Posts Tagged ‘Sovereign default’
Greek bailout

Well we have long said there was no way on earth people were going to be paid back the full value of their loans to Greece. Indeed, the same goes for much of the developed world. Too much debt is too much debt. The question was and remains, who bears the losses. Under capitalism it is supposed to be those who took the risks and enjoyed the rewards. At the moment it appears to be the taxpayer and ordinary citizens.

If you are retired and living off a fixed income, on state welfare or amongst the poorest members of society then you will be forced to suffer in order to make international bond holders good. The consequences for democracy and social stability of such measures is predictable. The question is simply what proportion of the nations assets will be looted before:

  • The government is overthrown.
  • Despotism established.
  • Both of the above, possibly more than once.

Make no mistake, the current process is not long compatible with democracy. At least not democracy in the traditional Western as opposed Eastern European “Democratic Peoples Republic of …” sense. It is inconceivable that a democracy would voluntarily acquiesce to:

It’s Official – Greece Unveils The Negative Salary, And A Whole New Meaning For “Pay To Play”: Beginning this month some Greeks will have to pay for the privilege of having a job. From the Press Project:

Salary cutbacks (called “unified payroll”) for contract workers at the public sector set to be finalized today. Cuts to be valid retroactively since november 2011. Expected result: Up to 64.000 people will work without salary this month, or even be asked to return money. Amongst them 21.000 teachers, 13.000 municipal employees and 30.000 civil servants.

But the Greek economy is uncompetitive. The Greeks are lucky to be getting anything. But what exactly are they getting:

Scandal: Greece To Receive “Negative” Cash From “Second Bailout” As It Funds Insolvent European Banks: It turns out that not only will Greece not see a single penny from the Second Greek bailout, whose entire Use of Proceeds will be limited to funding debt interest and maturity payments, but the country will actually have to fund said escrow! You read that right: the Greek bailout #2 is nothing but a Greek-funded bailout of Europe’s insolvent banks… and the Greek constitution is about to be changed to reflect this!

The smoking gun quote:

 The Eurogroup also welcomes Greece’s intention to put in place a mechanism that allows better tracing and monitoring of the official borrowing and internally-generated funds destined to service Greece’s debt by, under monitoring of the troika, paying an amount corresponding to the coming quarter’s debt service directly to a segregated account of Greece’s paying agent.

As for the priority of payments – it is more than clear:

Finally, the Eurogroup in this context welcomes the intention of the Greek authorities to introduce over the next two months in the Greek legal framework a provision ensuring that priority is granted to debt servicing payments. This provision will be introduced in the Greek constitution as soon as possible.

So there you have it: the Second Greek bailout is nothing but the first Greek bailout of Europe’s banks! And the Greek constitution is about to be changed to reflect that.

Congratulations Greece – you just got royally raped by your own unelected rulers and you didn’t even know it.

It is worth reminding ourselves of where the money from the previous bailouts went:

Where Does The Greek Bailout Money Go? In the end less than 19 cents of the bailout are going to allow Greece to continue its overspending. About 23 cents goes to Greek institutions, though at this point, all of that is held by the ECB, so it is not fully benefiting Greece.

18 cents are going to the ECB directly and 40 cents are going to banks and insurance companies outside of Greece. So at least 58 cents of every bailout Euro is going outside of Greece, and depending on how you treat the repo agreements, that number could easily be 70 cents.

Graphically it is illustrated as:

There is only one destination this path leads and it is not pleasant. Either a revolution of the left or the right. Both pointing to evil capitalists. But bailing out bondholders is not capitalism. Letting those who took the risks, benefited from the rewards, suffer the consequences of their poor investment choice is capitalism.  This fact needs to be screamed from the rooftops by all right thinking people. All it takes for evil to triumph is for the good to remain silent.

Do not remain silent. Evil will exploit your silence and blood will again flow in the name of fighting injustice. Do not wait before voicing your opinion. By then it may be fatal to do so. Once some things are set in motion they can consume all who are too close.

We have always had the means for mass violence. In Rwanda the machete was a weapon of mass destruction. But technology is now providing the means for unprecedented repression of the many by the few.

Again Greece is pointing the way. 43% of the population now support parties based on the ideology that killed over 100 million. Nice.

Paul Mason of BBC on How Austerity is Reducing Greece to Developing Country Status: Communists, Trotskyists and other extreme-left groups are polling at 43%. That’s a strikingly high number. This plus the level of dissent on the street suggests Greece is on its way out of the eurozone. But will the technocrats prevail? As Michael Hudson has stressed here and in other commentary, the banks are succeeding in stripping Greece of assets, an operation that used to be possible only via military force

In the video he talks about people getting Euro 350 electricity bill per month, most of which is tax. The person only earns Euro 400 per month. If you do not pay it then you get your electricity cut off. As a resident of Australia I have been horrified at how much my electricity bill has risen. Looks like there is plenty more scope. Although our price rises are the effects of green not Austerity taxes. Those will come later.

The outcomes for Greece and of what is occurring elsewhere can be contrasted with Iceland:

Icelandic Anger Brings Debt Forgiveness in Best Recovery Story: Iceland’s $13 billion economy, which shrank 6.7 percent in 2009, grew 2.9 percent last year and will expand 2.4 percent this year and next, the Paris-based OECD estimates. The euro area will grow 0.2 percent this year and the OECD area will expand 1.6 percent, according to November estimates.

Housing, measured as a subcomponent in the consumer price index, is now only about 3 percent below values in September 2008, just before the collapse. Fitch Ratings last week raised Iceland to investment grade, with a stable outlook, and said the island’s “unorthodox crisis policy response has succeeded.”

What are the chances that your government will follow the Iceland precedent rather than bailout bondholders? What has success got to do with it when there are vested interests to protect? I’d suggest you start preparing soon if you live in a nation that has experienced credit expansion to the point where people have unprecedented levels of debt. It matters not if it is secured against assets, as those assets are inflated. Inflated assets are assets that do not generate a return sufficient to justify their price. Capital gain does not count, when a bubble deflates capital gains turn into capital losses.

As an aside the economist profession ought to hang its head in shame. When some wanted an economic rationale to justify the credit expansion with all its associated excesses we trotted out the efficient markets hypothesis. Now some want to justify money printing we have a burst of coverage of modern monetary theory.

I leave the last word to Jesse:

Modern Monetary Theory Explained Simply and Questioned Again So, what is the scheme to prevent the over-printing of money in the MMT, and what recourse do the people have if this system fails?

We are grappling with this very question today with the global dollar reserve currency scheme, so it is not theoretical. Replacing a failed fiat currency with another similar system but with different denominations and names, reissuing the paper currency after it fails, is par for the course.

And I expect that to be the preferred government resolution this time as well. The only question in my mind is how draconian will they get in order to obtain the required obedience of the markets, and how far do they think their control needs to extend geographically in order to succeed?

And what would they do with countries who have things that they need, but who will not accept their monetary diktats?

Is this what we are talking about? Just give the Fed/Treasury more power, greater spans of control, and less restraint, and they will finally get it right?

Or at least right enough, because no one will be left to question it, and say it is wrong.

They say history does not repeat, but it does rhyme. Learn the rhythm. Don’t let them pervert capitalism any more, lest we all suffer the  fate of the Sabine women.

Greece and Sovereign Defaults

These charts sum things up rather well:

The first is courtesy of Stratfor – whose material is highly recommended:

Another take:

Failure being devastating does not ensure success

Bronte Capital has an excellent outline on Models for the Greek Default which clearly outlines why Europe is so concerned. In our interconnected world, it is not just Europe that needs to worry.

When Argentina defaulted not only did the government default but they forced a private default. If you had a debt in US Dollars in Argentina prior to the default you were forced to pay it back in Peso. Indeed it was illegal to make payment in US dollars.

Likewise if you had a US dollar asset you got back Peso. A dollar deposit in Citigroup in Buenos Aires became a peso deposit. If you really wanted to keep your dollars you needed to make your Citigroup deposit in New York.

The forced private sector default was necessary for Argentina. The Argentine banks all had lots of US dollar funding. If you devalued without forcing their default then they would all have uncontrolled defaults (a true disaster) and the country would lose its institutions. Telefonica Argentina would have failed too – failing to replay USD debts.

The same applies in Greece.


Now if you are Irish or Italian or Portuguese (or even Spanish) you know the rules. You get to get your Euro out of the PIGS and into the core (Germany) as fast as possible. So max all your credit cards (for cash), draw all your bank deposits and load them in the boot of your car and make the drive to Switzerland or Germany. Somewhere safe. Otherwise you are going to lose half the value the day that the rest of the PIGS do a Greece.

And this bank run – a run including tens of thousands of Italians driving their Fiats – will surely blow apart every Italian bank. And their Euro-skeloritic compatriots will sign the death knell for for all their banks too.

If you are going to go the devaluation route you are going to have to do it all at once. Like the big-bank weekend (maybe coinciding with a week long bank holiday) in which all core European countries get their own currency back.

Read the whole thing.

Even if you do not believe we are heading towards a depression, possibly the Greatest Depression, there could still be cause for alarm. Cardif Garcia details the effects of Great Stagnations from the Archives:

Another take by the Bank of England:

There could be some tough times ahead, even if we get through this without a depression.

State of denial

It’s a mad mad world. People are being driven mad by the expropriation of national treasure, basically their future taxes, to pay off financial vested interests. France of course averts its eyes from the insanity in front of its face to focus on the future of a “Europe” most of its citizens voted not to bring into being:

French say firm ‘No’ to EU treaty: French voters have overwhelmingly rejected the European Union’s proposed constitution in a key referendum.

Naturally Europe’s elite maneuvered their way around the law and the will of the people by agreeing to a treaty rather than a constitution. Heaven forbid that democracy should get in the way of a “progressive” project. Leaving Sarkozy to claim it would be madness to threaten this Union by withdrawing from the Euro:

Sarkozy tells nation leaving euro would be ‘madness’: “Do not believe, my dear compatriots, those who suggest that we leave the euro. The isolation of France would be madness. The end of the euro would be the end of Europe,” he said in a message broadcast on television.”

Sarkozy’s comments reminded me of the Yes Minister episode in which Sir Humphrey explains to cabinet minister Jim Hacker that you can never be certain that something will happen until the government denies it. In that spirit Barry Ritholz posted this marvelous series of quotes:

Its All Greek to Me!

1. “Spain is not Greece.” Elena Salgado, Spanish Finance minister, Feb. 2010

2. “Portugal is not Greece.” The Economist, 22nd April 2010.

3. “Ireland is not in ‘Greek Territory.’” Irish Finance Minister Brian Lenihan.

4. “Greece is not Ireland.” George Papaconstantinou, Greek Finance minister, 8th November, 2010.

5. “Spain is neither Ireland nor Portugal.” Elena Salgado, Spanish Finance minister, 16 November 2010.

6. “Neither Spain nor Portugal is Ireland.” Angel Gurria, Secretary-general OECD, 18th November, 2010.

I am not sure who exactly Sarkozy thinks France and Europe are or are not. I am almost past the point of caring about the prattling of Presidents and Prime Ministers. There is a surer way to gain insight into them and their institutions:

Ye shall know them by their fruits. Do men gather grapes of thorns, or figs of thistles? Even so every good tree bringeth forth good fruit; but a corrupt tree bringeth forth evil fruit. A good tree cannot bring forth evil fruit, neither can a corrupt tree bring forth good fruit. Every tree that bringeth not forth good fruit is hewn down, and cast into the fire. Wherefore by their fruits ye shall know them.”

We are overdue for a mighty large bonfire.

As for the future of the European Union, I stand by this post:

Sovereign default: there are too many countries with too many arms which would be better off defaulting for EU forces to step in successfully. The European Union is too lacking in legitimacy to overrule them peacefully. They do not have the forces to override the desires of its composite states. In any event, the merest hint of civil war would probably initiate the credit event they are trying to avoid.

Given the magnitudes of the debt and the likely domino effect of chain defaults the world will be rocked by the financial system. This time it will occur when governments have much weaker balance sheets, thanks to their choice to intervene in the way in which they did.

Essentially the last round of government interventions achieved nothing except more time. This was bought at the cost of a considerable increasing of public debt as they bailed out private debt holders. The decline in sovereign balance sheets limits their ability to meet any future expected event.

They also gave the appearance which may reflect the reality of being captured by vested interests related to their financial system. It is hard to see how their behavior differed to that of a kleptocracy.

While the unraveling will be rapid once it really gets going, the lead up always takes longer than expected. It took years for the Weimer Republic to experience its bonfire. The EU could also take years to reach its tipping point. The exact timing is not possible to determine. Nor is the exact nature of what replaces it. Europe has so many problems in so many areas that it is hard to know what will dominate. Or even if there will be a serious attempt to rectify things before countries fall into the abyss.

What we can say is that there is too much debt. Countries can not meet their past and future commitments. Excessive realized past commitments take the form of debt. Future commitments are often promises that have not been payed for. But people have made life choices based on believing their governments promises. Miserable health care, pensions and other government benefits will be seen as a betrayal. As will the inevitable write-offs, hair cuts and inflationary reduction in the value of private and public debt. There are tough times ahead for the developed world. This will be the case whether or not you are Greece, Ireland, Spain, Portugal….etc.