Europe’s problems multiply

Overnight, Greek Leftist leader, Alexis Tsipras, gave up on his attempts, or at least pretence of them, to form government. The gauntlet has now been handed to PASOK leader, Evangelos Venizelos, who again has 3 days to attempt the same.

Given that New Democracy, Venizelos’s potential coalition partner, has already failed to create a workable coalition it is doubtful PASOK will succeed. Neither Tsipras or Samaras used their fully allocated time suggesting there is little point dragging out talks as no comprises could be reached.

Greece appears to be heading back towards an interim technocrat government and new elections unless the Greek President is able to muster a workable coalition in the coming days. New elections may bring new alliances, but it is yet to be seen what the new political strategies will appear after the demolition of the centrist parties.

Overnight the EFSF board agreed to make an additional payment to Greece in order to keep it technically solvent for a few more weeks:

After a conference call, the board of the European Financial Stability Facility, the 700 billion euro bailout fund administered by the 17 countries that use the euro, agreed to make the scheduled payment, which will allow Greece to meet near-term bond redemptions and other obligations.

An initial 4.2 billion euros will be paid on Thursday, while the remaining 1 billion will be paid out later, “depending on the financing needs of Greece,” a statement said.

It said the remaining 1 billion was not needed before June.

This may appear as a back down but realistically it is just a payment in order for Greece to hand the money back again. Greece has approximately €3 billion worth of bonds held by the ECB maturing this month and also the non-greek law PSI bonds to sort out. This is very much a case of drip feeding money in order to protect greater Europe from the contagion of a default.

In the meantime the rhetoric from outside of Greece has ramped up a notch with European Central Bank Executive Board member Joerg Asmussen quoted as saying:

Greece has to be aware that there is no alternative to the agreed consolidation program if it wants to remain a member of the euro zone

The ECB currently holds €40 billion of Greek bonds and its banks have €140bn in repos. In that regard Mr Asmussen appears to be having an argument with a loaded gun, and this has very much turned into a game of chicken.

But members of the ECB aren’t alone in publicly announcing Greece’s choice. Until recently, speaking of a Greek departure from the Euro was completely out of bounds. But, as Bloomberg reports, the economic and political realities of the situation appear to have changed all of that:

From the monetary fortress of the European Central Bank to the pro-European duchy of Luxembourg, policy makers are beginning to air their doubts that Greece can stay in the euro.

Post-election tumult in Athens has put the once-taboo subject of an exit from the 17-country currency union on the agenda, lifting the veil on possible scenario planning afoot behind the scenes.

“If Greece decides not to stay in the euro zone, we cannot force Greece,” German Finance Minister Wolfgang Schaeuble said at a conference sponsored by German broadcaster WDR in Brussels today. “They will decide whether to stay in the euro zone or not.”

After 386 billion euros ($499 billion) in aid pledges for Greece, Ireland and Portugal, 214 billion euros in ECB bond purchases and another trillion euros in low-interest loans for banks, plus 17 high-level crisis summits, Greece’s political chaos thrust Europe into a perilous new phase.

The world is witnessing an “important moment in European Union history, a moment of crisis,” EU President Herman Van Rompuy said in Brussels on the 62nd anniversary of the declaration by Robert Schuman, then France’s foreign minister, that launched postwar European integration.

Let’s hope there is some form of compromise on both sides, but at this point in time it is very hard to say what is going to happen either way.

Greece, however, wasn’t the only problem overnight. Spain once again came to the fore as its 10 year bond yields rose 4.02% to reach 6.078. Meanwhile the spanish stock market indicator, the IBEX 35, closed down 2.77% overnight which took it back to levels not seen since October 2003 and it now sits lower than it did at the height of the GFC:

Overnight rumours of  plans to attempt to bolster the banking system, including huge jumps in capital requirements, hit the news wires:

Spain plans to partly nationalize BFA- Bankia group as Prime Minister Mariano Rajoy tries to restore investor confidence with his second overhaul of lenders in three months, a government official said.

The government will become the largest shareholder in the bank that has the biggest Spanish asset base, said the official, who declined to be named because the plan hasn’t been announced.

It’s also working on a plan to force banks to set aside more provisions on real estate loans that are still healthy, said a person familiar with the situation, who also declined to be identified. The rules, to be approved on May 11, will increase provisions on the loans to about 30 percent from 7 percent, creating an additional buffer of about 30 billion euros ($39 billion), the person said.

Rajoy, who said for the first time this week he may use public money to shore up banks, is trying to restore trust in the financial system without overburdening public finances.

As I have explained previously, Spain’s major economic issue the loss of private sector wealth from over exposure to a deflating housing bubble which, in the absence of a major push in counter cyclical fiscal policy, is leading to a surge in bad debts in the banking system.
Spanish house prices accelerated downwards in April with the YoY falls hitting 12.5%. The accumulative falls since the peak are now 29.8%

With asset devaluations like that it is very difficult to see how the Spanish taxpayer is going to stay unencumbered under any new plan.

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  1. Greece or Germany.

    Ultimately, while the Germans may like having a currency that is more competitive due to the PIIGS their tolerance for paying for the duds and being called ‘Nazis’ at the same time will wear thin very quickly.

    Thus the Germans have been doing a lot of work over the last 12-18 months creating a defensive wall around their banks and according to some – preparing the plates to start printing the Deustchmark Mk II.

    While they may prefer that the PIIGS leave the EZ they may recognise that this will never happen because the PIIGS know life without German cash will be tough.

    Why leave when you can stay, get cash and refuse to take orders from Berlin – defying the German bully is great domestic politics.

    Thus the Germans may be forced to leave (possibly not alone – some others may choose to join a new Deutschmark zone)

    This is why the Germans are playing hard ball with the Greeks – they want to force the issue.

    They need some cover to leave because the EZ was a French idea for controlling Germany after unification. They need to be able to say “We did our best but the mission was hopeless”

    Either the Germans get to run the EZ (and the whingers/poor performers are kicked out or jump ship)


    The Germans will leave the EZ.

    I reckon the second option is looking more likely every day.

    • If the EZ breaks up, there’ll be swift and sharp currency devaluations across the periphery, so the Germans will receive pennies on the dollar from the money they’ve leant these countries. The fall in its European trading partners’ exchange rates will be accompanied with a big leaps in the new deutsche mark (I read recently that Germany’s exchange rate would be 40% higher today under the deutsche mark rather than the euro), so Germany will immediately lose much of its competitive edge. Not a lot to recommend a reversion to the DM in Germany’s eyes.

      • If the worst the Germans have to face is a highly valued DM compared to the Euro I think they will see that as the lesser of many evils.

        After all people paid top dollar for German exports for many years when the DM was strong.

        And of course this is assuming that in a pinch the Germans would not try to devalue the DM to ease the adjustment.

        The Germans got through unification and a few downtowns in the 20th century – by comparison leaving the EZ will barely raise a sweat. The sweat will be elsewhere in Europe.

      • Right.

        Attitude in Germany is “we dont need these losers”. But actually they do. Theyve built their wealth on exports in an undervalued currency (because of the PIIGS) and theyve lent money to the PIIGS who’ve then bought their products.

        Not to say that Germany has done something evil or underhand. But they need to accept the benefits they’ve had, as well as the responsibility they took on when they joined a currency union with these other countries. if they didnt want that responsibility, they shouldnt have done it.

        Like a marriage – “for richer, for poorer, in times of health or sickness” etc.

        • Unfortunately, the Eurozone was a shot-gun wedding designed to draw Germany into a bear hug before it got too cuddly with its East Germany cousins. Now it is too big for the matrimonial bed.

          An ever closer fiscal union is no solution when populations are not mobile for deep seated cultural reasons. At least in the United States when work runs out in one areas people can move to another without difficulty. Try telling the population of Greece they should get on a bus and move to Hamburg because that is where the jobs are.

          It hasn’t worked and staying together for the sake of the kids is rarely good advice.

          The kids (PIIGS) always suffer when a marriage breaks down.

          • dumb_non_economist

            What makes you think Greeks aren’t willing to move to where the work is if they have no choice? Plenty of eastern Europeans in the UK when I was passing through there 05 to 08.

          • I am sure many are willing but the work options are not likely to be attractive if you cant speak German.

            And that is assuming the Germans tolerate a pile of re- locating residents of periphery.

            Cultural traditions and language identity are great except when you need to move countries

    • Ronin8317MEMBER

      Germany cannot leave the EU since German banks hold debts denominated in Euros, but their depositors will demand the new Deutsche mark. Even if by some miracle that the ECB decides to ‘help’ Germany and honour the debt on the debtor’s behalf, the certain appreciation of new Deutsche mark will create the massive bankrun from other EU countries. Everyone will deposit their Euro into a German bank for a guaranteed profit during the conversion.

      Leaving a currency will be very, very messy. For better or for worse, the EU is stuck with it.

      • Staying is also messy.

        It is just a question if the greater messy tipping point will be crossed.

        I feel it will be crossed but i am not certain nor do i have any idea when.

        There just seems to be a steady and consistent increase in pressure regardless of the actions taken.

        Sure some of the actions could be better but debt to solve debt in a low growth environment seems doomed.

  2. At what point does borrowing costs become un-serviceable ? is it around %7 or is it higher or lower ?

    • 7% is about the minimum mortgage debt interest rate I’ve seen in my lifetime, though I have a clear childhood memory of a “life-size” 6% sign in a bank window in the 1960’s.

      If Australians can dump 70% of their after tax income into accommodation debt, then Europeans won’t mind paying the same amounts to repay their national debts… surely.

      Isn’t it the volume of the amount owed rather than the % rate of rent on that borrowed money that counts?

  3. “Let’s hope there is some form of compromise on both sides”

    Why? Anyone can see that an exit from the Euro and a swift subsequent devaluing of the Drachma is the only option open to Greece. They’ve defaulted enough times in the last hundred years to know the drill by now.

    Pfh007; no need for new plates in a hurry. Take a look at a Euro note; the serial numbers are coded to indicate the issuing country. The process to exit the Euro is therefore straightforward;
    1. Stop extra-border capital transfers
    2. Call a Bank Holiday
    3. Next working day, all German or Greek or whoever’s issued Euros become convertible 1 to 1 the new currency over a defined period.
    4. Float the new currency and hold on tight.

    • BakuninMEMBER

      TNA said:

      “They’ve defaulted enough times in the last hundred years to know the drill by now”.

      Since 1800 Spain has defaulted 13 times, France and Germany have defaulted eight times each and Greece has defaulted 5 times.


  4. If anyone needs to get a sense of how clueless the EZ great brains are, they need only watch lateline on iview for Thurs night.

    Tony jones interviews Thomas Klau of the Euro Council for Foreign Relations.

    Lots of finger wagging at Greece. Lots of talk how the Greeks need to suck it up. Lots of confidence that rational Greeks will do as they are told.

    It is easy to be rational when you are a well fed and well paid diplomat type.

    Considering the deep european historical love affair with irrationality and chaos one would think they might have better understanding that when it comes to people under pressure you should expect the unexpected.

    • I think you are confusing what they actually think with what they are prepared to tell the press.
      At this point the Euro chap was describing the Brussels initial bargaining position.
      I have no doubt that we will see belligerence and brinksmanship from Greece – their initial bargaining position plus their attempt to extract value from Brussels.
      I would not worry about their public statements – think of it as publicly funded theatre that the media will only too happily televise in instalments.
      In a few months time we will finally get to a decision – Greece out or another bailout. Not sure which way yet.
      In macro terms there can as many bailouts as the Germans are prepared to fund – but the only exit is currency devaluation and unless someone gets very creative that means a drachma. Just like going off the Gold Standard to end the Great Depression.

      • I would add that I have a very great respect for the Euro authorities to change their stated rules at any point if that gets them what they want, and especially if they can bury some hedge funds in the process.
        Just look at their track record in 2010 and 2011.
        Hence at the start of a crisis I can reliably expect a period of negotiation and no pre-emptive official moves. But after that ….

      • I appreciate that it was a demonstration of typical EZ ‘chess tactics’ to get what you describe as ‘…..what they want..’

        That is my point. The EZ great brains think that what they want is what a rational European would want. Thus provided they hold the line with some tactics and ducking and weaving sense will prevail and no one will do something rash.

        They dont seem to comprehend that under pressure what people want is often irrational.

        The 1930s were marked by lots of people refusing to believe that the irrational was possible.