Greece chooses violence

The Greek deal has been struck with complete national humiliation its core principle, including the transfer of 50 billion euros in state-owned assets abroad. The deal is far worse than that rejected in the referendum ipso facto it has an ice block’s chance in Hell of surviving domestic politics. Indeed, violence is now the base case.

Bloomie has a wrap of what to expect next:

WHAT’S NEXT?

  • The Greek govt is set to renew a bank holiday and capital controls decree which expires today
  • The ECB’s GC is expected to discuss ELA for Greece’s banks
  • Eurogroup meeting later today will work on Greece’s short-term needs and discuss bridge financing
  • Greece has accepted to legislate on 4 action points by Thursday July 16, and another two by July 22, according to Malta’s PM Muscat
  • Then Greece would come before the Eurogroup and euro- area member states would decide to open or close the needed negotiations that would let the ESM to disburse funds, Muscat says
  • Dutch PM Rutte says it could take weeks to negotiate Greek ESM aid deal

WHAT DOES IT MEAN FOR GREECE’S BANKS?

  • Greek banks are to be recapitalized by Greek asset fund and Tsipras says the deal protects the stability of the banking system
  • ELA will stay in place all the while that another bailout is in the pipeline, Mizuho’s Peter Chatwell says in e-mailed comments
  • ECB ELA will most likely stay in place until at least Wednesday, pending Greek ability to legislate the list of prior actions, Oxford Economics says in a note

WHAT ABOUT TSIPRAS AND SYRIZA?

  • Support at Wednesday’s vote from Greece’s pro-Europe parties will come at a cost, when the timing is right, Barclays says
  • It makes more sense for those parties to let PM Tsipras bear the political cost of capital controls while triggering elections would make default inevitable, plunging the country into a complete paralysis for the next 30 days
  • Don’t entirely rule out a coalition partner change (with To Potami), and believe this situation will eventually lead to new elections after the summer
  • A new unity govt or an early election very possible, Rabobank says
  • Given political fractures in Greece, passage of the proposal through parliament is far from certain, Richard Cochinos, strategist at Citigroup, says in client note
  • Decent likelihood of a Greek cabinet reshuffle; govt could possibly fold on reforms
  • Tsipras may seek to expel those opposed to a deal with creditors from the party as he no longer commands a majority in parliament, Reuters said, citing people familiar
  • “Constructive” centrist parties will likely continue to support the government coalition, Barclays says
  • Snap elections necessary but can’t take place now, Greece’s Labor minister Skourletis says

WHAT ABOUT ITS CREDITORS? 

  • Germany, the Netherlands, Austria, Slovakia, Estonia and Finland all need parliamentary approval to open negotiations on a new Greek program, an EU official said last week, while France’s Hollande said French National Assembly to vote on the deal on Wednesday
  • While Marcel Fratzscher, president of the DIW economic institute, says it will be very difficult to sell the deal to German voters and Germany’s Greens say the deal means Greece will be stuck in a  recession, a govt lawmaker said it is likely the German coalition will approve the deal
  • Rutte says he’s unhappy he has to break an electoral promise to Dutch constituents on no further Greece aid
  • The deal is so tough there’s a better than even chance that the Finnish parliament will authorize the negotiations, Berenberg’s Holger Schmieding writes in e- mailed comment
  • Even if a deal can eventually be reached to keep Greece in the euro area, there will be long-term consequences, the damage done to relations between France and Germany may prove irredeemable while Germany’s suggestion Greece be granted a short term exit from the single currency shatters the principle that euro-area membership is irrevocable, Oxford Economics says

IS THERE ANY AGREEMENT ON RESTRUCTURING GREECE’S DEBT?

  • Over the weekend, an IMF source told Reuters said that if other creditors couldn’t agree on a haircut, grace periods on interest payments could be combined with lower rates and extended maturities
  • Tsipras said the negotiations had managed to gain restructuring while Merkel confirmed interest-payment grace periods and longer maturities will “be discussed once there is a successful evaluation of the new Greek program”

WHAT ABOUT GREXIT?

  • Tsipras says summit outcome averts collapse of banking system
  • Risks of a Greek exit have reduced in the very short term as the ECB should remain supportive as long as prior actions are passed in Parliament by Wednesday and talks are headed in the right direction, Barclays says
  • The chances of a Grexit have now fallen below 50%, UBS WM write
  • The deal and Wednesday’s vote may stretch the Greek govt to breaking point, forcing new elections; the month’s hiatus that would ensue while elections took place would almost certainly see Greece ejected from the euro area, Oxford Economics says

We can surely now expect the Tsipras Government to collapse in short order and the new elections to bring extremists to power. It seems the only way that Greece can do the right thing – that is leave the euro – is via some very wrong folks. It appears Yanis Varafoukas had the right idea five months late, from The New Statesman:

He was prepared to do three things: issue euro-denominated IOUs; apply a “haircut” to the bonds Greek issued to the ECB in 2012, reducing Greece’s debt; and seize control of the Bank of Greece from the ECB.”

The plan was taken to the six-member inner circle of Syriza but he lost 4-2, with Tsipras opposing. He quit the government the next day.

“That very night the government decided that the will of the people, this resounding ‘No’, should not be what energised the energetic approach [his plan]. Instead it should lead to major concessions to the other side: the meeting of the council of political leaders, with our Prime Minister accepting the premise that whatever happens, whatever the other side does, we will never respond in any way that challenges them. And essentially that means folding. … You cease to negotiate.

Goldman sums up market sentiment:

On Friday we argued that the chances of Greece and its creditors coming to a fully comprehensive agreement over a new multi-year third programme over the weekend were low. Nevertheless, we expected that an accommodation of some form would be found to forestall the definitive ‘Grexit’ that had threatened. Overall (and recognising that, even if modest, procedural risks remain), the outcome announced this morning is thus a positive surprise, at least from a shorter-run, tactical perspective.

Yet looking ahead, the acrimonious process of reaching agreement has done little to re-establish trust among the various parties. Indeed, the opposite is likely the case. And frictions have emerged among the creditor countries (e.g. between France and Germany) over how to treat Greece and what implications that will have for the stability and resilience of the Euro area as a whole going forward.

With the economic situation in Greece deteriorating, substantial implementation risks to the new programme remain. Greek banks are likely to remain subject to controls for some time, even if — as we expect — the ECB Governing Council sustains the current level of emergency liquidity assistance while banks are restructured. Domestic political pressures against further adjustment and austerity will continue to mount. As we have seen in the past, the scope for the Greek authorities to backtrack from programme commitments once the financial support is flowing is high. After the events of the past few weeks, tolerance for such recidivism is likely to be extremely low. Greece will be kept on a short leash with invasive monitoring by the creditor institutions.

Greek membership of the Euro area over the longer term therefore remains in question. Even with a new programme, the substantial economic and political challenges facing the adjustments required to make Greece’s fiscal, competitive and employment situation sustainable still need to be addressed. And despite measures in the new programme to boost investment, restoring growth to Greece remains a formidable challenge.

Yet the broader market is increasingly able to separate Greece from the rest of the Euro area. Particularly with regard to sovereign spreads, the impact of the recent Greek saga has been relatively modest, owing to some combination of: (a) expectations that a deal would be reached eventually; (b) the credibility of the ECB’s backstops and willingness to do “whatever it takes”; and (c) the recognition that (now that direct private sector exposures to both Greek banks and sovereign have been reduced) Greece no longer poses the contagion threat it did in the past.

While Greece itself will remain in the news, we expect it will become less of a focus for broader market developments.

Market implications

The response in markets to the news of a ‘deal’, conditional on further ‘prior actions’ on the Greek side, has been tepid. This is broadly in line with what we wrote in our note last Friday, where we argued for the marathon negotiations to extend beyond the weekend.

In our view, there are two main factors keeping investors sidelined. One is the residual implementation risks involved in the latest arrangements. Political hurdles in Greece and among those creditor countries most recalcitrant to offer concessions without guarantees will leave short-term investors unwilling to bear the volatility from headline news in relatively illiquid markets. The second, of much broader importance, is the accumulated evidence of the inadequacy of the Euro area’s present fiscal governance, which takes up too many resources and exposes the whole system to collapse. Unless rectified by credible steps towards greater integration and ex ante risk-sharing, long-term investors seeking exposure to duration will shy away.

We have used the 10-year government bond differential between the average of Italy/Spain and Germany as a gauge of intra-EMU sovereign risk. Our baseline economic forecasts, reinforced by the effects of QE, suggest that there is room for the spread to tighten below 100bp. In coming weeks, however, we continue to see the spread range-bound between 100 and 120bp.

In the near term, the main focus will be on the ‘bridge financing’ to avoid a default on the ECB on 20 July as this would compromise the chances of seeing a relaxation of the ELA. Then attention will shift to the treatment of the Greek banks, and the potential read-across to other resolution cases. On balance, we do not think that deposits and senior secured bond holders will be bailed in. Finally, attention will move to the terms of debt relief as discussion will take place as to whether they will be applied to other former program countries (our answer is, probably yes).

Should negotiations collapse — a smaller probability outcome at this stage, but not a negligible one either — we think that spreads would go to 200-250bp (i.e. 10yr yields back at 3perc) before the ECB intervenes to push them back down.

Sadly, it will get worse before it gets better.

Comments

  1. 24hr general strike called for tomorrow.
    ERT reporting major news re. govt re-structure, also coming tomorrow.

    Europe gets:
    1) Regime-change, then
    2) Unity or technocratic Govt. leading to
    3) Mass civil disobedience, and banks stay shut (until autumn?)
    4) Military coup

    Get out now Greece.

    • Thats what Germany is trying to do… it doesn’t want Greece to accept these measures, it has purposely made the conditions so harsh, that Greece has to exit the Euro, without being seen to be pushed out…

      Its only Greece that wants to remain. Agree, time to leave. But as always with the Left, they want social largesse, and somebody else to pay for it…

      • Can I also say, there will be no violence in Greece… just a muted whimper…

        The mighty Greeks have been bought to their knees. One day they will remember who they are. But not today. For now they will cry poor, and appeal to France.

        The Euro project is dead.

      • Ronin8317MEMBER

        Greece is on its way to become a failed state. Transferring the 50 billion dollars of state asset abroad is a crime against the Greek state. I don’t think we’ll see another election in Greece : the army will take over soon.

      • You miss the point… Germany does not want those assets – they want Greece gone!

      • For any that missed Yanis on Late Night Live last night, his first interview since stepping down and interesting throughout. He is adamant the Germans, Schauble in particular want Greece out of the EU. One thing strikes listening to him, there is no politician in the current mob here in Oz anything like him (Yanis, that is – oh wait, none like Schauble either!).

        Recommended.

        http://www.abc.net.au/radionational/programs/latenightlive/

      • Ronin8317MEMBER

        I’m not contesting that German want Greece gone. However, the transfer of those asset makes the introduction of the Drachma even harder, and to whom will those assets be transferred to? It’s blatant looting.

      • The ONLY way out of this for Greece is to default and go back to the Drachma. Due to the distortions caused by, for Greece, an over-valued currency and fiscal profligacy they are on a hiding to nothing anyway.
        The Greeks should have used less ‘Game Theory’ and more ‘Planning Theory’ As per ‘Links’ Schauble was more prepared for the Greeks to exit than were the Greeks themselves.

      • “But as always with the Left, they want social largesse, and somebody else to pay for it…”

        Yeah, no. Polls have consistently shown that the vast majority of Greeks want to stay in the Euro AND the EU. God knows why, after five years of this awfulness. Even polling asking those who voted No what they hoped to get out of the situation showed that what they wanted was a ANOTHER bail-out. What do you do if you’re a Greek politician with a populace in complete denial over what is happening?

      • The Greeks know – as bad as it is, its about to get a whole lot worse! As if a referendum would have made any difference – they should have been braver in 2010! The best option is to prostrate themselves in front of the French – and hope the Good Cop will try and make things happen… but I suspect the Bad Cop won’t let them.

        If you think Greece is bad today – come back in five years post Euro ejection. Mind you in saying that – the Russians will not let them fall that far. For that, the Greeks will remember their history (Vienna 1683 aside, when they fought along side with the Tatars)

      • “But as always with the Left, they want social largesse, and somebody else to pay for it…”

        And always with the right, they think that the risk of borrowing falls only on the borrower and that outstanding loans should be socialised at the first hint of any risk. Capitalism at its finest.

      • No one put a gun to the Greeks to borrow. Likewise, no one is forcing them to pay back their debts now… in fact the creditors want them to default – and get on with it. Everyone knows Greece will default – its either now or later.

        If you don’t like capitalism, then don’t get involved!!!! Its as simple as that. North Korea awaits! If you don’t have the money to pay existing debt back – no one is obligated to give you more.

        This is a great quote from David Zervos of Jefferies & Co (written June 17 – far before any other analysis you see these days):

        It is actually amazing that we have not seen any of the left-leaning party leaders from the rest of Europe running to Tsipras’ side as he truculently engages his paymasters. Where are all these European anti-austarians? Of course they are hiding from the Germans, hoping not to receive the same fate as Alexis. So there he sits, alone and under his last Soviet-held bridge, just like Hemingway’s Robert Jordan. He is waiting to cause just a little more damage before his time is up.

        In the end, there is no question that the Germans have executed a near flawless plan to humiliate and vilify Greece. The Greeks now stand as poster children for European profligacy. And they are being paraded through every town square in the EU, in shackles, as the bell tolls near the gallows for their leader. And to be sure, making an example of Greece is a probably the greatest achievement for the fiscal disciplinarians of Europe. Maastricht never had any teeth. But this exercise is impressive. It shows that fiscal excess will be squashed in Europe. The Portuguese, Spanish, and Italians are surely taking notice….

        Oddly enough, I actually think this has been the German plan all along. With no real way to ensure fiscal discipline through the treaty, they resorted to killing one of their own in order to keep the masses in line. It explains why Merkel took out Samaras when she knew a more hostile government would surely emerge in Greece. This was masterful political manipulation…”

      • Actually the Chinese have a great saying about this situation – “Kill the chicken to scare the monkey”…

      • drsmithyMEMBER

        But as always with the Left, they want social largesse, and somebody else to pay for it…

        No, they want social security, and everyone to pay for it.

      • When I first read that, I wasn’t sure if it was in the positive or negative – I think I will read it in the negative.

        The unpalatable truth for many is that a nation without the wealthy, is a poor nation. The trick is to take just enough of the rich, so they don’t jump off-shore, and the rest is trickery and mirrors and platitudes… for most, that latter works fine. To attempt the former in todays economic climate is asking for trouble. Wealth is too mobile these days – and there is an international market for it.

      • Kinda of fits my description of social democratic capitalism and is why I’d be surprised to see any long term uprising.

      • drsmithyMEMBER

        The unpalatable truth for many is that a nation without the wealthy, is a poor nation.

        Who is arguing for that ?

        The trick is to take just enough of the rich, so they don’t jump off-shore, […]

        What’s the problem ? Someone else will replace them.

        To attempt the former in todays economic climate is asking for trouble. Wealth is too mobile these days – and there is an international market for it.

        Constraining – or not – the movement of wealth is a policy choice.

  2. Brett Edgerton

    Would I be correct in saying that no European country has actually gifted Greece anything – that thus far any funds provided to Greece have been in the form of loans, and can thus be regarded as an investment on which the creditors are (clearly) insisting on getting repaid in full plus interest?

    (And these investments, by fellow European countries – thus their taxpayers – were actually a bail out of their own banks – thus were to help themselves by preventing their banks from becoming impaired)

    Is that the long and the short of it ?

    • fitzroyMEMBER

      Yep. Less money for Greek pensioners. The German plutocrats have already been paid

  3. It is now time for Greece to take a big breath, give the current politicians and the EU the flick, and start over. Some extracts from the link below, WW
    Their greatest nightmare was our success: were we to succeed in negotiating a better deal for Greece, that would of course obliterate them politically, they would have to answer to their own people why they didn’t negotiate like we were doing.
    The Eurogroup does not exist in law, there is no treaty which has convened this group.” It is a fairytale group that has the greatest power to determine the lives of Europeans. It’s not answerable to anyone, given it doesn’t exist in law; no minutes are kept; and it’s confidential. So no citizen ever knows what is said within. …

    http://www.newstatesman.com/world-affairs/2015/07/yanis-varoufakis-full-transcript-our-battle-save-greece

    • +1

      Its a jaw-dropping account of the crypto shit-strudle and anti-democratic farce that is the EZ and the ‘eurogroup’ (which truly doesn’t really exist in law.)

      Its dictates, however, are enforced.

      An important point the people on the streets should remember tomorrow.

  4. Schauble is 71 and believes deeply in austerity. Germany is hostage to a particularly retrograde school of economics called ordoliberalism. So his school of thinking goes over well in what passes for elite circles in much of Germany.

    Elites run most country’s as they are the major bond holders, their bias is what shapes or seeks ideology’s – mythology’s that best serve them, austerity is a form of gold standard for bond asset holders.

    Skippy… bonus question how many wars and conflicts have been proxy wars for bond holders…

    PS. this is what you get when you morph Locke and Hayek together….

    • Skip, listen to the interview with Yanis I’ve linked above. He maintains Schauble wants Greece out and a very austere, strictly controlled EU where sovereign governments are required to present all budgets for approval etc to ensure they conform to basically ‘Schaublellian’ or perhaps German criteria. The expulsion of Greece (and any subsequent difficulties it faces) is desired to ensure compliance to EU edicts particularly from the southern EU countries.

      Now I don’t know if any of this is true, but this is the view of Varoufakis.

      • Yves Smith
        July 13, 2015 at 4:38 am

        Syriza was far more a confused exercise in optics than most of its supporters seem able to recognize.

        Despite its bluster, Syriza had VOLUNTEERED to continue austerity as early as February. Varoufakis offered, under no pressure, and proudly, that Greece would always run a primary surplus. That is contractionary in a healthy economy and disastrous in a deeply depressed one. Bill Mitchell has estimated that Greece needs to run primary deficits of 10% of GDP for a while to get back to health.

        Moreover, Varoufakis committed to continue to pay the creditors, when defaulting when the government still had cash would have left Greece with more runway and more options. Instead, they stripped every government coffer bare, including borrowing against them, meaning raiding pensions, even when they said they were preserving them. And they lost credibility with the creditors by not being serious about collecting taxes.

        All Syriza stood for was trying to shift the burden of austerity more onto the wealthy, as opposed to ending it. That would still have been an important accomplishment but falls well short of what they had promised. But even then it is not clear how real they were. For instance, one sore point with the Samaras government was a program to collect back taxes. It wanted to let delinquents pay in installments. That’s not unreasonable. But the Troika wanted the top 6500, all of whom were rich and owed over 1 million euros each, to be exempted. The old government refused.

        The program was not implemented and the new government under Syriza went to put in place their version of it. The Troika said fine but repeated its demand that the top 6500 be exempted. Syriza also rejected the request. Syriza similarly failed to go after the easy-to-get at oligarchs, the ones with media licenses, where it could have suspended or cancelled them for tax evasion. In its proposals, the government similarly has refused to cut military spending as much as the creditors have requested. Syriza also handed out plum patronage jobs just like predecessor governments, and flew government jets at huge cost to many of its meetings rather than flying commercial. The last move really pissed off other Eurogroup ministers.

        So as much as the creditors are dreadful, Syriza did not walk its talk.

        Skippy…. as a negotiators Yanis and Syriza were clearly out of their depth, as such they have magnified the suffering the people of Greece will endure with setting back the push against the hard right by a decade at least. That will not only effect Greece but the rest of the periphery not to mention have global ramifications. You should be dancing in the street 3d1k, they threw themselves under the bus.

      • But the Troika wanted the top 6500, all of whom were rich and owed over 1 million euros each, to be exempted. The old government refused.

        How can any self-respecting government agree to such an exemption though? Especially when the Troika were more than happy to allow the smearing of the Greek people as all tax-dodgers and layabouts, meanwhile allowing the real culprits (their mates in the ‘elite’) to continue to get away with it for their own benefit. You can bet your ass those tax-dodged Euros aren’t still sitting in Greek banks.

        Syriza, despite putting on a hard face about rejecting austerity also had a mandate to stay in the Euro. They were caught between a rock and a hard place, and with zero bargaining position. It’s no wonder that even an expert on game theory was unable to get a better deal, when the other party holds all the cards.

      • @Jason…… Game theory is crap and if Yanis thought observing Valves team fortress 2 market player interaction wrt hats ,would lend insight to how to negotiate with ridged ideologues with more bargain power one, has to question their sobriety.

        Skippy…. its more similar to Obama’s antics, completely threw is base under the bus whilst publicly complaining about Rep, yet staffed his entire cabinet with the same people that caused the mess in the first place. Now he’s seeing how close he can get his private library to Milton’s statue, and Yanis is off on his bike w/ leather jacket, could not even vote.

      • 3d1k

        Germany keeping Greece in the EURO maintains a lower currency for German exports. However the longer game is to drive Greece out while maintaining that lower currency, at this point France will be crippled and Germany will simply remove itself from the Euro and revert to Deutsche Mark.

  5. ….including the transfer of 50 billion euros in state-owned assets abroad? War reparations I presume.

  6. I disagree. The headline should read “Schauble chooses violence”. Greece, either its people or its sovereign government had no choice whatsoever.

  7. You guys are pretty negative, it’s like an orgy of negativity. Bunch of whingers like the poms !

    p.s Greece is prob screwed

    • FWIW, I saw a figure of 500,000 Greeks emigrating in the last 5 years, which is pretty substantial for a population of ~11 million, especially if they are younger and more capable citizens.

    • The population demographics are similar in most of the developed world if you discount temporary immigration, i.e. the permanent populations are ageing, and temps are used to support the tax base, and replace the coming exit of the baby boomers from the workforce; while having limited or no access to state resources or rights (disenfranchised).

      Greece is not the only nation in the EU or world experiencing youth and working age emigration, although in the EU the lines have become blurry between loyalty to ones’ nation and/or EU/Europe, it’s not clear cut. For example, and it’s true in Oz, many 20 somethings have far more experience of life, work and employment than older generations, and if/when they return home they can introduce innovations, new ideas and many other skills.

      This in itself is a threat to the nation based elites whether political or employment as youth and working age with new ideas and experiences are a threat to the status quo.

      It’s also exemplified in nations begging to join the EU, but then once they are in the ‘club’, national politicians and media start attacking the EU, you know xenophobia to stir the masses up, even if the same politicians are both national and Euro MPs……. the same politicians would be palpably terrified of these more savvy and experienced youth/work age coming home to unemployment, and hitting the streets, or worse, becoming involved in politics…..

  8. This deal reminds one of the treaty of Versailles, The Irony that it is Germany imposing this is awe inspiring. But People don’t learn. For a good account of the process of destroying a country and bringing a mad man to power to restore order I can highly recommend Keynes’s “The consequence of the peace”. I could not read the whole thing as it was to depressing to see how the ego and pure greed of a few arseholes set in train a world war that would kill millions.

  9. Well my optimism was misplaced.
    It seems the people suggesting that Tsipras really went to the referendum hoping for a Yes vote.
    He has totally surrendered, it’s really disgraceful.
    Clearly Syriza will rebel strongly but I don’t know how the numbers work out in the parliament, maybe he will be able to pass this criminal agreement. I hope not.
    This move will destroy Tsipras or both Greece and then Tsipras

  10. Meanwhile, just heard Joe Hockey say on TV that momentum is building in the Australian economy…