Time for Greece to Play Hardball?

Larry Eliott of the Guardian reports, Merkel and Sarkozy to hold crisis talks with George Papandreou:

Angela Merkel and Nicolas Sarkozy will hold crisis talks with the Greek prime minister, George Papandreou, on Wednesday in an attempt to defuse the eurozone's escalating debt crisis.

With President Barack Obama putting pressure on Europe's politicians to show the necessary leadership to prevent a Greek debt default triggering a market meltdown, the German chancellor and the French president will on Wednesday insist that Athens stick to its tough deficit-reduction programme. The US fears the worsening eurozone situation risks a return to the mayhem in the global markets seen three years ago this week when Lehman Brothers went bankrupt.

The US treasury secretary, Tim Geithner, will take the unprecedented step of attending Friday's meeting of EU finance ministers in Poland and will urge European leaders to speed up ratification of July's agreement to establish a new bailout fund to help debt-stricken members of the eurozone. Geithner, in his second visit to Europe in a week, will also urge that the European Financial Stability Facility should be raised from €440bn (£380bn).

Speaking in Washington on Tuesday, Obama said: "In the end, the big countries in Europe, the leaders in Europe, must meet and take a decision on how to co-ordinate monetary integration with more effective co-ordinated fiscal policy."

Hopes that the talks between the German, French and Greek leaders could bear fruit helped calm Europe's stock markets on Tuesday and halted the run on bank shares. But the jittery mood was underlined by an increase in the interest rates Italy has to pay when it borrows from the financial markets. Despite rumours that China was in talks with Rome about investing in Italy, the yield on five-year Italian bonds rose to its highest level since the single currency began in the 1990s.

The latest phase in Europe's debt crisis was prompted by the resignation of Germany's Jürgen Stark from the council of the European Central Bank, seen by the markets as a sign that Europe's paymaster was opposed to the ECB continuing to buy Italian and Spanish bonds in order to drive down interest rates. Evidence that Greece is way off track with its EU-IMF deficit reduction programme has added to the gloom.

Merkel insisted that Europe was doing all it could to avoid a Greek default, although the interest rate on two-year Greek bonds was approaching 100% last night, a sign that the markets believe the two-year crisis is coming to a head.

Patrick Coast, of Lombard Street Research, said: "The Euroland prescription of tightening your belt without restructuring debt has failed in Greece, serving only to plunge the economy further into recession. Deficit figures for the first six months of this year are a quarter above those last year, due to a fall in indirect tax revenues and a rise in interest payments" said Patrick Coast of Lombard Street Research. ". Europe's fiscal crisis looks set to deteriorate".

Sony Kapoor, managing director of Redefine, a Brussels-based think tank., said: "Greece is behind on all substantial aspects of the July deal so it will need to be revisited by the end of the year, but a disorderly default remains highly unlikely".

Patrick Coast of Lombard Street Research is absolutely right, austerity has been a disaster in Greece, pushing the economy on the edge of collapse. The markets know this which is why they're betting that the likelihood of a Greek default in the near future is almost 100%.

I was watching a morning talk show earlier today where the Defence Minister, Panos Belitis, was urging all Greeks to "sacrifice for the country during this crisis period." He castigated the unions of taxi drivers and DEH (Greek electric utility company) for not putting the country's interests first.

Of course, Mr. Belitis failed to mention that for years crooked and corrupt politicians in the Greek government from both major parties were pillaging the public coffers, putting their own self interest first. And now, they are resorting to the "shock doctrine" where they tap into collective fear, warning of "dire consequences" if Greece defaults.

What a bunch on hypocritical nonsense. At the heart of this European "debt crisis" is greed and the neo-capitalistic agenda of weakening labor, depressing wages and cutting pensions and benefits for everyone so the few at the top can continue raping the masses. Don't get me wrong, I'm the first to admit that Greece has an overbloated public sector and corruption at all levels, including tax collectors, but when I see some Greek politician who's being driven around in a Mercedes limousine go on television and appeal to the public to "sacrifice for the greater good of the country," I feel like vomiting.

The truth is Greeks have suffered. Admittedly, the private sector a lot more than the public sector, but all Greeks have suffered in the last couple of years. The unofficial unemployment rate stands at 35% and youth unemployment is officially recorded at 45%. With every new austerity measure being rammed down the country's throat by the EU-IMF thugs, the economy keeps plunging deeper and deeper into depression.

I can't sit by and watch this madness any longer. There are so many myths circulating out there. Greeks aren't lazy, stupid people. Along with Israelis, they're the most educated population in the region and those lucky enough to have a job work long hours, and many work two or three jobs to make ends meet.

Austerity simply isn't working in Greece. It's utter madness, ensuring a depression there and escating the risks of a pan-European depression/ deflationary crisis. Anyone with basic training in economics would recognize this. That's why some think it's high time that Greece 'defaults big':

Mario Blejer, who managed Argentina’s central bank in the aftermath of the world’s biggest sovereign default, said Greece should halt payments on its debt to stop a deterioration of the economy that threatens the European Union.

“This debt is unpayable,” Blejer, who was also an adviser to Bank of England Governor Mervyn King from 2003 to 2008, said in an interview in Buenos Aires. “Greece should default, and default big. A small default is worse than a big default and also worse than no default.”

World Bank and International Monetary Fund officials will meet in Washington Sept. 23-25 as European Union officials work to keep the currency union from unraveling and the Greek crisis worsens. Europe is facing “a full-blown banking crisis” said Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., in an interview yesterday.

Rescue programs backed by the IMF and European Central Bank are “recession-creating” efforts that will leave Greece saddled with more debt relative to the size of its economy in coming years and stifle growth, Blejer said. A Greek default would push Portugal to do the same and would put Ireland “under tremendous pressure to at least symbolically default” on some of its debt, he added.

‘Totally Ridiculous’

“It’s totally ridiculous what is going on,” Blejer, 63, said. “If you assume that these countries do everything that is in the program, they do all these adjustments and privatizations, at the end of 2012 debt-to-GDP will be bigger than this year.”

The statements by Blejer, who ran Argentina’s central bank in the months after its default on $95 billion in debt, put him at odds with German Chancellor Angela Merkel, who said the risks of contagion from a Greek default are too big and that an “uncontrolled insolvency” would further agitate turbulent global markets.

German coalition officials stepped up their criticism of Greece last week after a delegation from the European Commission, European Central Bank and IMF suspended a report on progress made in Athens toward meeting the terms of its rescue program. The delay threatened to derail a payment to Greece due next month.

“It doesn’t make sense to give money to Greece so Greece can pay the Germans back,” Blejer said when asked about the aid programs. “All these projects, all the euro projects don’t make sense economically.”

‘Recipe for Disaster’

Domenico Lombardi, a former IMF board official and a senior fellow at the Brookings Institution in Washington, said a “disorderly default” in Greece would be “a recipe for disaster.”

“The spreading of the European crisis has gone so far that it would be really impossible to contain its spillover effects to the rest of the euro area,” Lombardi said in an interview.

An orderly default with private investor engagement would be better for Greece, he said.

Greece’s government now expects the economy to shrink more than 5 percent this year, more than the 3.8 percent forecast by the European Commission, as austerity measures deepen a three- year recession. Prime Minister George Papandreou approved a plan to help repair the budget deficit at the weekend amid swelling resistance from Greeks.

It costs a record $5.8 million upfront and $100,000 annually to insure $10 million of Greece’s debt for five years using credit-default swaps, up from $5.5 million in advance on Sept. 9, according to CMA.

‘Very Complicated’

Blejer didn’t advocate Greece leaving the euro zone, which he said would be a “very complicated” move that would force a rewriting of business contracts and would push more lenders toward bankruptcy. Germany and France will have to bear the brunt of financing efforts to help Greece and other countries that default re-start their economies, he said.

“Someone will have to pay,” said Blejer, who is a vice chairman of mortgage bank Banco Hipotecario SA (BHIP) and a board member of energy company YPF SA. (YPFD) “If they are not willing to pay for the euro they will have to get out of the euro.”

Greece’s 10-year bond yield rose 94 basis points, or 0.94 percentage point, to 24.48 percent at 5 p.m. in New York, after earlier climbing to a euro-era record of 25 percent.

Italian borrowing costs also jumped at a 6.5 billion-euro ($8.8 billion) bond auction yesterday as contagion from Europe’s debt crisis leaves investors shunning the region’s most-indebted nations. Italy’s Treasury sold 3.9 billion euros of a benchmark five-year bond to yield 5.6 percent, up from 4.93 percent for similar maturity securities sold in July.

Argentina Crisis

Blejer took the reins of Argentina’s central bank for five months starting in January 2002, when the country was reeling from the effects of its default and the loss of four presidents in just over two weeks. The government had just ended the peso’s one-to-one peg with the dollar when Blejer accepted the position from then-President Eduardo Duhalde.

To help stabilize the currency after the devaluation, Blejer created short-term bonds known as lebacs that paid an annual interest rate of as much as 140 percent, he said.

Argentina’s economy shrank 10.9 percent in 2002 before starting a nine-year growth streak, aided by rising commodity prices and an expansion in neighboring Brazil.

Blejer left the central bank in June 2002 after disputes with then-Economy Minister Roberto Lavagna over lifting restrictions on the withdrawal of bank deposits.

A friend of mine who understands the crisis well sent me this comment after reading this article: "Finally ... someone who recognizes that Greece needs to cut a deal now. The voluntary haircut did not work and it is time for Papandreou to play hardball. He should be negotiating from a position of strength. This is just silly now."

It's beyond silly, it's truly pathetic and I hope Papandreou and Venizelos finally wake up and start negotiating better terms for Greece, starting with debt swaps. Germany and France are not foolish enough to risk a European depression. And if they are, Tim Geithner is there to remind them US interests are on the line too. That's why now more than ever, it's time for Greek leaders to wake up and start playing hardball and finally put the interests of Greeks first.