Tuesday, June 30, 2015

Averting a Greek Collapse?

Joseph. Stiglitz, a Nobel laureate in economics and University Professor at Columbia University, wrote an op-ed for the Guardian, How I would vote in the Greek referendum:
The rising crescendo of bickering and acrimony within Europe might seem to outsiders to be the inevitable result of the bitter endgame playing out between Greece and its creditors. In fact, European leaders are finally beginning to reveal the true nature of the ongoing debt dispute, and the answer is not pleasant: it is about power and democracy much more than money and economics.

Of course, the economics behind the programme that the “troika” (the European Commission, the European Central Bank, and the International Monetary Fund) foisted on Greece five years ago has been abysmal, resulting in a 25% decline in the country’s GDP. I can think of no depression, ever, that has been so deliberate and had such catastrophic consequences: Greece’s rate of youth unemployment, for example, now exceeds 60%.

It is startling that the troika has refused to accept responsibility for any of this or admit how bad its forecasts and models have been. But what is even more surprising is that Europe’s leaders have not even learned. The troika is still demanding that Greece achieve a primary budget surplus (excluding interest payments) of 3.5% of GDP by 2018.

Economists around the world have condemned that target as punitive, because aiming for it will inevitably result in a deeper downturn. Indeed, even if Greece’s debt is restructured beyond anything imaginable, the country will remain in depression if voters there commit to the troika’s target in the snap referendum to be held this weekend.

In terms of transforming a large primary deficit into a surplus, few countries have accomplished anything like what the Greeks have achieved in the last five years. And, though the cost in terms of human suffering has been extremely high, the Greek government’s recent proposals went a long way toward meeting its creditors’ demands.

We should be clear: almost none of the huge amount of money loaned to Greece has actually gone there. It has gone to pay out private-sector creditors – including German and French banks. Greece has gotten but a pittance, but it has paid a high price to preserve these countries’ banking systems. The IMF and the other “official” creditors do not need the money that is being demanded. Under a business-as-usual scenario, the money received would most likely just be lent out again to Greece.

But, again, it’s not about the money. It’s about using “deadlines” to force Greece to knuckle under, and to accept the unacceptable – not only austerity measures, but other regressive and punitive policies.

But why would Europe do this? Why are European Union leaders resisting the referendum and refusing even to extend by a few days the June 30 deadline for Greece’s next payment to the IMF? Isn’t Europe all about democracy?

In January, Greece’s citizens voted for a government committed to ending austerity. If the government were simply fulfilling its campaign promises, it would already have rejected the proposal. But it wanted to give Greeks a chance to weigh in on this issue, so critical for their country’s future wellbeing.

That concern for popular legitimacy is incompatible with the politics of the eurozone, which was never a very democratic project. Most of its members’ governments did not seek their people’s approval to turn over their monetary sovereignty to the ECB. When Sweden’s did, Swedes said no. They understood that unemployment would rise if the country’s monetary policy were set by a central bank that focused single-mindedly on inflation (and also that there would be insufficient attention to financial stability). The economy would suffer, because the economic model underlying the eurozone was predicated on power relationships that disadvantaged workers.

And, sure enough, what we are seeing now, 16 years after the eurozone institutionalised those relationships, is the antithesis of democracy: many European leaders want to see the end of prime minister Alexis Tsipras’ leftist government. After all, it is extremely inconvenient to have in Greece a government that is so opposed to the types of policies that have done so much to increase inequality in so many advanced countries, and that is so committed to curbing the unbridled power of wealth. They seem to believe that they can eventually bring down the Greek government by bullying it into accepting an agreement that contravenes its mandate.

It is hard to advise Greeks how to vote on 5 July. Neither alternative – approval or rejection of the troika’s terms – will be easy, and both carry huge risks. A yes vote would mean depression almost without end. Perhaps a depleted country – one that has sold off all of its assets, and whose bright young people have emigrated – might finally get debt forgiveness; perhaps, having shrivelled into a middle-income economy, Greece might finally be able to get assistance from the World Bank. All of this might happen in the next decade, or perhaps in the decade after that.

By contrast, a no vote would at least open the possibility that Greece, with its strong democratic tradition, might grasp its destiny in its own hands. Greeks might gain the opportunity to shape a future that, though perhaps not as prosperous as the past, is far more hopeful than the unconscionable torture of the present.

I know how I would vote.
Another Nobel Prize-winning economist, Paul Krugman, also came out recently to urge Greeks to vote no in the referendum:
OK, this is real: Greek banks closed, capital controls imposed. Grexit isn’t a hard stretch from here — the much feared mother of all bank runs has already happened, which means that the cost-benefit analysis starting from here is much more favorable to euro exit than it ever was before.

Clearly, though, some decisions now have to wait on the referendum.

I would vote no, for two reasons. First, much as the prospect of euro exit frightens everyone — me included — the troika is now effectively demanding that the policy regime of the past five years be continued indefinitely. Where is the hope in that? Maybe, just maybe, the willingness to leave will inspire a rethink, although probably not. But even so, devaluation couldn’t create that much more chaos than already exists, and would pave the way for eventual recovery, just as it has in many other times and places. Greece is not that different.

Second, the political implications of a yes vote would be deeply troubling. The troika clearly did a reverse Corleone — they made Tsipras an offer he can’t accept, and presumably did this knowingly. So the ultimatum was, in effect, a move to replace the Greek government. And even if you don’t like Syriza, that has to be disturbing for anyone who believes in European ideals.
I have tremendous respect for Stiglitz and Krugman but when it comes to the Greek economy, they either do not understand what is going on or they like Varoufakis choose to state half-truths and conveniently ignore what exactly has happened in Greece over the last five years.

They both need to read an op-ed thirteen prominent Greek economists from around the world wrote to explain why Greece must sign a deal now and say yes to the euro.

First, I agree, the Troika has proven itself to be entirely incompetent. Several former IMF economists have come out to discredit the austerity measures imposed on Greece.

But here is where Stiglitz and Krugman got it wrong. The asinine austerity measures Troika imposed on Greece disproportionately hurt the Greek private sector, leaving the bloated and inefficient public sector largely intact.

I keep referring to this unsustainable figure: 1.5 million Greek public sector workers vs 2.5 million Greek private sector workers. Some people argue that my figures are off as it's 700,000 public sector workers but when you look at the broad  measure of everyone getting a paycheck from the state, it's more than double the official figure.

Keep in mind that ratio of public-to-private sector workers in Greece was unsustainable prior to the crisis and has reached disastrous levels as the private sector keeps hemorrhaging jobs. 

In any case, one thing is for sure, there have been no job cuts in the Greek public sector, even after five years of crisis. Do you know there are people who worked in public sector in Greece who are being paid right now even though they're not working? They were "shifted" and are in a "state of flux" waiting for SYRIZA to place them back into a job.

This is amazing when you think about it. In Canada, the Conservative government has (needlessly and foolishly in my opinion) shed quite a few public sector jobs over the last five years but in Greece no politician has dared to touch the public sector because they fear the repercussions of powerful public-sector unions (this is what happens when your economy succumbs to the tyranny of public-sector unions).

And it's not just Alexis Tsipras. When he was slipping in the polls, the former Greek Prime Minister and New Democracy leader Antonis Samaras hired a bunch of people in the Greek public sector in a last ditch attempt to hold on to power. This is why I keep telling you, don't trust Greek politicians, they're all liars and they put their party above their country each and every time.

So, when Stiglitz writes "a no vote would at least open the possibility that Greece, with its strong democratic tradition, might grasp its destiny in its own hands," I can't help but laugh. Over the last 40 years, Greeks have proven themselves incapable of governing their country properly. If they were capable of this, they would have introduced draconian job cuts to the over-bloated and inefficient Greek public sector a long, long time ago (read former finance minister Stefanos Manos's opinion piece, Leaving our statist habits behind).

And the real tragedy now is that the Greek private sector -- the little left -- will continue to experience "shock therapy" from Troika's asinine measures or worse, from a return to the drachma which will ensure more statist policies and keep this ratio of public-to-private sector workers unsustainable and ludicrously high.

Also, as I explained in my last comment on Greece's Metaxas moment, there are many dire economic and political consequences to leaving the eurozone, much worse than living under Troika's idiotic measures. Greeks aren't stupid. They know what Grexit means which is why they overwhelmingly want to stay in the eurozone. They're living a nightmare now which will only get worse once they default and their banks collapse.

Amazingly, Greek Prime Minister Alexis Tsipras remains defiant, rejecting the idea that a No vote means Grexit. Quite laughably, Greece has threatened to seek a court injunction against the EU institutions, both to block the country's expulsion from the euro and to halt asphyxiation of the banking system.

These are acts of desperate people. Tsipras and Varoufakis know their time is up. A yes vote will usher them out quickly whereas a no vote will just buy them some time until Greeks force them out with pitchforks.

Quite worrisome, Andreas Koutras sent me this from Athens today:
If you thought that Greek FM was an expert in game theory he also proves to be an ideal chaos practitioner.

From the one hand he is saying that the referendum is not about exiting euro zone and then he goes off and pronounces injunction against the ECB. It is quite obvious that he does not know how Europe works and also that he plays for his home crowd.

Syriza is already moving the boundaries of democratic behaviour as they please. They passed a law that effectively gives more TV and radio time to the NO campaign and they changed the president of the highest court who is also presiding the referendum process two days ago. They further refused to place an independent minister in charge of the election, something that happens normally in every election. In addition they printed a ballot box that clearly aims to confuse the people and promote the NO vote. The short period of time also means that many if not most poll station would not have a representative form the judicial system and many fear that this would make electoral fraud very easy.

In terms of the economy there were rumours of lowering the 60euro limit but later this was denied. For the first time in history thousands of pensioners were not paid and some were left literally crying outside the banks. According to reports Greece has barely more than 1-3bln of cash to survive and after this chaos.

PM Tsipras in a televised interview with the state TV. An interview reminiscent of the best practices of Sadam regime. In it he hinted that he may go if there is a YES vote. Yet many now say that it is hard to believe anything that comes out from this government.

Today Greece is going to fail the IMF payment and the markets should wait for the response. If they declare Greece in arrears and in default then the ECB would be free from tomorrow to cut off any banking support.

Officially the program expires tonight and Greece would be unprotected. From Wednesday onwards Europe can pull all the plugs. There are signs that this may happen but this means a humanitarian aid program should be voted.

Reaction so far in the markets has been muted. As we have argued before the financial and economic risks are limited. Political risks are not easily quantifiable but the markets reaction so far point to faith in Europe's politicians to deal with it in a a effective way.

Just to add some news. Most ATMs have run out of 20s so they dispense only 50s. In addition pensioners with no cash cards are only allowed to withdraw up to 120 euros a week.
Andreas also told me he fears SYRIZA will move to haircut bank deposits very soon. If that happens, you will see civil war in Greece (I'm serious).

Sensing the rage of pensioners, the Greek government just announced it will open 700 banks Wednesday, Thursday and Friday to allow pensioners to withdraw a maximum of 120 euros (40 euros a day). I'm waiting to see how this will go down as many irate pensioners are going to be demanding a lot more.

There was a large crowd of anti-bailout protesters which gathered at Syntagma Square last night to support the government. I suspect most of these people work in the public sector or are unemployed and desperate. Interestingly, on camera, many were stating that they want to remain in the eurozone but will vote No on Sunday.

Unfortunately, these people are delusional and believe the garbage SYRIZA is feeding them. It's sad because they don't realize or don't understand what a no vote means and how much worse off the country will be outside the eurozone.

But when you have Nobel Prize-winning economists publicly telling them to vote no on Sunday, what do you expect these people to think? Stiglitz and Krugman aren't the ones waiting in line to withdraw 60 euros a day or waiting at banks for their pension to buy some bread as not to starve.

I suggest Krugman, Stiglitz and many other economists who don't really understand the Greek economy and what's at stake if Greeks vote no in the referendum to please butt out. Your anti-austerity agenda is fine but in Greece, austerity measures have killed the private sector, not the over-bloated and inefficient public sector. And Tsipras's big gamble will pretty much kill off the little that remains in the private sector and jeopardize the future of the country.

Greeks are worried. If they don't sign an agreement, banks will not reopen next week. There will be no money to pay pensions and public-sector wages. The country will experience riots and social unrest.

Markets are calm on Tuesday and even rallying a bit. Perhaps the smart money is sensing Greeks will come to their senses and vote yes on Sunday, which will also force SYRIZA out. I actually believe the mayhem in Greece will work in favor of a yes vote but I'm worried that far too many Greeks will vote no thinking they can reject the proposals and remain in the eurozone.

Below, RT interviewed Jim Rogers, co-founder of the Quantum Fund, who stated "Greece will collapse this week and people will be terrified." I hope he's wrong.

As I end this comment, the BBC is reporting that the Greek government is reportedly planning to request a new two-year bailout deal from the eurozone in a last ditch effort to avoid defaulting on its IMF loan. The Eurogroup is holding an emergency meeting to discuss the latest Greek proposal.

Greek deputy foreign minister Euclid Tsakalotos told the BBC's Katya Adler he believed a solution could be found. I certainly hope so but I simply don't trust SYRIZA and think the country is better off with new leaders.

Update: Eurozone finance ministers have declined to extend Greece's bailout, just hours before its expiry and a possible IMF default, but talks will continue on Wednesday after Athens asked for a new aid plan, officials said.

More interestingly, my sources in Athens tell me that polls now suggest the yes vote (47%) is ahead of no votes (43%) with the rest undecided. They tell me that rather than face a humiliating defeat, Tsipras will call off the referendum, step down and a new party formed from New Democracy, PASOK and To Potami will take over. Still, it could take weeks before Greek banks reopen. In the meantime, the Greek economy and the private sector in particular sink further into the abyss.

Late Tuesday Greece officially missed a roughly $1.7 billion loan repayment due to the International Monetary Fund -- a first for an advanced economy.

On Wednesday, the Greek government indicated to its creditors that it is willing to accept many of the terms of a bailout package that it had earlier rejected, if they are part of a broader deal to address the country’s funding needs for the next two years. For her part, Angela Merkel refuses to negotiate on new Tsipras bailout proposals before Sunday referendum

I believe Mr. Tsipras should call off the referendum and resign. If he truly cares about his country, he will step down as soon as possible and allow a coalition government to work on a new deal now.

Monday, June 29, 2015

Greece's Metaxas Moment?

“There’s a dark night going on in Europe, a dark and foggy night where bad things come out of trees and bite you. It’s a pretty scary place.”

 -- Michael Sabia (2013), CEO of the Caisse de dépôt et placement du Québec
Kathimerini reports, Closed banks and capital controls until referendum:
Greece heads to a referendum on Sunday that could decide whether its future lies in or out of the eurozone, with its banks closed and capital controls in place after the European Central Bank decided not to further increase the emergency liquidity it supplies to local lenders.

The decision to impose the extended bank holiday was taken during a meeting of Greece’s financial stability council, which included Finance Minister Yanis Varoufakis and Bank of Greece Governor Yannis Stournaras.

The official announcement had not been made at the time of going to press but sources said that ATM withdrawals would be limited to 60 euros per day per account and that banks would remain closed for at least the next six working days, including the day after the referendum on the institutions’ proposals to Greece. Visitors to Greece will be able to withdraw cash up to the limit set by their bank.

The decision to shut down banks and bring in capital controls came less than 24 hours after Parliament voted in favor, by 178 votes to 120, of holding a referendum on Sunday. This, combined with the expiration of Greece’s bailout extension Tuesday, prompted the ECB governing council, which met Sunday, to decide not to raise the Emergency Liquidity Assistance ceiling beyond the level it reached on Friday.

This meant that banks would not have enough liquidity to support the spike in withdrawals prompted by Prime Minister Alexis Tsipras calling a referendum on Friday night. Around 1 billion euros was taken out of accounts on Saturday as Greeks queued at ATMs around the country. There were longer queues Sunday.

Tsipras blamed the country’s creditors for forcing Greece’s hand but said that this would not halt the plan to hold a referendum next Sunday.

“(Rejection) of the Greek government’s request for a short extension of the program was an unprecedented act by European standards, questioning the right of a sovereign people to decide,” Tsipras said in televised address to the nation Sunday.

“This decision led the ECB today to limit the liquidity available to Greek banks and forced the Greek central bank to suggest a bank holiday and restrictions on bank withdrawals.”

Tsipras also said he sent a new request for an extension of Greece’s bailout – which expires on June 30 – to leaders of eurozone countries and the heads of the European Central Bank, the European Commission, the EU parliament and the European Council.

“I am awaiting their immediate response to a fundamentally democratic request,” he said, adding that such a move could prompt the ECB to turn on the liquidity tap again.

“One thing is clear: the refusal of a short extension, and the attempt to nullify a democratic procedure is an act deeply offensive and shameful for the democratic traditions of Europe.”

Tsipras suggested that the lenders’ behavior would make Greeks more determined to vote against the bailout proposal put forward by lenders to the Greek government on Thursday. In his speech in Parliament on Saturday, the Greek prime minister suggested that a “no” vote would allow him to return to negotiations in a stronger position and able to ask for a better deal from the institutions.

Tsipras said bank deposits and wage and pension payments in Greece remained safe and appealed to Greeks to stay calm.

“Any difficulties that may arise must be dealt with with calmness,” said the premier. “The calmer we are, the sooner we will get out of this situation.”

New Democracy leader Antonis Samaras, who clashed with Tsipras in Parliament on Saturday, called on the prime minister to continue negotiations with the country’s lenders this week in the hope of finding a last-minute compromise. Samaras suggested that if Tsipras does not have enough support from his own party, he should create a national unity administration with the participation of opposition parties.

“Our country needs to remain in the heart of Europe and in the euro. Mr Tsipras must continue the negotiations,” Samaras said. “If he can’t do that by himself, he should attempt a big national consensus.”

Developments in Greece also drew the attention of the American government Sunday. US Treasury Secretary Jack Lew urged top European finance ministers and the International Monetary Fund to continue working together toward a “sustainable solution” to reforms in Greece and its recovery within the eurozone.

Lew spoke by phone with several top officials on Saturday, including the finance ministers of Germany and France, and IMF Managing Director Christine Lagarde, according to a readout of the call provided by the Treasury Department on Sunday.

In those calls, he said it was “important for all parties to continue to work to reach a solution, including a discussion of potential debt relief for Greece, in the run up to the July 5th referendum,” according to the readout, referring to a planned vote in Greece.

Lew also underscored the need for Greece to adopt “difficult measures to reach a pragmatic compromise with its creditors,” the Treasury statement said.

The Treasury spokesperson said senior department officials have also been in regulator communication with Greece and that Lew had spoken to Prime Minister Alexis Tsipras “multiple times” over the past two weeks.

The department has urged Greece to work closely with its international partners on planning for a bank holiday and capital controls, the spokesperson said.

President Barack Obama spoke with German Chancellor Angela Merkel on Sunday about the Greek situation.

“The two leaders agreed that it was critically important to make every effort to return to a path that will allow Greece to resume reforms and growth within the eurozone,” a White House statement said.

“The leaders affirmed that their respective economic teams are carefully monitoring the situation and will remain in close touch.”
Not surprisingly, global markets slid lower on Monday. Reuters reports that European bank stocks and bonds are shaken by Greek turmoil:
Europe's financial markets were jolted on Monday by the collapse of talks and imposition of capital controls in Greece, although initial heavy selling eased as investors judged there was still some way to run for the saga.

Banks and bond market borrowing costs for Italy, Spain and Portugal bore the brunt of markets' fright that Prime Minister Alexis Tsipras' calling of a referendum on further austerity demanded by euro zone creditors would see Greece leave the euro.

After an initial wave of selling, however, most markets recovered some ground. The one-day moves were large but looked pale in comparison to the events of 2008 or the last major round of Greek-spurred turmoil in 2011-12.

Wall Street was set to open around 1 percent lower while the FTSE Eurofirst blue chip index was down by just over 2 percent overall.

"The European financial system now has much less exposure to Greece than in 2011 and 2012," said Stephanie Flanders, Chief Market Strategist for Europe at JP Morgan Asset Management.

"It is also better equipped to deal with contagion to other countries -- and so are the countries themselves."

Greece's banks and stock market were closed on Monday and were expected to remain so until after the July 5 snap referendum called by Greek Prime Minister Alexis Tsipras on austerity demanded by euro zone partners.
Beware of market strategists telling you that "Grexit can be contained." This is pure rubbish and wishful thinking. There's a reason why Francois Hollande and Angela Merkel are urging Greeks to vote "yes" on Sunday, they're petrified of the ramifications of a Grexit.

What are my thoughts on all this? I've written extensively on a Greek suicide, the endgame for Greece and Europe and managing a Greek default. I warned you to prepare for Graccident, knowing full well that SYRIZA's leaders weren't going to blink first and that all hell would break loose if there was no deal for Greece.

Faced with political suicide, Greek Prime Minister Alexis Tsipras decided to abdicate his responsibilities to the country and called a referendum on the proposals. He's playing this referendum as Greece's Metaxas moment (borrowed this term from a friend of mine; h/t Dimitri) in a pathetic attempt to appeal to nationalism and stand up to the "blackmail" of creditors.

But the timing of this referendum is highly specious and I agree with those who think it's more of a con than about democracy. Moreover, Hugo Dixon of Reuters is right, as Tsipras gambles Greece, it could backfire on him and his party:
This, indeed, is one of the problems with Tsipras’ move. Even if the people say they want the creditors’ proposals, it is not clear these will still be on the table in a week because the euro zone’s bailout programme will have expired.

In theory, a totally new programme could be created. But, in practice, it will be impossible to persuade creditor countries such as Germany to approve such a deal if Tsipras is still in power. It is hard to see how Athens could avoid defaulting on some bonds owned by the ECB itself on July 20.

Although Tsipras has vowed to respect the decision of the people, he will struggle to hang onto power if they vote against him. But that won’t make things a lot easier because no other combination of parties can form an alternative government.

It is likely therefore that there would be new elections. It is possible that this could lead to a national unity government that then reached terms with the creditors. But the ensuing havoc would have damaged the economy further. What’s more, with the opposition in disarray, there’s no guarantee that even new elections would end the political paralysis.

On the other hand, if the people backed Tsipras, it is hard to see any outcome other than Greece quitting the euro. Some might hope that the creditors would then back down. But it seems more likely they would harden their line.

With the banks in meltdown, Tsipras might try to avoid the inevitable by issuing IOUs to pay his bills. But this is unlikely to do more than postpone the time before Greece returned to the drachma or whatever it would call its new currency.

In theory, default and the launch of a new currency could give Greece a new lease of life after a sharp shock, provided Tsipras then pursued a responsible fiscal and monetary policy. But this doesn’t seem likely. Tsipras and his colleagues in the radical left Syriza party would be more likely to use their renewed control of monetary policy to print money. The new currency would then devalue massively, leading to rising inflation. There would also be such dislocation that unemployment and poverty would increase.

Foreigners might also initially be deterred from visiting the country. That would be a blow to Greece’s most important industry, tourism.

Meanwhile, the euro zone is facing the most testing time in its troubled history. The ECB’s so-called quantitative easing programme, which involves buying masses of bonds issued by euro zone governments, will probably keep things under control.

But if Greece leaves the euro, there would be a nagging question over whether other countries in trouble might in the future quit too. In some circumstances, such doubts could become self-fulfilling.

Beyond the economic repercussions, a so-called Grexit would unleash vitriolic recriminations. These could poison intra-European relations for years to come.
Nobody really wants Grexit except the way SYRIZA's leftist lunatics are acting, I'm beginning to wonder if this was their goal all along. One might also wonder if Merkel, Schaeuble and other leaders of creditor nations are also looking for Grexit.

This is what happens when two sides practice the politics of brinkmanship. This Greek "crisis" could have been settled a few years ago by providing Greece meaningful debt relief in exchange for huge job cuts to the Greek public sector. The Troika should have written off 30%-50% of Greece's debt and provide concurrent investment projects but imposed draconian cuts to the public sector and a 1% primary surplus every year.

Instead, the Troika in its infinite wisdom imposed asinine measures which slowly but surely ensured a Greek depression as the Greek private sector bore the brunt of these harsh austerity measures.  Greeks revolted by voting in SYRIZA and now we're at the brink of a Greek disaster and possibly something much, much worse.

Even now, as the Greek economy plunges into the abyss, job losses in the private sector will soar. Some analysts in Greece think the 1.3 million unemployed will reach 2 million unemployed but don't worry, nobody in the Greek public sector will lose their job. At least not yet, once the crisis reaches epic proportions and there is no money to pay them, there will draconian cuts in the public sector too.

This is what Greeks don't understand. Unlike what Paul Krugman thinks, leaving the eurozone will plunge the Greek economy back to 1975. Dimitrios Giokas outlined 12 devastating consequences if Greece returns to the drachma:
  1. Rapid devaluation of the drachma against other currencies (the rate might surpass 1,000 ΔΡΧ/1€). An attempt to tie the drachma to the euro and lock the conversion rate is doomed to fail (as it failed in the case of Argentina), because of the huge capital flight and depletion of foreign exchange reserves.
  2. The devaluation will lead to skyrocketing inflation at levels equal and greater than 40 percent, further limiting thereby the purchasing power of citizens.
  3. Capital flight and a sharp increase in non-performing loans will be the coup de grace for the weak country's financial system, which would collapse, "drying" the real economy.
  4. In such an eventuality the wage and pension freeze payment will be inevitable for a while until the partial restoration of liquidity. The consequences from social unrest that will likely follow are unpredictable.
  5. Gross domestic product will likely shrink to about 2/3 of the current level.
  6. The public debt of Greece, totaling 322 billion euros, will increase automatically depending on the amount of the depreciation of the drachma, multiplying our borrowings.
  7. Even if, after bankruptcy, a partial debt restructuring follows, it will not be painless. It will be accompanied by a new rescue package (only from the IMF now) and very burdensome fiscal adjustment measures.
  8. There will be an equal increase of private debt through the skyrocketing of lending and depositing rates in an effort to control inflation. Higher interest rates will also make it difficult for businesses to raise capital.
  9. Suffocation of import business due to a weakened market, the devaluation of the drachma and the obvious lack of credit.
  10. Failure of imports will bring shortage of essential items on the market since, as we know, Greece is not self-sufficient in raw materials and meets its needs (eg. wheat, milk, meat) by imports from foreign countries.
  11. Invasion of predatory foreign investors, who will acquire companies, property, and public property at derisory prices. It will lead to a sellout of the country, now claimed by the proponents of the drachma.
  12. Diplomatic and economic isolation of Greece, who, being in a very difficult situation, will not be able to follow geopolitical developments in the region, as well as any challenges by its neighbors.
There are other consequences to leaving the eurozone. Greeks won't be allowed to work in eurozone countries and their kids will find it harder to study abroad. Even visiting these European countries will be a lot harder.

But the way SYRIZA is phrasing the question of the referendum is very misleading because most Greeks don't want the harsh austerity measures creditors are imposing on their country and some think by voting "no", it will force creditors to ease up.

This could prove to be a disastrous miscalculation. True, the creditors are absolutely dumb in their demands but a "no" vote will be a total disaster for Greece and the eurozone. Keep in mind, there are many extreme left-wing and right-wing imbeciles in Greece who don't care and think they're better off without the eurozone. But even some in the center think they can force better terms by rejecting these proposals and that scares me.

So what happens now? I'm hoping that as Greeks get a taste of what communism is all about -- namely, long lineups at ATMs and gas stations and food shortages at supermarkets -- they will come to their senses and vote a resounding "yes" in the referendum on Sunday.

If they vote "yes", Tsipras and company will be forced to resign and call an election. This is what the creditors want. They want to kill SYRIZA once and for all and they might achieve this goal. A lot of Greeks are fed up with SYRIZA too and they want them out.

And what if it's a "no" vote? This might buy SYRIZA some time but when the country plunges into the abyss and has no money to pay pensioners and public sector workers on July 15th, Greeks will hang Tsipras, Varoufakis and other members of SYRIZA, quite literally.

Either way, yes or no, I truly believe Tsipras and SYRIZA are cooked. Of course, I worry more about the second scenario as a "no" vote will set Greece back to the 1940s and possibly trigger a liquidity time bomb in Europe and the rest of the world. 

That is something Tsipras and company are hoping for. They want a global financial crisis to spread so they can make their case for a new deal for Greece. But this is a dumb strategy too because if the world is thrown into a crisis, Greeks will be even more isolated.

As far as the creditors are concerned, they need to take responsibility for this latest tragic turn of events too. As they wage ideological warfare on SYRIZA and other leftist parties in the eurozone, they risk fanning the flames of radicalism in Europe, and that will come back to haunt the continent.

As far as the Greek stock market, it's closed for a week. Some investors are speculating on the National Bank of Greece (NBG) and the FTSE Greece ETF (GREK) on the NYSE but I would steer clear of both as the risk of nationalization has just increased considerably. There are plenty of nervous investors watching events in Greece, including Canada's Warren Buffett and frantic hedge fund managers that made big bets on Greece.

Who else is nervous? PSP Investments which bought a big stake in Athens' airport and other large investors with big stakes in Greece. The events of the last few days has made everyone very nervous as SYRIZA's leaders are showing they're willing to nationalize everything in their twisted and perverted version of democracy.

On a personal note, it pains me to see what is going on right now in Greece. Old men and women waiting at the doorsteps of banks to see if they can get their pensions. One old lady passed out waiting in a huge lineup at an ATM as she tried to get money to pay for her doctor's visit. 60 euros a day is nothing, it's a joke in Greece, especially in Athens.

I hope Greeks see all this and vent their rage against Tsipras, Varoufakis and the rest of the clowns governing the country right now. I hope they vote "yes" to the eurozone and vote these bums out. Greece needs a new deal, one based on market principles and the primacy of the private sector over the public sector. Mindless austerity is insanity but so is expanding the bloated an inefficient public sector at all cost even when the country is faced with ruin.

And if you're thinking of visiting Greece this summer, bring lots of cash, get ready for aggravation and read the views from a friend of mine in Mykonos now:
"I’m in Mykonos at the moment. Last night, after they announced the measures for the next week, I went to withdraw money from ATMs; 5 in the main city (Chora) were out of service. I found one that still had cash. I withdraw up to my daily limit. It was getting busy by the time I left.
Ironic comments flew about situation and references to Argentina rose; a lady was told not to go to ATM alone from now on...
This morning, pensioners we’re lining up at banks to get money. Unlucky.

Today, at lunch, our foreign credit card was declined by restaurant. They offered us to pay cash or to drive us to an ATM since foreign cards are not limited on withdrawals.

Seems though that we’re disconnected from the rest of the country here. Greeks from abroad can’t believe where the situation has gotten to. Local Greeks are generally calm given the circumstances.

Back in Athens tomorrow. Will update you."
Below, Greece's government is under pressure after a shock decision to hold a referendum hit markets and closed banks. Reuters Ciara Lee looks at how likely a Greek exit from the euro zone is now.

And CNN talks to New York University Professor Nicholas Economides about the Greek debt crisis. Listen carefully to his comments, he understands what is at stake now that no deal is signed and the country's banks are on the verge of collapse.

The next few days have the potential to transform Greece and Europe. What remains to be seen is if this transformation will be for the better or worse. Will the Greek debt crisis be the Iraq War of finance or will there be a real awakening among Europe's leaders and an attempt to deal with huge inequities between eurozone's northern and southern members?

I remain very skeptical and fear eurozone's deflation crisis will get worse until these structural issues are finally dealt with, one way or another. Let's hope it's a peaceful resolution which takes everyone's best interests into consideration.

Friday, June 26, 2015

CalPERS' Fiduciaries Breach Their Duties?

Alexandra Stevenson of the New York Times reports, Calpers’s Disclosure on Fees Brings Surprise, and Scrutiny:
Earlier this year, a senior executive of the California Public Employees’ Retirement System, the country’s biggest state pension fund, made a surprising statement: The fund did not know what it was paying some of its Wall Street managers.

Wylie A. Tollette, the chief operating investment officer, told an investment committee in April that the fees Calpers paid to private equity firms were “not explicitly disclosed or accounted for. We can’t track it today.” 
It was an unusual disclosure. In the world of public pension funds, Calpers is a big fish. It manages $300 billion in retirement funds for 1.6 million teachers, firefighters, police officers and other state employees and is generally credited with being the most sophisticated investor in the pension world.

For J. J. Jelincic, a member of the Calpers board, the disclosure raised a red flag. “I am disturbed that we don’t disclose the carry,” Mr. Jelincic said, referring to carried interest, the industry term for private equity performance fees. “I am appalled and, actually, I’m not sure I believe the staff when they say they don’t know what the carry is,” he added.

It also caught the attention of Edward A. H. Siedle, a pension fraud investigator and a former lawyer at the Securities and Exchange Commission. Mr. Siedle, who has investigated public funds like those in North Carolina, Alabama and Rhode Island, and corporate retirement plans for Walmart, Caterpillar and Boeing, is seeking to investigate Calpers with the help of crowdfunding. He wants to determine, among other things, how much Calpers pays in private equity fees. He plans to pay for his project by raising $750,000 from the public through the online platform Kickstarter.

“The money manager knows to a penny what the fees are,” Mr. Siedle said. “The only explanation is that the pension fund has chosen not to ask the question because, from an accounting and legal perspective, those numbers have to be readily available. They are intentionally not asking because if the fees were publicly disclosed, the public would scream.”

Calpers paid $1.6 billion in fees to Wall Street in 2014, according to its annual report. The figure, however, does not include how much it paid in carried interest. Both Mr. Siedle and Mr. Jelincic say that figure could be as much as an additional $1 billion a year.

Private equity firms typically charge investors a management fee of 1 to 2 percent of assets and about 20 percent of any gains each year. But fees for transactions, costs for monitoring investments and legal fees are not readily disclosed. Those undisclosed fees result in a substantial weight on returns, according to a recent study by CEM Benchmarking.

Faced with ballooning deficits and lackluster performance, state pension funds nationwide are beginning to examine more closely how much they are paying Wall Street to manage their investments. Calpers for the first time this year will begin to make more payments to retirees than it receives from contributions and its investments. Pennsylvania is facing a $50 billion shortfall in its pension fund.

In New York City, the comptroller, Scott M. Stringer, commissioned a study of the city’s five pension funds that showed external managers fell more $2.5 billion short of benchmark returns over 10 years.

Mr. Siedle’s firm, Benchmark Financial Services, recently published a crowdfunded investigation into Rhode Island’s public employee pension fund. In an 81-page report, Mr. Siedle outlined how the pension fund had incurred $2 billion in preventable losses from investments in outside real estate, private equity and hedge funds. Seth Magaziner, Rhode Island’s treasurer, has disputed the report.

“Treasurer Magaziner strongly agrees with the need for greater transparency and lower fees by alternative investment managers doing business with public pension funds,” Shana Autiello, a spokeswoman for Mr. Magaziner, said.

In addition to wanting to examine the fees that Calpers pays, Mr. Siedle also wants to scrutinize the relationship its executives and placement agents — middlemen it hires to help it find money managers — have with Wall Street to determine whether any conflicts of interest exist. He plans to spend nine months sifting through Calpers’s public disclosures and will also comb through the private offering documents that external money managers give to consultants who advise Calpers.

Calpers said it was trying to address the lack of transparency around fees. In April, Mr. Tollette, the chief operating investment officer, told the investment committee that Calpers planned to require greater disclosure from the private equity firms it invests in, adding that this was an industrywide problem. Calpers is also working on a reporting program that would track data from each external firm with which it has investments.

“Calpers has long been a leader in advocating for fee economies and transparency, including in private equity,” Joe DeAnda, a spokesman for Calpers, said. “A necessary element in that effort is additional disclosure and reporting from the general partners managing the funds,” he added.

The public scrutiny comes as Calpers seeks to simplify what it has called a complex and expensive portfolio. This month, Ted Eliopoulos, the chief investment officer, said that over the next five years, Calpers would cut by more than half the 212 external money managers it invests with for private equity, real estate and global equity funds. It will reduce the number of private equity firms to 30 from 98, giving those firms $30 billion to manage. Calpers has put its money with some of the biggest private equity firms in the world, including TPG, Blackstone, Carlyle and Kohlberg Kravis Roberts.

Last year, as part of its move to slim down its external investments, Calpers decided to liquidate $4 billion of hedge fund investments.

The S.E.C. has started to look more closely at private equity firms to understand how they value their assets and charge fees. The agency, which has conducted examinations of private equity firms, found that more than 50 percent of the time there were violations of law or weaknesses in a firm’s controls.

Mr. DeAnda, the Calpers spokesman, said fund officials had been “actively engaging with some of our private equity partners to help improve the disclosure and data available and have been closely monitoring the regulatory announcements and attention around this subject.”

Mr. Siedle’s investigation will not be the first for Calpers. In 2009, it hired the law firm Steptoe & Johnson to look at its use of placement agents as part of a wider pay-to-play scandal across the industry. The investigation, which cost Calpers $11 million, uncovered evidence of bribery and corruption. The S.E.C. accused Federico R. Buenrostro Jr., the Calpers chief executive from 2002 and 2008, and Alfred J. R. Villalobos, a former board member turned placement agent, with fraud. The United States attorney in San Francisco charged the two men with criminal fraud. Mr. Buenrostro pleaded guilty last year to conspiracy to commit bribery and fraud. Mr. Villalobos, who pleaded not guilty, committed suicide this year. 
Seeking to put the controversy behind it, Calpers adopted new policies and disclosure requirements. It continues to use placement firms.
This article covers a lot of hot topics. First, let me disclose that I sent an email yesterday to Ted Eliopoulos, CalPERS' CIO, and Réal Desrochers, the head of CalPERS' private equity, to see their response to the article. My email went unanswered, which is odd since Réal knows me well.

Anyways, let me share with you my thoughts. It's utterly unacceptable for any limited partner (pension fund, sovereign wealth fund, insurance company, endowment, etc) not to know the fees it's doling out to private equity funds. In the case of CalPERS, the largest most followed public pension fund in the U.S., it's worse as it should publicly disclose all fees being doled out to each of their GPs (private equity and other external funds).

I simply don't buy the excuses being doled out by CalPERS' senior staff and agree with J. J. Jelincic, one of their members cited in the article, there's no way that CalPERS' private equity staff don't know what the carry is on each of their fund investments. I know Réal Desrochers well enough to know that he holds that information on his fingertips and can easily disclose it to any board member.

So why isn't he doing so? I don't know but if I was a CalPERS' board member, I would demand the information or simply fire him for failing to disclose these fees and violating his fiduciary duties. It's simply unacceptable for any public pension fund, especially CalPERS which prides itself on good governance, not to disclose all these fees as well as hidden fees and all relationships with third party placement agents.

On the topic of placement agents, the scandal that rocked CalPERS over two years ago should have been a wake-up call to ban them altogether. Instead, this arcane practice fraught with conflicts of interests continues at CalPERS and elsewhere where millions are squandered on middlemen.

The fact that Mr. Villabos committed suicide is tragic and shows you how ugly things get when big money meets big pensions. The potential for fraud and bribes is huge and I simply don't trust placement agents or underpaid pension fund managers enough to take their word that everything is kosher. I've seen enough shady things from "CFAs" and even well-paid pension fund managers on the take to know that bribing pension fund managers although rare, can and does happen.

Ted Siedle, the pension proctologist, should shine a light on all these fees and third party relationships. When it comes to public pensions, my philosophy is simple, I want to know every detail in terms of performance and money and fees being doled out to all external managers and third party providers like placement agents, lawyers, accountants, software vendors, consultants, and brokers.

People think fraud and bribes at pension funds can only happen with external managers but that is nonsense. I've seen pension fund managers schmoozing with brokers, consultants and third party vendors, pushing commissions to their favorite brokers while ignoring others who don't wine and dine them, sending a contract to their consultant buddies or buying expensive and useless risk, back and front software systems without a proper request for proposal (RFP) and proper bid process, scrutinized by internal and external auditors.

The same goes for law firms, accounting firms, actuarial firms and investment consultants. There needs to be a proper bidding process and the public should know which firms are selected every year and how much money is being doled out and on what basis.

What else? As I stated in my recent comment on private equity stealing from clients, limited partners should be made aware of any rebates private equity funds enjoy with third party providers and these rebates should be discounted from the fees they pay these funds.

Folks, we live in an era of deflation, pension poverty, underfunded pensions and increased regulatory scrutiny. The good old days of fast times in Pensionland are over. Board members and beneficiaries are increasingly asking for more transparency on fees and performance, and they're holding pension fund managers accountable if they're not meeting their fiduciary standards. And regulatory bodies are increasingly paying attention to public pensions too.

But let me not be overly critical of CalPERS staff in this post, after all Ted Eliopoulos and Réal Desrochers are not to blame for past investment mistakes that cost the giant fund billions and they're moving to streamline investments and lower fees by chopping in half the number of external managers in illiquid alternatives and by nuking their hedge fund investments.

Finally, I highly recommend you read a RIABIZ article, CalPERS's hatchet man, Ted Eliopoulos, goes on a manager firing spree, shaving hundreds of millions in management fees -- but is it enough?.

This article provides a very decent overview of what Mr. Eliopoulos and his investment staff have managed to do in terms of cutting external manager relationships. It states that for its most recent fiscal year, the pension giant paid $1.6 billion in fees, with close to 90% of that money going to the real estate, private equity, and egregiously pricey hedge fund managers. But again that $1.6 billion in fees doesn't include carried interest estimated at over $1 billion. A billion here, a billion there, pretty soon you're talking about real money!

As far as their new investment approach to private equity, the article ends by stating this:
In its statement earlier this week, CalPERS said it expects to change its fundamental approach to private-equity investment. Going forward, CalPERS plans to invest via separately managed accounts with its external managers instead of investing in general funds. These external SMAs are often less expensive than traditional private-equity arrangements and offer more control and transparency for investors. Typically, however, they require larger sums of committed capital.

“I think this is all part of a much broader push for transparency, structure and as well pricing, in the investments space. The 'black box’ hasn’t sold well since Madoff,” says Will Trout, a senior analyst with Houston-based Celent. See: Nine threats to the RIA business and how they can be avoided.

Such consolidation is good news for private-equity giants like The Blackstone Group LP, Carlyle Investment Management LLC, Apollo Global Management LLC and TPG, each of which already manages multiple billions for CalPERS and has capacity to take even more commitments.

In a sign of things to come, the Wall Street Journal recently reported CalPERS was handing another $500 million to Blackstone Group for a fund over which CalPERS will have some influence.

Yet CalPERS also made it clear that these Wall Street Goliaths won’t be the only winners of the consolidation push. Pensions & Investments reported last week that the fund is setting aside $7 billion to significantly increase allocations to managers in its development program who currently manage assets only in the tens of millions — an act that has the look of deconsolidation.
That $7 billion is a pittance compared to what Blackstone (BX), Carlyle (CG), Apollo (APO), KKR (KKR) and TPG are going to get but at least they thought of setting some money aside for emerging managers and smaller funds. Every pension fund should be doing this through specialized funds of funds that can identify and track top emerging managers and smaller funds that fall under the radar.

As far as separately managed accounts with its external managers, unlike Canadian funds, CalPERS and many U.S. pension funds don't have the investment staff to co-invest alongside their private equity managers, so this approach allows them to provide a big chunk of money to fewer relationships, squeezing them hard on fees.

Still, don't kid yourselves, private equity is only trying to emulate Warren Buffett because it sees the writing on the wall and wants to increase the size of assets under management so it can keep collecting management fees and carried interest on a larger asset base.

Lastly, Dan Primack of Fortune provides more evidence that CalPERS's private equity problem is about CalPERS, not private equity:
His example was the Texas County & District Retirement System, which invests around 12% of its $25 billion into private equity. In the pension’s comprehensive annual financial report, it explicitly breaks out the amount paid in carried interest to its private equity managers. See below (click on image):

So much for the CalPERS argument that this is a “private equity industry issue” rather than a CalPERS issue…
Below,  have a look at CalPERS' investment committee meeting from April 27, 2015. Take the time to listen to all of it. The presentation on cost management starts at 1 hour 55 minutes, and the section on carried interest begins at 2 hours 6 minutes, and the CalPERS staff member making the presentation is Wylie Tollette, Chief Operating Investment Officer.

Again, it's simply unacceptable and a breach of fiduciary duties not to disclose all fees, including hidden fees, that external managers and third-party providers are charging a public pension fund, especially when that fund is the largest best known fund in the United States. Good governance starts by taking your fiduciary responsibilities seriously, disclosing all pertinent information to your board of directors, beneficiaries and other stakeholders.

Thursday, June 25, 2015

OECD's Dire Warning on Pensions?

Alistair Gray and Josephine Columbo of the Financial Times report, OECD warns over pension scheme solvency as low rates bite:
Retirement funds and life assurers are in danger of being unable to keep their promises to pensioners and policyholders because of rock-bottom interest rates, the Organisation for Economic Co-operation and Development has warned.

Ultraloose monetary policy poses “serious problems to the solvency” of pension schemes and insurers as they struggle to produce enough income to fund their obligations, the group of rich nations said on Wednesday.

The warning from the Paris-based body is among the starkest yet about how institutions from Germany to the US can generate sufficient returns to meet their obligations without taking on extra risks.

In its inaugural annual business and finance outlook, the OECD identified the impact of cheap money from central banks on insurers and pension schemes as one of the biggest challenges facing economic policy makers.

“The current low interest rate environment poses a significant risk for the long-term financial viability of pension funds and insurance companies,” said the report.

The OECD raised the prospect the funds could be forced to cut payouts to retirees, saying they may have to “renegotiate” their promises to remain sustainable.

The organisation joins a growing chorus of economists and regulators speaking out about problems caused by historically low interest rates, as central banks from the eurozone to China try to stimulate economic growth.

Its assessment comes just three months after a similar warning from the International Monetary Fund, which said the European life insurance sector was facing “severe challenges”.

The problem arises because such institutions have little choice but to allocate a big chunk of their investment portfolios to conservative, low-yielding assets, notably government and corporate bonds.

The nature of their commitments prevents them from investing in potentially higher-returning but more risky securities, such as equities. Yet the cautious investment strategy they pursue has become increasingly problematic as bond yields have tumbled.

The OECD said it was growing concerned that the funds were being tempted to turn to alternative assets, such as private equity.

Presenting the study in Paris on Wednesday, Angel Gurría, the OECD’s secretary-general, said: “Pension funds and life insurers are feeling the pressure to chase yield . . . and to pursue higher-risk investment strategies that could ultimately undermine their solvency.

“This not only poses financial sector risks but potentially jeopardises the secure retirement of our citizens.”

While the report itself acknowledged there was a lack of detailed data to provide evidence for such an asset allocation shift, it said figures available for the UK showed that pension funds “may already be engaging in a ‘search for yield’”.

In response to the report, the UK’s National Association of Pension Funds, which represents 1,300 workplace schemes, said the switch into new asset classes did not necessarily mean they were taking on extra risk.

“Some of the underlying assumptions of the report do not necessarily hold true on the ground with UK pension funds,” said Helen Forrest, defined benefits policy lead at the NAPF.

“It is not necessarily taking extra risk in the search for yield, but finding alternative ways of providing the inflation-proofing the funds require.”
You can view the OECD's new annual Business and Finance Outlook by clicking here. To view it in PDF format register and view it by clicking here.

What are my thoughts on all this? The OECD is right, ultraloose monetary policy is wreaking havoc on global pensions and life insurers looking for yield, forcing them to search for higher yielding alternative assets, but in my humble opinion, this report is missing something.

Importantly, why are central banks pumping so much money into the global financial system and why are ultra low yields here to stay, forcing pensions and insurers to take risks in illiquid asset classes and hedge funds?

Regular readers of my blog already know my answer. I've been warning you to prepare for global deflation for a very long time. Never mind what the reflationistas tell you. Forget about billionaire hedge fund managers warning you of the bigger short.

I'm warning all of you, in a world of rising inequality, structurally high long-term unemployment, pension poverty, and aging demographics, global deflation is virtually assured and it will decimate pension plans struggling with chronic underfunding.

Of course, fears of deflation seem to be fading in Europe but it is still too early to claim bond markets are signalling a decisive shift to a less worryingly-low inflation environment. Mark my words, this is only a temporary reprieve due to the lower euro. Deal or no deal for Greece, the structural problems plaguing the eurozone remain unaddressed, and deflation will come back to haunt the continent.

And it's the specter of deflation that still worries me, central bankers and most intelligent economists, bond managers and hedge fund managers warning the Fed not to make a monumental mistake and start hiking rates too fast and too aggressively.

My fear is that they will sign another bogus "extend and pretend" deal for Greece, that Europe will stabilize somewhat in the coming months and the Fed will interpret this as a green light to start hiking rates in September.

Such a move would be catastrophic for the bond market and other markets suffering from liquidity constraints. A shift in monetary policy without an appropriate and sustained shift in long-term inflation expectations can precipitate a liquidity time bomb, bringing about another more pronounced global financial crisis.

As far as the shift into alternative assets like private equity, go back to read Ron Mock's warning on alternatives as well as my recent comment on private equity stealing from clients. Private equity is an important asset class for pensions, one that has a fairly long-term focus and is a good fit in terms of asset-liability management but ultra low rates have pushed deal pricing to nosebleed valuations, which is why some think it's time to stick a fork in it.

There are other problems with private equity. Yves Smith of the Naked Capitalism blog published a comment, “A Bad Man’s Guide to Private Equity and Pensions”, discussing how the surge in dividend recapitalization is loading private companies up with debt and jeopardizing private pension plans.

I've covered why private equity is eying dividend recaps and think this is a similar trend to what is going on in public markets where ultra low rates are inflating the buyback bubble, allowing corporate CEOs to artificially inflate earnings-per-share so they justify their pay which is spinning out of control. Meanwhile, average wages for workers stagnate as corporate profits are being plowed back into buybacks instead of hiring people, increasing wages or investing in research and development.

So, ultraloose monetary policy is driving inequality as corporate CEOs jump on the buyback bandwagon. It's also making the top private equity and hedge fund managers obscenely wealthy as global pensions search for yield and "scalable alpha".

Of course, none of this is discussed in any OECD, IMF or central bank report. Finance capitalism has serious structural problems, and unless policymakers and global pensions start discussing how they're fueling extraordinary inequality, this trend will continue, decimating the middle class in all developed countries.

Again, rising inequality, aging demographics, high structural long-term unemployment and the global pension crisis are why I remain convinced that we are heading for an unprecedented and prolonged period of global deflation. Anyone who thinks we are on a path to global recovery is absolutely fooling themselves. The China bubble will only exacerbate this global deflationary trend.

Remember, the titanic battle of deflation versus inflation should be central to your investment approach and how you address market volatility. If you think deflation is dead, you're dead.

Below, York University political economist Jonathan Nitzan discusses a paper he co-authored with Shimshon Bichler, Capital Accumulation: Fiction and Reality. This is the type of stuff George Soros would devour in his younger years (he's now too busy spreading disinformation on the Ukraine crisis), but I urge all of you, especially the folks at the IMF, OECD and central banks, to take the time to read the paper and listen to Jonathan's comments below.

Wednesday, June 24, 2015

No Deal For Greece?

Catherine Boyle of CNBC reports, Greek crisis: Tsipras says 'no deal' with creditors:
International creditors on Wednesday rejected the Greek government's plan to end its financial crisis, but they have submitted counterproposals.

News of the rejection, announced by Greek Prime Minister Alexis Tsipras, dashed hopes of an imminent deal between the embattled Mediterranean country and its creditors. Greece needs additional financial aid to prevent it from defaulting on its 1.6 billion euro debt at the end of the month, but its lenders have refused to release funds without the implementation of more reforms.

The International Monetary Fund is believed to be the most skeptical of the troika of bodies overseeing Greece's bailout. Its creditors have now put forward a new set of counterproposals, sources close to the talks told Reuters.

European markets turned lower on news of the rejection, with Germany's Dax falling 1.2 percent and the Athens stock exchange down 3.3 percent.

"Certain institutions insist in not accepting equivalent measures suggested by the Greek government," Tsipras told his colleagues before departing to Brussels, according to a statement. "The non acceptance of equivalent measures has never happened before. Neither in Ireland nor in Portugal. Nowhere!"

He added: "This strange stance could be hiding one of two things. They either don't want a deal or they are serving certain interests in Greece."

The prime minister also took to Twitter to update on the latest developments (click on image).

It came at crunch time for Greece's continued membership of the euro zone.

On Wednesday evening, the Eurogroup of euro zone finance ministers is due to discuss reforms for Greece. These are likely to involve concessions from the Greek government on surplus targets, which many analysts believe to be astonishingly optimistic; pensions; VAT and privatizations.

If the proposals are approved, which now looks far from certain, Greece will get 35 billion euros of EU funds for economic development until 2020.
‘Anti-democratic agreement’

Dimitris Koutsoumbas, general secretary for the Communist Party of Greece, said the Greek people shouldn't accept an "antidemocratic agreement" with the EU.

"We need a complete plan—an exit from the euro zone and the currency won't solve everything," he told CNBC on Wednesday.

"The attitude of the European Union and Germany is unacceptable. Past Greek governments are also responsible."

And given this discontent, the chances of a second election this year in Greece are rising. Tsipras's Syriza-led coalition only has a 12-seat majority, and may have difficulty selling the new deal to its own MPs.

There will "probably" be another election this year in Greece, Panagiotis Karkatsoulis of the centrist To Potami party, told CNBC. However, Makis Voridis, an MP from New Democracy, the center-right party defeated by Syriza in the last elections, said another election would put the country in "big trouble."

Michala Marcussen, global head of economics at Societe Generale Corporate and Investment Banking, reflected the opinion of many in the markets on Wednesday morning when she told CNBC a Greek deal will "most likely" get through a Greek and German vote.

Market reaction to Greece has been quite calm compared to what has happened in the last few years, aided by the European Central Bank's expansionist monetary policies, Marcussen pointed out.

As the central bank will likely have to lead the policy response in the event of Greece being forced to leave the euro zone, this level of trust from market participants is important—but if it slips, more trouble likely lies ahead.
The Telegraph's Isabelle Fraser also reports, Greek crisis: deal unravels as both sides reject reform measures before crunch finance ministers meeting.

The Guardian provides a summary of the key Greek proposals being debated with creditors. I must admit, not only does it look like Tsipras and Varoufakis pretty much caved in to creditors, which won't sit well with hard line SYRIZA members, but this new rescue plan is deeply flawed and doomed to fail. Here are three big problems with the plan as discussed on CNN:
1. The wrong kind of savings

Left-wing Prime Minister Alexis Tsipras was elected in January on a promise to end years of austerity that contributed to a 25% slump in the Greek economy.

The reality of an accelerating bank run, and the prospect of a chaotic exit from the euro, have forced Tsipras to backpedal, but the budget savings he is now proposing risk prolonging the recession that Greece has sunk back into this year.

Experts say there's too much emphasis on raising taxes and pension contributions, and not enough on cutting spending or making the economy more flexible.

Berenberg chief economist Holger Schmieding said Greece risked repeating the mistakes of its first bailout program, by hitting demand in the economy too hard.

2. No debt relief

Greece has the second highest debt mountain in the world based on the size of its economy. Until recently Tsipras, and his combative finance minister Yanis Varoufakis, were insisting that relieving that burden had to be part of the agreement under discussion.

Senior European officials -- mindful that their own taxpayers won't accept a haircut on the money they've loaned Greece -- killed any talk of that Monday after a summit of eurozone leaders.

But economists say Greece won't grow fast enough, or generate big enough budget surpluses, to service its enormous debt any time soon -- even given the extremely low interest rates and deferred payment schedules attached to the international bailout loans.

"We disagree with the proposal's suggestion that the intended measures will lead to a return to debt sustainability for Greece within 10 years," commented analysts at UBS Wealth Management.

3. It won't last long

Assuming Tsipras can force the deal through the Greek parliament, and that key creditors such as the IMF and Germany accept it too, it will do little more than buy time for negotiations on yet another rescue.

The final tranche of cash from the existing bailout should be enough to meet repayments due to the IMF and European Central Bank through the end of August. But the Greek government will then have to find more than two billion euros for both institutions in September and October.

"If this week concludes with agreement between Greece and its creditors, it won't be long before the next chapter in this drama," said Angus Campbell, senior analyst at FxPro.

UBS estimates Greece may need additional funds of nearly 14 billion euros to carry it through to the end of 2015.

"Greece therefore needs a new funding program, a debt restructuring or a combination of the two," wrote analysts at the Swiss bank.
As Greece's lenders scrutinize the bailout proposal, let me offer you some additional thoughts. Tsipras went back home saying they saved "pensions and public sector jobs." Why did he do this? Simple, the people who voted for SYRIZA are pensioners and public sector workers.

But the truth is he didn't save anyone. The 23% proposed rate for the valued-added tax (VAT) is steep and will hurt pensioners on a tight fixed income very hard. Of course, he once again "saved" public sector jobs (like all previous Greek governments) but for how long and how did he achieve this?

How else? By taxing the ever shrinking private sector which is the only engine of growth in the Greek economy. And as any economist will tell you, in a depression, more taxes will lead to more unemployment and more tax evasion, which is already rampant in Greece.

And all this is happening during peak tourist season, adding more uncertainty to an economy already on the brink. Do you think European tourists on a tight budget are going to visit Greece if they're going to get clobbered with a 23% VAT tax? Of course not, most of them will just go to Turkey or elsewhere.

And I'm completely dismayed by Varoufakis's "great game" and how he and Tsipras after months of wrangling and posturing didn't at least secure additional debt relief for these insane proposals. If they're willing to accept the imposition of more harsh austerity which will sink the Greek economy further into debt, you'd think they'd have the brains to demand additional debt relief and more growth initiatives.

Then there is a political backlash brewing in Greece not only from SYRIZA's hard line members but also with Greece's junior coalition party which wants debt relief as part of deal:
Back in Athens, the government’s junior coalition partner, the small right-wing Independent Greeks party (Anel), has made resolution of Greece’s debt problem, a precondition of its support of any deal that is eventually reached, reports Helena Smith.

“Our red lines remain,” Panos Kammenos, the party’s leader, is reported to have told MPs who (as we flagged earlier) met in extraordinary session this afternoon to discuss the government’s proposed reforms. “It is now very clear that it is Greece that is negotiating, not simply a government that is negotiating. We hope that the course of negotiations will be positive for the Greek people.”

Parliamentary endorsement of the agreement would be premised on whether the debt issue was tackled with a legal commitment on the part of creditors to some form of debt relief, party members said.

Elimination of tax exemptions on Greek islands was another red line that the Independent Greeks would not cross “even if the government falls,” Kammenos was quoted as telling MPs.
Now, I don't really trust Panos Kammenos and think he'll do anything to remain defense minister, but what if he breaks off from this coalition government? My contacts in Greece tell me To Potami party will step in to avoid Greek elections and Grexit but this is far from certain.

And what if enough SYRIZA hard liners reject this deal? What then? There will be no time to call snap elections as payments to creditors are due at the end of the month.

I happen to agree with the IMF, forget tax hikes and focus on cutting the bloated and inefficient public sector. I would approach Tsipras and Varoufakis with an offer: cut the public sector by 30% and we can cut the debt by an equal amount and focus on growth initiatives. They can also leave pensions alone if such cuts are agreed to.

Of course, as I repeatedly tell you, no Greek politician has ever cut the public sector because in a country where the ratio of public to private sector workers is ludicrously high, any job cuts to the public sector are tantamount to political suicide. But with the country at the brink, this is the time for hard decisions and I think the IMF is right to play hard ball on cutting expenses.

A lot of bloggers came out too quickly to state an eminent deal is in the works. No such deal has been finalized and time is running out fast. At best, I see another "extend and pretend' deal but this isn't satisfactory and puts off the inevitable hard choices for the future. Meanwhile, the euro deflation crisis rages on and can make it that much more difficult to come to a long lasting agreement in the future.

This Greek debt crisis is a complete mess. It wasn't handled right from the get-go. Creditors should have demanded deep cuts in the public sector in exchange for debt relief and investment projects. Instead, each Greek government including SYRIZA has proposed measures which will once again disproportionately hurt the private sector and leave the bloated and inefficient public sector intact.

Go back to read Theodore Economou's insights in my comment on managing a Greek default. If they don't strike a deal, you need to prepare for Graccident and even if they do strike a deal, unless it's comprehensive and includes debt relief and growth initiatives in exchange for deep cuts in the public sector, Grexit will only be postponed, not laid to rest once and for all.

Below, Greek Prime Minister Alexis Tsipras has informed his government that creditors have rejected the nation’s latest aid proposals. Tsipras is headed back to Brussels for emergency talks in search of a solution to the crisis. Bloomberg’s Hans Nichols and Guy Johnson report on “Bloomberg Surveillance.”

And Harvard economist Larry Summers explains why Germany's strategy won't work for Greece. Listen carefully to Summers, he's one of the best economists in the world and a close friend and confidant of Bridgewater's Ray Dalio.

He's right, asinine austerity measures being imposed on Greece will backfire but there needs to be deep cuts in the Greek public sector in exchange for debt relief and investments.

Update: Michael Hudson sent me this from Athens after reading my comment:
I’m here in Athens with Syriza. I’m told that the reason they can’t cut back public employment — even the patronage jobs of PASOK and New Democracy — is because they can’t get it through parliament. Otherwise, they would be all for it, so I’m told.

Everything seems up for grabs here. A few blocks from Syntagma square, half the shops on major streets are closed up, gone out of business. But Greeks have been buying cars as “hard currency assets” to prepare for drachma.
I strongly doubt SYRIZA's leaders would have agreed to any job cuts in the Greek public sector and fear the worst lies ahead if the drachma comes back. Let's hope cooler heads prevail from all sides.