“What should have been done to avert this crisis?”

Shoulda, Coulda, Woulda…

Still in the game of hypotheses:

Greece should have defaulted in 2010. Its debt burden then was unsustainable and nothing since then has changed this. It is true that financial markets were much more jittery at that time, but the money that was raised to pay off the creditors in that bailout could have been diverted to support Greece and other weak countries.

Once the fake bank rescue of 2010 was undertaken and code named “The Greek Bailout” in order to protect the German and French Banks — it was inevitable that some form of debt relief for the innocent little scapegoat named Greece, was going to be not just necessary, but rather inevitable, and clearly unavoidable.