Greece: End of days ?

Another day, another episode in the soap opera that is European economics. It seems more detached from reality the longer it goes on.

From Reuters:

Euro zone finance ministers postponed a final decision on extending 12 billion euros ($17 billion) in emergency loans to Greece, saying Athens would first have to introduce harsh austerity measures.

The ministers said they expected the money, the next tranche in a 110 billion euro ($156 billion) bailout of Greece by the European Union and the International Monetary Fund, to be paid by mid-July. Greece has said it needs the loans by then to avoid defaulting on its debt.

But keeping up their pressure on Athens, where public opposition to austerity has been growing, the ministers insisted that disbursement would depend on the Greek parliament first passing laws on fiscal reforms and selling off state assets.

“To move to the payment of the next tranche, we need to be sure that the Greek parliament will approve the confidence vote and support the programme, so the decision will be taken at the start of the month of July,” said Belgian Finance Minister Didier Reynders.

I feel like I am living on another planet when I read these sort of reports.

Firstly there is the short term issue that , as noted by Zero Hedge over the weekend, even if  full payment of 12 billion euro managed to get past the EU and IMF, it still requires two rounds of votes from the Greek parliament, and even if it manages those hurdles it doesn’t even cover Greece’s bill until August.

On top of that small little problem there is the big one. A problem that no one in the Euro-elite seems to either be aware of or wants to acknowledge. The problem that under the current European macro-economic environment Greece continues to leak money from its external sector every day. I have spoken about this issues previously where I stated.

Put simply, austerity isn’t fixing the real problem. While Greece sells its national assets, its wealth continues to leave the country via the foreign trade sector even as unemployment rises. Under these conditions there is simply no way that the country or its people will be able to pay back the debt they have accumulated, and continue to accumulate.

The financial times also covered this issue in a recent video blog.

BBC also reported on the loan argy-bargy this morning and included a chart displaying which Euro nations are in the firing line of an initial default by Greece.

The Big Picture also has interesting data on which private institutions are involved and are suggesting that Greece needs at least a 52% default on bonds, and that is just to get debt back to 90% of GDP.

As you can see from the above data, and as I have been warning, while the Euro-elite argue over 6 billion euro, Greece’s debt continues to rise. The implementation of austerity is causing GDP to contract, real industrial output to fall, commercial and residential property prices to slide and to top it off  80% of the population doesn’t agree with the austerity package and rioting in the street has now become a daily event as the Greek government is looking increasingly vulnerable.

It seems to me, under these circumstance, that a Greek default is imminent. Obviously the Euro-elite want to bury their heads in the sand because they understand that whatever is finally offered to Greece will be the starting point for negotiations with other Euro nations in a similar predicament. Europe may be able to afford a 52% restructure on Greek debt, but it certainly cannot afford it on Irish, Icelandic, Portuguese and Spanish debt.

However, the final decision on how to handle Europe’s debt crisis may be taken out of the politician’s hands. The European private banking system look as if it may have already made up its mind about what is going to occur in Europe in what looks to be the making of a new credit crunch. The Guardian reports that European inter-bank liquidity is drying up.

Senior sources have revealed that leading banks, including Barclays and Standard Chartered, have radically reduced the amount of unsecured lending they are prepared to make available to eurozone banks, raising the prospect of a new credit crunch for the European banking system.

Standard Chartered is understood to have withdrawn tens of billions of pounds from the eurozone inter-bank lending market in recent months and cut its overall exposure by two-thirds in the past few weeks as it has become increasingly worried about the finances of other European banks.

Barclays has also cut its exposure in recent months as senior managers have become increasingly concerned about developments among banks with large exposures to the troubled European countries Greece, Ireland, Spain, Italy and Portugal.

There is no question, sooner or later Greece is going to default. Is this time finally it?

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  1. One thing the banksters don’t seem to realize is that people power can wipe out all the clout and influence they wield over the political elite.
    They would do well if they look back in history (most notably, the French revolution) and study the possible outcomes they can expect.

    • Yep.. I am with you Mav, the greek PM has already offered his resignation, I really don’t think it will be that long before he goes.

      If 80% of the Greek populace don’t want something to happen and are already protesting that point I can’t see this going much further. All this and we haven’t even got the finances to a point where the debt is actually shrinking !!

      We have already seen the “return to Drachma” talk in the media and members of the Greek parliament discussing that fact.

      I would like to think that this was going to have some sort of “soft and calm” resolution, but I just can’t see it.

  2. Great piece DE

    I agree Mav…the situation in Greece is all part of a massive civil uprising. It can be seen in the Tea Party in the US, the democratic movements in Middle East and growing tension in the Euro periphery. History has shown that people can be stuffed around only for so long and eventually, revolution is the only answer.

    The historical significance of what is taking place in Greece right now is massive. The way in which the MSM makes out this is an isolated and containable matter is disgusting.

    Michael Pasco, Adam Carr, Chris Joye and all the other bullhawks simply continue to pretend to not notice how wrong they got it! And they are the ones people listen to…thank god for Macrobusiness Super Blog and a few other sources of thoughtful and independent analysis.

      • A couple smooching in the midst of some riot somewhere in the world is all the lamestream believes we would and should be interested in ( and one of them was an aussie to boot. oi oi oi!)

        So when it comes to Greece – just think Sandy and Danny. It’s just another larrikin love story.

    • Unless you are referring to the original Tea Party, I don’t agree the present movement is a massive civil uprising – They received a lil help from Rick Santelli of CNBC, Fox News and the Koch brothers.
      But since this is off-topic, I would probably elaborate on it when Rotten Apple gets around to writing a blog post on the topic.

  3. … and the big problem is that a default would not be much better for Greece either.
    They would still need to borrow money, even after a default: and who would be giving them money then???

    The EU is their only hope really.

    Best for them would be if they can have a partial default, supported by the EU. That would please Greece and northern Europe, but would be a real problem for the other in-debited countries of southern Europe.

      • The two are not comparable IMO. Greece would need to re-capitalize their banks too in case of default, which are now barely kept alive by ECB loans. Ireland does not have the EURO and still controls its monetary policy and it’s a much smaller / flexible economy. Greece can’t print money or hike rates. And austerity would be needed anyway in Greece, even after a default. Overall I think the best solution for them would be a partial default with EU assistance.

      • CM, I don’t think Iceland had a sovereign default. The Icelandic government just refused to take on the overseas obligations of its private banks.
        i.e. The government took over and let the private banks default on their overseas depositors/bond holders, while insuring the deposits of its own people 🙂

  4. They should default and then, kicked out of the Euro.
    That’ll teach em…

    There isn’t a hope in hell, a Socialist party would reduce pensions/wages and sell national assets, without the people revolting and causing a revolution…

    They got a hope in hell. Might as well get this over and done with.

    • Ironically, it does seem the lesser of evils, doesn’t it?

      This simply cannot be dealt with without kicking the can down the road some more (if possible?!!?!?!?)…which is just going to have large inflationary and inter-generational wealth-transfer consequences…


  5. They default, they refloat the Drachma, at about 70% discount to the Euro, pay back the debt, sell cheap olive oil Ouzou and greek Island holidays. Those lucky Greeks that are getting Australian Age pensions become very rich given the relative strength of the Aud to the new drachma, life begins anew. Hopefully also reforms can occur rather than trying the easy way of cheap credit. Menawhile the rest of europe…and the Euro zone ?

    The greeks invented the default remember Solon and his reforms in 509bc.

    • EUR/USD, also on a slippery slope.

      Can’t post a chart from where I am, but can say any move under 1.42 will likely see acceleration to the downside. Currently 1.4230.

  6. Great Post DE. I saw other figures that suggest the US has a bigger stake in Greece also. Either way Greece can’t pay back the debt, so as a country, do they allow the public assets to be sold at a fire sale price, and within a year what else do they sell to to pay the debt?

    The IMF don’t want the default yet as there is some re-positioning going on, and if the ten US banks that have the exposure go down what happens to confidence in the US? A default would be a trigger for Ireland, Portugal, and Spain maybe (three big French banks exposed as well), so the US and the IMF don’t want this yet.

    It purely a kick the can solution. It also take a bit of heat of the US situation IMO.

    • But it will likely cause a run back to the USD, which is bad for the US, who are relying on exports (via a a (weak USD)to grow out of their debt.

      I can see the US printing more money soon….QE3 is coming.

  7. Ok a couple of stupid questions..please forgive me for lowering the level of the conversation.
    When they talk about Greek debt are they talking about public sector debt?
    Also what form will a “Greek default” take? Does this mean when some loan repayments start to be missed, or when they go full hog and declare some kind of bankruptcy?

  8. Time for the banks to take a haircut. They should try and negotiate a lower rate before they take a complete bath.

    Everyone is acting as if it should be a zero sum game but interest is offered with the understanding that risk is borne. If there was zero chance of default there should be no interest payment.

    I watch on with baited breath

    • The sooner they realise that, the quicker the problem can be addressed.
      My heart goes out to the bankers, obtaining that remaining few percent of wealth they don’t already own is proving such a bother.

    • A zero sum game isn’t a reference to default chance or risk involved.
      This sort of debt really is a zero sum game, for one party to win the other has to lose by the same amount. Right now the Banksters and their European Government puppets want the Greek People to take a massive loss so they can profit. Much better for Greece to default, forcing the banks to renegotiate to a rate Greece can actually pay.
      Actually I suspect that an austerity regime would result in a negative sum game, with the total wealth shrinking as the real economy is destroyed and the Banks still making a profit as Greece takes even larger losses.

  9. Alex Heyworth

    Time to Greece a few palms?

    On a more serious note, there is some long term research around (I forget where) showing that Greece has been in default for more years than it has not been in default, since 1820.

    The lenders should just take their medicine. They knew Greece’s track record, and chose to lend to them. The interest rate they charged should have appropriately priced the risk of default.

    • “The lenders should just take their medicine” they should but are they strong enough ? it might just kill them !

  10. If you were to compare the Greek economy to a computer, what part is broken?

    Is it the hardware: the resources and skills of the people?

    Is it the operating system: the monetary system that is used not only by Greece, but the other EU nations?

    Is it among the applications that run on the operating system: the government, the private sector industries and the quasi-government industries?

    If it is the first, then you could try to employ people more effectively (not reduce their output with austerity measures).

    If it is the second, the monetary/operating system, then other countries in the EU would be having similar problems. Also, other countries that use the same monetary system as the EU would be experiencing similar problems.

    If it is the applications, then countries with similar governments or industries would have similar problems.

    It appears to me that Greece does not have a hardware problem. The problem is in the software, particularly the operating system. Other countries in the EU are suffering similar problems. Also, other countries which use the same operating system as the EU are suffering similar problems.

    There are some problems with the applications, particularly the government. However, if Greece had a sound monetary/operating system, I doubt that it would have a problem with that application.

    Hence, Greece’s problem appears to be not just Greece’s problem. It is an EU problem. Trying to prop up Greece is really an attempt to prop up the failing EU monetary system.

  11. What is the potential impact on the Aussie dollar vs the euro should Greece default and everything that entails? It currently sits around 74 cents to the dollar. Fall or rise?

    • Fall, IMHO….others might have a better idea.

      AUD is still very speculative, a growth proxy, and if credit tightens (eg. credit crunch), then growth prospects plummet, and investors will seek safer shores.

  12. The whole sorry story reminds me of how important it is to make the right monetary and fiscal decisions, at the right time. In Australia, we should be grateful that a series of Treasurers on both sides, combined with excellent Reserve Bank governors have made those right calls.

  13. Sandgroper Sceptic

    Default is coming, notwithstanding the nonsense from ECB and France/Germany. Greece will survive, these guys are the masters of default. However some Euro banks will be in bad shape if they take a 50-80% haircut, my guess is 75%, and it will cause some issues in the interbank lending market which will derail equity markets for a period. It also has massive repercussions for Ireland, Portugal, Spain etc who are waiting to see what happens…Greece out of the Euro means eventually a much smaller Euro area or perhaps no Euro at all.

  14. DE, I’m confused. Why is the euro currency not crashing at this point?

    What is likely to happen in the short term(months) when Greece defaults?

  15. Basically banks have been selling CDS’s as insurance lines against Greece defaulting. Now anyone can buy this insurance regardless of if they actually loaned Greece any money.

  16. Watched a very interesting documentary after reading about the treason accusations

    They could go down the path of calling it illegitimate debt based on various deals made to the disadvantage of the Greek people.

    Of course the lenders always have the power but the evidence is that the Greek people will not stand for it. Having to cut pensions and social services yet as part of agreements made with the Eurozone and IMF they must still purchase French and German military equipment. Come on! The people won’t stand for it for long.