Monday, February 2, 2015

Checkmate For Greece?

Andrew Ackerman of the Wall Street Journal reports, Obama Expresses Sympathy for New Greek Government:
President Barack Obama expressed sympathy for the new Greek government as it seeks to rollback its strict bailout regime, saying there are limits to how far its European creditors can press Athens to repay its debts while restructuring the economy.

“You cannot keep on squeezing countries that are in the midst of depression. At some point there has to be a growth strategy in order for them to pay off their debts to eliminate some of their deficits,” Mr. Obama said in an interview with CNN’s Fareed Zakaria aired Sunday.

He said Athens needs to restructure its economy to boost its competitiveness, “but it’s very hard to initiate those changes if people’s standards of livings are dropping by 25%. Over time, eventually the political system, the society can’t sustain it.”

Mr. Obama expressed hope that an agreement would be reached so Greece can stay in the eurozone, saying, “I think that will require compromise on all sides.”

The comments come as Athens’s new antiausterity government begins a push this month to convince eurozone countries to ease the terms under which it received large international financial rescues in recent years. Options include reducing Greece’s budget constraints and debt-service burdens. Relations between Greece and the rest of the eurozone have been rocky since the left-wing Syriza party won Greek elections on Jan. 25.

More broadly, I’m concerned about growth in Europe, ” he added. He said fiscal prudence and structural changes are important in many eurozone countries, but “what we’ve learned in the U.S. experience...is that the best way to reduce deficits and to restore fiscal soundness is to grow. And when you have an economy that is in a free-fall there has to be a growth strategy and not simply the effort to squeeze more and more from a population that is hurting worse and worse.
President Obama isn't the only one who's sounding the alarm on the failure of myopic austerity in Greece and elsewhere. Over the weekend, in an article for The Telegraph, Lord Lamont called on European leaders to agree to write off Greek debts in order to resolve the crisis, instead of offering another “fudge” solution of lowering interest rates on some loans:
Mr Cameron has promised to negotiate with Brussels to claw back powers for Britain, before putting a new deal on EU membership to voters in an in/out referendum by 2017.

But Lord Lamont warned Mr Cameron that European leaders may be preoccupied with the increasingly “bleak” crisis over Greece when he is trying to negotiate new terms for Britain.

“The longer the crisis goes on, the more Europe’s politicians will be focused on Greece,” the Conservative peer said.

“Their irritation with what they might see as unreasonable demands or a diversion from the main issue could count against Britain.”

His intervention comes as the Eurozone economy teeters on the brink of a new crisis, following the election of a radical Left-wing government in Greece earlier this month.

On Saturday, Mrs Merkel, the German Chancellor, ruled out any cancellation of Greece's debt and said the country has already received substantial cuts from banks and creditors.

“There has already been voluntary debt forgiveness by private creditors, banks have already slashed billions from Greece's debt," she said in an interview with the Hamburger Abendblatt newspaper.

"I do not envisage fresh debt cancellation," she said.

The new Greek government has already begun to roll back years of austerity measures demanded by the EU and the International Monetary Fund in return for a 240 billion euro ($269 billion) bailout granted to avoid a financial meltdown in 2010, and says it will negotiate to halve the debt.

At the start of 2012, Greece restructured its debt in a deal involving private creditors who took "haircuts" or wrote down parts of their holdings. This cut Greece's total debt burden by around 100 billion euros.

But the country is still lumbered with a debt pile of more than 315 billion euros, upwards of 175 percent of gross domestic product (GDP), a record for the European Union.

Writing in the Telegraph, Lord Lamont, who was Mr Cameron’s boss at the Treasury in the 1990s, said the lingering threat of Greece leaving the euro could undermine the Prime Minister’s attempts to renegotiate Britain’s EU membership.

The former Chancellor warned that the stand-off between the new anti-austerity Greek government and Germany is a “bleak” threat to stability across Europe.

“The next euro crisis is never far away,” he said. If Greece is forced out of the Eurozone, “the next time there is a crisis, the question will immediately be asked whether others will leave”.

“A Greek exit would surely cause investors to worry whether other southern countries with high levels of debt would be nudged towards the exit door by voters,” he said.

“If the euro survives, the experience will be like a painful, ill-fitting shoe. Over time the foot becomes so twisted out of shape that the shoe eventually fits. But it will be a pointless, painful process over many years. Far better not to have bought the wrong size shoe in the first place.”
Lord Lamont is a wise man, what is going on in Europe is a travesty on many levels. Austerity in Greece isn't working. It's sinking the country deeper into depression and it has exacerbated the euro deflation crisis which in turn threatens to bring about an epochal period of global deflation.

But as I stated in my last comment on Greece's do-or-die moment, the main problem isn't just austerity but the completely incompetent way it was implemented. The brunt of the Greek crisis is not being felt in the public sector, which will continue to thrive under a Syriza-led coalition, it's being felt in the Greek private sector.

There hasn't been any major effort to significantly cut Greece's bloated public sector. None, zero, zilch! Greek politicians from all parties are incapable of cutting the bloated public sector because it would mean cutting off their ability to govern the country.

Instead, they keep secretly or publicly adding jobs, buying votes and implement austerity in the most asinine ways, like drastically cutting funding at universities (where by the way, students get everything for free, including their textbooks) or not paying doctors for months on end (there was an article in one of the hundreds of Greek newspapers over the weekend which talked about a pathologist moonlighting as a sex escort at night to feed her family).

Welcome to the wacky world of Greece where politicians are incapable of reforming a bloated, antiquated bureaucracy that keeps suffocating the country. This is why cynical Greeks like myself know full well that even if you forgave all of Greece's debt, the country will be right back in the same spot 20 or 30 years down the road (or possibly sooner).

Having said this, I'm equally if not more disturbed with the mighty Germany. It has been and continues to be the chief beneficiary of the EMU and euro crisis and its leaders continue to willfully ignore Einstein's definition of insanity: "Doing the same thing over and over again and expecting different results."

And now that Yanis Varoufakis, Greece's new finance minister, burst Eurogroup's bubble, asking to negotiate a new deal for Greece and finally address Pan-European growth, everyone is shocked at "his intransigence." How dare he ask for a new approach (even if that's why his party was elected by a democratic process)?

Over the weekend, Theodore Economou, the CEO of CERN Pension Fund who runs it like a macro fund,  shared these thoughts with me:

I’m afraid the international press has got the situation backwards.

It is the Troika that did not (and still does not yet) want to negotiate.


Varoufakis has always been adamant that the Greek side should negotiate a bankruptcy restructuring.


He just needed a way to get the other party to the negotiating table. The only way he can get there, is to state that he does not need the Troika’s «gift» of yet more toxic refinancing loans in March (which would be used to repay the Troika, so that the Troika can pretend to its constituency that Greece is not bankrupt). So therefore no further discussion is needed, on that one point, before a negotiation of the debt structure (and restructuring) takes place.


This is standard practice for bankruptcy proceedings in London or New York, and that’s what he referred to at some point in the BBC interview that you tweeted to your readers this morning. First you agree how debt will be restructured, then you decide whether (or not) to grant a new credit line to allow the (now restructured) entity to move on.


I have read Varoufakis’s books (in Greek), as well as a large number of his hundreds of posts on his own web site (mostly in English) and on protagon.gr, over the past five years.


In these documents, he laid out very clearly and cogently, a long time ago, what the Greek government's strategy should be. It has been there for all to read.


Contrary to many reports, he has been adamant that Greece must stay in the Euro, though not at the cost of continuing its death spiral. This is common sense, and in fact, the IMF has come out publicly in support of this stance.


He has also been adamant that Germany should exercise more, not less, leadership in Europe.


My view is that for the past five years, he has been executing a very carefully drawn up plan, whose first step was the publication of his « modest proposal », in November 2010. Since then, he has worked tirelessly to convince a broad international constituency to support his proposal to solve the Eurozone’s predicament. Among others, he has gained support from IMF staff, OECD decision makers, institutional investors in Germany (!), European politicians and leaders, and parts of the US and European academic community. Seen under this lens, the drama going on right now is just the last chapter of a game that has been very carefully set up by him (and I believe with the support of many US decision makers) during the past four years.


Let’s not forget that Varoufakis has written a textbook on game theory.
While I don't share Theodore's enthusiasm for game theory, I thank him for sharing these insights and wish him well on his new job as head and CIO of Lombard Odier’s Multi-Asset business, based in Geneva and London (he started on Monday).

Theodore is right, it's Troika that refuses to negotiate and now that it's being scrapped, there may be room for more fruitful discussions. Varoufakis's first visit was in France where his counterpart, Michel Sapin, offered support but no debt relief. This will be a common refrain, especially in France and Germany, the two countries that have the most to lose if Grexit materializes. 


Varoufakis emphasized that he's seeking to renegotiate Greece's huge debt obligations, stating his priority is the well-being of all Europeans and has ruled out accepting more bailout cash.

Greece insists it will pay back its creditors and hired Lazard to advise it on its debt. But with no more funds, the situation is critical for Greece. Professor Nicholas Economides of NYU's Stern School of Business sent me these comments via email:

Notice Syriza says it will pay IMF ECB (fully) but "will reach a deal with EU. The debt is:
  • 28.5 IMF
  • 29.2 ECB
  • 52.9 biltateral to EU countries
  • 139.9 EFSF
So this is a commitment on about 57 billion and no commitment on about 193 billion.

I do not think Tsipras has a plan and now he is scrambling because the EU officials showed up earlier than he expected.
No doubt, Tsipras and Varoufakis are scrambling and doing lots of damage control, but they have some powerful allies and when it comes down to the wire, I wouldn't be surprised if they manage to negotiate an additional haircut for Greece from other EU members (mostly Germany and France).

I leave you with the Guardian's view on Greece’s debt relief where it states compromise is the way to go:

If what counts is what works, then the Greeks did the right thing by rejecting austerity at the ballot box. After years in which the servicing of debts has been pursued to the exclusion of every other objective, it has plainly not worked. A quarter of the economy has disappeared and half of young citizens are workless. To cap it all, the debt burden itself did not fall but instead grew to reach 175% of GDP. If that doesn’t constitute failure, then what would? To have kept doing the same thing, while expecting different results, would have been madness.

But in Amsterdam, Berlin or Helsinki, the demands of Alexis Tsipras for a “viable, fair, mutually beneficial” way out of the debt crisis may also seem to express delusional disregard for experience. Greece has already received two big bailouts. If its new prime minister is now to be allowed to wriggle free of commitments given by his country, then what reason will it ever have to learn to live without the begging bowl? And why should other indebted states do anything other than demand similar favourable terms, or themselves elect populists promising to make unpleasant obligations go away? Writedowns for Greece might be affordable because of its small size, but the sums would soon change if accommodations had to be reached with Sinn Féin in Ireland and Podemos in Spain.


These are rational arguments, but they are also dangerous. They potentially close off the room for the compromise that Europe needs. They will be forcefully pursued by a new wave of conservative populists in the creditor countries, which could make it tempting for Angela Merkel, in particular, to calculate that cutting Greece loose from the euro would be the more manageable evil than kowtowing to Athens. She has talked tough throughout the single currency’s crisis, but on the substance – from the bailouts to the banking union, and most recently QE – she has repeatedly been forced to make concessions. The electorate has responded to a chancellor that has looked in command, but she won’t win waverers back from Alternative für Deutschland by lofty appeals to European solidarity. Whatever the technical merits of Mark Carney’s suggestion on Wednesday night that Europe must now bind its fiscal fortunes more closely, the reality is that diverging perspectives on debt risk promoting a nationalism that only widens the gap between north and south.


The one thing that might save the looming negotiations is a careful consideration of where self-interest lies – less on the part of Greece than on the creditor countries. Most Greeks, including the supposedly firebrand new finance minister, Yanis Varoufakis, want to stay in a single currency which is, however perversely, regarded as a badge of economic modernity by a people it has impoverished. If they were kicked out, the ejection would be effected by cutting off liquidity for the banks. That would mean an instant scramble to withdraw savings, followed first by devaluation and then by inflation, with attendant effects on all sorts of contracts. In sum, there would be chaos. But how long it would last, and how much worse it could be than the social catastrophe that has already ensued, is not at all clear. The relatively happy experience of Iceland, after it responded to a dire credit crunch with heterodox defiance, might encourage hopes that the worst may be over quickly.


For the rest of the single currency club, by contrast, the damage would last forever. Investors would wonder who would be next, and begin pulling funds out, potentially spreading the debt crisis. Day-one losses on Greek debt, newly denominated in devalued drachmas, would be followed by costly new arrangements to insure against future exits for the rest of time.


The great bailouts for Greece have overwhelmingly being spent on servicing Greek debt. The creditor countries have thus, almost literally, been giving with the one hand and taking with the other. It is this confusing conjuring that has left different parts of Europe seeing the crisis in entirely different ways. It may be that another conjuring trick is now required to deal with the consequences of that, such as delayed repayment schedules which maintain the illusion of a fixed debt but reduce its real worth. But however it is done, done it must be. Greece’s debt is too big to be paid. Much of it will have to be magicked away.
The sad truth is the Greek bailouts have been nothing more than corporate handouts. Moreover, Troika's austerity measures were completely bungled up, disproportionately decimating the Greek private sector while leaving its public sector largely intact, sinking the country further into an economic abyss.

Germany and the ECB can play hardball with Greece, but the reality is they can't risk Grexit, not now, not ever. Developments in Spain and Italy are placing more pressure on Merkel to find a resolution fast. Varoufakis knows this and so does Tsipras but they can't be overly confident either, because if something goes wrong, Greece will leave the euro and Greeks will chop heir heads off.

And lurking in the background is global deflation which seems to be intensifying by the day.  Moreover, the Fed's 'solid' growth view faces test as Greek drama unfolds. This is why it can no longer afford to ignore international developments or else it risks making a monumental mistake.

Below, a few clips that struck me this past weekend. First, Eurogroup Chief Jeroen Dijsselbloem's reaction when Varoufakis told him he has no intention of working with Troika (full story available via Keep Talking Greece).

Second, Yanis Varoufakis was interviewed on BBC Newsnight. On his blog, Varoufakis states the following regarding the interview: "As a fan of the BBC, I must say I was appalled by the depths of inaccuracy in the reporting underpinning this interview (not to mention the presenter’s considerable rudeness). Still, and despite the cold wind on that balcony, it was fun!".

Varoufakis was too kind and classy, exercising extraordinary self-restraint. I would have blasted this BBC reporter and simply walked off instead of being subjected to her constant and rude interruptions, not to mention imbecilic and misleading questions (nothing more annoying than those holier-than-thou Brits, they should visit Malia, Crete in the summer to see Britain's future in all its glory).

Finally, a pretty good older report which appeared on German public television on how Germany benefited from the Greek crisis.  If you don't understand German,
click "CC" to turn on the English subtitles.

Whether or not you agree in part or in whole with this comment, please forward it along to your friends so they can understand what's really behind the Greek crisis and what's at stake for the global economy which is increasingly tied to the misfortunes of financial markets.

Update: Citing the FT, Zero Hedge reports,Greece Changes Strategy: No Longer Demands Debt Write Off, Proposes Debt Exchange Instead. Then less the 24 hours later, Zero Hedge reports,
Greece FinMin: "No U-Turn" In Our Position; "Write-Off Can Occur In Several Methods" Spokesman Adds. Not surprisingly, Germany rebuffed the finance minister's 'half baked' proposals.

Also, Suzanne Bishopric of the UN Staff Pension Fund sent me Ken Rogoff's comment, What Is Plan B For Greece?, which I highly recommend you read. I quote the following:
Some eurozone policymakers seem to be confident that a Greek exit from the euro, hard or soft, will no longer pose a threat to the other periphery countries. They might be right; then again, back in 2008, US policymakers thought that the collapse of one investment house, Bear Stearns, had prepared markets for the bankruptcy of another, Lehman Brothers. We know how that turned out.
Finally, read my follow-up comments on whether Germany will push Greece over the edge and why the Varometer is rising in Europe. Stay tuned, this isn't over, but it's increasingly looking like checkmate by not for Greece.



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