Greek humiliation deepens

The IMF can see just how bad is Greek humiliation, from Reuters:

Greece will need far bigger debt relief than euro zone partners have been prepared to envisage so far due to the devastation of its economy and banks in the last two weeks, a confidential study by the International Monetary Fund seen by Reuters shows.

The updated debt sustainability analysis (DSA) was sent to euro zone governments late on Monday, hours after Athens and its 18 partners agreed in principle to open negotiations on a third bailout program of up to 86 billion euros in return for tougher austerity measures and structural reforms.

“The dramatic deterioration in debt sustainability points to the need for debt relief on a scale that would need to go well beyond what has been under consideration to date – and what has been proposed by the ESM,” the IMF said, referring to the European Stability Mechanism bailout fund.

European countries would have to give Greece a 30-year grace period on servicing all its European debt, including new loans, and a very dramatic maturity extension, or else make explicit annual fiscal transfers to the Greek budget or accept “deep upfront haircuts” on their loans to Athens, the report said.

Germany is insisting on IMF involvement in the bailout but it may actually walk away, dealing it a huge credibility blow, from the FT:

The International Monetary Fund has sent its strongest signal that it may walk away from Greece’s new bailout programme, arguing in a confidential analysis that the country’s debt is skyrocketing and budget surplus targets set by Athens cannot be achieved.

“Greece’s debt can now only be made sustainable through debt relief measures that go far beyond what Europe has been willing to consider so far,” the memo reads. Under its rules, the IMF is not allowed to participate in a bailout if a country’s debt is deemed unsustainable and there is no prospect of it returning to private bond markets for financing. The IMF has bent its rules to participate in previous Greek bailouts, but the memo suggests it can no longer do so.

Cop that. Other tensions are rising. Bridging finance for Greece is proposed to come from the obsolete EFSM but that drags in Britain and it is bucking:

According to an opt-out negotiated by David Cameron with EU leaders in 2010, the fund in question – the European Financial Stabilisation Mechanism – could not be used to rescue eurozone countries after June 2013.

At the time, the PM declared he had a “clear and unanimous agreement” from Brussels. But the Commission seems to want to trample all over Mr Cameron’s big EU victory. They are considering the EFSM, alongside some other plans to release ECB profits, or negotiate bilateral loans, to keep Greece from bankruptcy until at least September.

The EFSM works by using funds from the EU budget as collateral for lending. The UK pays around 14pc, exposing the Treasury to around £850m of liabilities to provide Greece a bridging loan of €8.6bn. Despite the UK’s opposition – the Chancellor could still be out-voted on the matter through a qualified majority vote system.

Greek domestic politics is heating up as well, from Reuters:

Comparing the challenge facing the government to the Gordian Knot of mythology that was impossible to untie, Interior Minister Nikos Voutsis was nevertheless confident that Tsipras could muster enough votes in parliament.

…”I’ve taken the decision, this is a tough third bailout and I will not vote for it,” Despoina Charalambidou, a deputy parliament speaker and Syriza lawmaker, told Vima FM radio.

…Another obstacle could be parliamentary speaker Zoe Constantopoulou, who is key to the logistics of the vote and has been one of the creditors’ most ferocious critics. Tsipras could try to force her out through a no-confidence vote but that would eat up precious time and political capital for the reform bills.

“The government finds itself in quicksand after the deal with creditors,” the centre-right Kathimerini newspaper said.

“Mr. Tsipras needs to solve a difficult equation as dissenters on Wednesday’s vote may reach or exceed 40,” it said. Tsipras needs 151 of 300 lawmakers to pass the reforms and with the votes of his own party and allies theoretically has 162.

Tsipras himself is feeding the flames with outrageous statements all day:

  • GREEK PM TSIPRAS SAYS I SIGNED I DEAL I DO NOT BELIEVE IN BUT I’M WILLING TO IMPLEMENT AND WILL ASSUME RESPONSIBILITIES
  • GREEK PM TSIPRAS SAYS LENDERS GIVE A MESSAGE THAT IN COUNTRIES UNDER A BAILOUT THERE IS NO POINT IN HOLDING ELECTIONS

As Germany should know from its own history, humiliating a people does not usually end well.

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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Comments

  1. The troika is in absolute la la land if they think the demands on Greece are in any way feasible. I find it astonishing there has been no mention of the dire situation of Greek unemployment. Tax increases and gov expenditure cuts in the face of 1 in 4 out of work. The tax base is shot. The demands are absurd.

    • Josh MoorreesMEMBER

      I’m pretty sure they didn’t expect Greece to accept this deal. I suspect they made it so tough so that they would rather leave the EU. Imagine their glee when Greece agrees to become a debt serf vassal state to be sold of piece by piece to and the bones picked clean just to send a clear message that you need to do what you’re told by germany

  2. StomperMEMBER

    Has anyone outlined the end game under the new agreement? Is it even possible that Greece can get to surplus or even reduce debt?

  3. Humiliating a people;
    Spending foreign money while regarding tax as theft and not paying any;
    Electing successive governments who share your views about tax and regard civil responsibility as a license to print..
    No, none of these policies will end well.

      • From your observation DE:
        ”What they need to do is address their competitiveness versus other European nations so that their current account is turned around. To do this while staying in with the Euro will require them to significantly adjust their national average wage downwards, which will mean they will not be able to afford to pay back the accumulated debt.”

        We all buy cheap goods that result from low comparative wages. Evolution in action. Love her or hate her, Thatcher was right on the ball when she observed that socialism works just fine until you run out of other people’s money. Where are we all going now that money doesn’t flow out of the ground? We will want so much, we will contribute too little. Perhaps we will rename ourselves “New Greece”.

      • And … deflation caused by the debt reacts on the debt. Each dollar of debt still unpaid becomes a bigger dollar, and if the over-indebtedness with which we started was great enough, the liquidation of debts cannot keep up with the fall of prices which it causes. In that case, the liquidation defeats itself. While it diminishes the number of dollars owed, it may not do so as fast as it increases the value of each dollar owed. Then, the very effort of individuals to lessen their burden of debts increases it, because of the mass effect of the stampede to liquidate in swelling each dollar owed. Then we have the great paradox which, I submit, is the chief secret of most, if not all, great depressions: The more the debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip. It is not tending to right itself, but is capsizing.

      • MJV,

        This pertains to your comment, tho is a response to a Hillary speech –

        MRW
        July 14, 2015 at 2:43 pm

        Well, that was some tour de force, Lambert.

        The bottom line is that she doesn’t know what she’s talking about. She doesn’t understand how the federal economy works. Period. Her husband road into DC as the ex-governor of a state where he proudly balanced the state budget, and rightfully should have. Mrs. Clinton retains that mindset. Greenspan and Rubin met with her husband two weeks before he was inaugurated and told him there wasn’t enough money in the federal kitty to enact his social programs—we were ‘running out of money’—so Clinton should just let the ‘free market’ handle the economy, and the hayseed fell for it. [Adam Curtis has Rubin on tape describing this.] Greenspan had been chair of the Fed at that point for five years. Either he lied to an incoming president—treasonous if said to an inaugurated president—or he had no business being anywhere near the Federal Reserve.

        I would like to see a female president but this isn’t the one. She’s smart, but she doesn’t know the basics of the office she’s “fighting” for.

        BTW, this was a great line:

        Democrats always “fight for.” They very rarely deliver.

        Reply ↓

        MRW
        July 14, 2015 at 2:56 pm

        Just to clarify, for anyone who is new to this blog: the US federal government cannot run out of money. It issues its own currency. State and local governments can run out of money because they need income to survive, just like businesses and households. State and local governments, businesses, and households use the currency; they can’t issue it themselves.

        Mrs. Clinton does not understand this, so she is incapable of understanding the enormous implications of what the federal economy can do to serve the people it is meant to serve.

        http://www.nakedcapitalism.com/2015/07/clintons-speech-on-the-economy-wheres-the-beef.html

      • notsofastMEMBER

        MJV,

        “The more the debtors pay, the more they owe.”

        You have summed up the way the situation has been set up in relation to Greece nicely. The same is true for Australia. When Australia comes to try to pay down its massive foreign debts it has incurred through its big banks in creating its housing ponzi it find that the debts cannot be paid either.

      • Ronin8317MEMBER

        What’s the interest rate in EU right now? How is that not printing money? However Greece is not getting any of it because they have no influence.
        The entire concept of EU is sold to Greece on the lie that Greece will become a rich country by being part of Europe. The politicians borrowed foreign money and gave the Greek people a few scraps, while enriching themselves enormously. It is very similar to manager in a company borrowing money and then bank it as profit. By the time the loan is due, the CEO would be long gone after collecting the bonus. The Greek people however still cling to the naive notion that ‘Europe’ will somehow save them. If they truly realize the truth, they will storm parliament and put every politician to the guillotine.

      • @skippy

        That’s based on the assumption that physical notes will remain valid. The petro-dollar system is a cheat, and eventually it will crash. When that happens (not a matter of if, but when), it would be hard to say that the American federal government can continue printing money when the value of that said printed money would be naught. There’s a limit to how much America can f*** the world over before they’ve had enough.

      • “There’s a limit to how much America can f*** the world over before they’ve had enough.”

        It seems to be an awfully high limit though.

      • @Wh1te,

        Your belief that FRN are attached to a single commodity is where your line of reasoning goes off the rails, only taxes and legal tender laws give FRN value, projecting monetarist beliefs where they do not apply will only result in inaccuracy. This is complicated by your additional brief that America is printing money which will lead to hyperinflation, the hyperinflation manics seem to forget everything is deflationary at the moment and historically hyperinflation is a direct result of trades shocks in the first case w/ internal financial demands creating a death spiral e.g. no trade shock no hyperinflation.

      • @skippy

        Um, no? Hyperinflation has several causes including a loss in confidence in the currency (be it from factors not limited to political turmoil and social conditions etc…), a situation where the currency is being mass printed – hello QE (which in theory would cause higher inflation in the long term), internal productivity slowdowns AND external trade shocks. The current deflationary state is contrary to globally low interests rates and the fun game of hot potato we are currently engaged in. We have an aftermath of the GFC, lower perceived pricing power, subdued wages and arguably the largest factor is simply that monetary policy is having little (or for those that still believe – delayed) effects. Also, it is not deflationary everywhere, Japan is currently experiencing inflationary issues due to the lack of proper wage growth.

        And for the record, I never intended to imply that hyperinflation would occur due to fed’s mass printing of notes (If it appeared that way, then maybe you just have something against them), I simply took a jab that sustaining their incredulous debt through more printing will eventually bite back at them – it has the ability to morph into hyperinflation – but more importantly I was hinting that mass printing of the dollar to devalue themselves threatens their own position as the reserve currency.

    • notsofastMEMBER

      “Spending foreign money while regarding tax as theft and not paying any;”

      Well that could apply to the multinationals and the very wealthy in Australia…

      When ever it is brought to Joe Hockey’s attention he puffs and blows about it and when ever he is forced to do something about it he brings out the wet lettuce leaf…

    • @ rob barrat. At what point does the lender take responsibility when they have known with almost certainty for some time that they have been lending money that will not be repaid?

      Greece is humiliated because they have allowed it to be so.

      • notsofastMEMBER

        JC,

        The answer in todays world is that the lender takes no responsibility. Worse than this when TSHTF they get the opportunity to buy a countries best assets at rock bottom prices and impose economic slavery upon it masses.

      • If they want to riot, then they simply need to be prepared for more pain. Rioting wont help them. If they seriously default, then we might see another case like Argentina and Paul Singer. Do you want some rich hedge fund repeatedly bringing a nation to its knees?

  4. Hmmm, if the IMF are getting cold feet about bring a party to this farce that says something.

    Now that people are more generally aware that the IMF bent its own rules back in 2010 to do the creditors a favour it needs to tread carefully.

    The IMF needs at least a veneer of credibility if it is to do its own version of “God’s work” moving forward.

    Would be a major development if the Troika becomes the Duoika.

    • Yes Pfh007, I find mealy mouthed advice from the IMF a bit hard to stomach considering the truculent shrieking from that posturing half wit Lagarde. It seems the IMF are trying to wash their hands of the sorry mess and take none of the responsibility for perpetuating it in the first place. Maybe Obama had a word with his World Bank cronies and suggested the IMF softens their view while he seeks a deal with Iran on nuclear weapons production. I questioned where the UK was in all of this a week ago and it’s interesting to see how quickly they come out of the woodwork when their hip pocket is being fingered.

      • A tour de force, sir!!

        “mealy mouthed advice from the IMF a bit hard to stomach considering the truculent shrieking from that posturing half wit Lagarde.”

      • Nice rhetorical Skippy.
        Haven’t checked for a while now but US, Germany, Japan, U.K. and France about 40 – 45% ? But yeah, point taken.

    • Plenty of IMF chat via the UK Telegraph Live link above. The whole thing is a farce.

      As I see it, the question is … when will the Greek people take back control ?

      Its unlikely to be very pretty getting to that stage.

  5. moderate mouse

    Clearly the latest chapter is a totally unworkable deal, again designed to keep creditors from wearing any of the fallout. It is always framed as ‘reckless borrowing’ on Greece’s behalf that created this situation, and the German position appears to be that the Greek people must be punished for such recklessness. Where is the talk of ‘reckless lending’? Why should creditor’s money be guaranteed in all circumstances? If I walk into the pub on Friday night and start handing out the $50 notes to anyone who wants them, should I be guaranteed to get my money back? Of course not. But this is exactly the mentality that has taken hold in the world of international banking. All recent economic crises have this moral hazard at their heart – creditors lending excessively in the belief that their risk is nil. Germany needs to accept that such lending brings its own risks, and demonstrate that to the wider world by negotiating a haircut on the debt. That is the true lesson that must come from Greece – lending is not risk free.

    • Aren’t there several lessons MM?
      1) You won’t win by humiliating the debtor;
      2) Lending is not risk free
      3) If you borrow money to start a small business – good luck.
      4) If you borrow money to buy another crate of Ouzo – watch out..

      • Gegenstandoderkonzeptdasalswirtschaftseinklägerwahrgenommenwerdenkann.

        “They will say we are subsidising scroungers, lounging in cafes on the Mediterranean beaches. Monetary union, in the end, will result in a gigantic blackmailing operation. When we Germans demand financial discipline, other countries will blame their financial woes on that same discipline, and by extension, on us. More, they will perceive us as a kind of economic policeman. We risk once again becoming one of the most hated people in Europe.”

        Arnulf Baring, 1997

      • Though I confined myself to identifying that there are good and bad lending AND borrowing practices, Ronin and others have highlighted the fact that one of the risks in both is that the lender may act through or be represented by a third party who collects on the transaction without incurring any risk, and that this is also true of the borrower.
        As you and others have pointed out 3d1k, there is also the gulf of difference between the German perception of the world and the Greek perception. Both have their strengths and weaknesses, and it only needs enough of a mix of bad corporate practice and too high a set of expectations to end up with the Greek (and other) lending imbroglios.

      • @Rob,

        “We agree that retail banking is not what it used to be. However, there are many issues missing from your account. Including them considerably changes the picture of how we got to be where we are and what might be done.

        Retail lending was never a terribly prestigious activity in banking institutions, but when banks were regulated as utilities, they played an important and recognized role as important anchors of communities, and that alone was a lure when society was less stratified than it is now. The branch manager was a respected position, and for many, that was ample reward when communities were more stable than now. One would hardly call these old school bankers creative or terribly talented. Internally, retail branch managers where were the middle-of-the-pack graduates of two-year credit officer training programs wound up. The best graduates of those programs got MBAs and went to Wall Street. In the late 1970s, a good 10% of the incoming MBA class at Harvard came from big bank credit officer programs. The best of the ones that remained at banks were put on big corporate lending. And the other route to prestige and power at a bank was through rising in the ranks. Power and prestige was directly related to the number of people you had working for you.

        This all started breaking down in the early 1980s as the banks began their long push for dereglation, which was driven in large measure by envy of investment banking profit margins and profits. That morphed in the 1990s and 2000s into envy of hedge fund profits. I saw this first hand, since I was hired into McKinsey to help with this effort and worked extensively on the Citibank account. As of the early 1980s, as testament that this train had already left the barn, the second highest paid person at Citigroup was Mark Kessenich,the head of the money markets division. This was seen as scandalous within Citi as it upset the traditional bank pecking order. One of Kessenich’s most important direct reports was Paul DeRosa, who can lay claim, but doesn’t, to having invented the swaps market (he does take credit for having invented caps and collars). DeRosa trained a generation of swaps professionals, who in large measure decamped to other banks and investment banks. By the later 1980s, Kessenich and DeRosa were running their own hedge fund, Eastbridge Capital.

        By the mid-1980s, the increased role of bond markets in credit intermediation, and the high profits resulting from the strong scale factors in that business (network effects and high minimum scale requirements) was pressuring both investment banks and commercial banks. Even McKinsey was losing out in campus recruiting and facing significant losses of mid-level staff, which put the firm in a funk. McKinsey was pushing securitization (“you’ll be on this bus or under the bus”) as having insurmountable economic advantages, and regulators also looked favorably upon it, seeing it as making more efficient use of bank capital.

        The move towards predatory practices also started much earlier than you indicate. For instance, McKinsey did what amounted to the first tricks and traps study, a study on “pricing” checking services. By tweaking features and introducing some “gotchas,” the McKinsey study increased the profitability of the checking product by $30 million a year, a big number in the 1980s. Needless to say, the firm started selling similar studies to other big bank clients. Banks adopted this line of thinking and brought it in house. This is certainly a use of talent, but is it socially productive?

        Securitization changed the role of bank branches radically. It no longer made sense to train credit officers to make local decisions, since loan products needed to be standardized to facilitate their bundling and sale to investors. The main branch lending products, consumer mortgages and credit cards, were being significantly securitized by the late 1980s-early 1990s. Even for the old branch managers who still had the skills to do credit analysis and character based loans had little scope to do them. When those higher-skilled branch manager retired, they were replaced with retail store managers. The branch was no longer the nexus of credit decisions. They were replaced with score-based lending, reviewed and approved elsewhere in the retail division.

        Thus while it is true that retail banking has been de-skilled, the economics of the industry simply won’t support the old high-touch lending model for small loans. I find it perverse that you decry regulations when it was regulations that assured banks high enough profit margins to allow banks to play the role you’d like to see them play. And I don’t see how you roll back securitization to go back to high-discretion lending. As Amar Bhide (professor of entrepreneurship as well as former proprietary trader) has written, banks aren’t in the business of small business lending and haven’t been for some time, despite the Fed’s bizarre talk of low interest rates supposedly stimulating small business lending. Small business lending is in fact either collateralized (against business real estate, to finance equipment, etc) or credit cards/small limit credit lines that are personally guaranteed by the business owner (and therefore based on his FICO).

        As Georgetown Law professor and securitization/payment systems expert Adam Levitin added via e-mail:

        She’s got a short-sighted view of retail banking issues. Forget misselling and underwriting fraud. What about all of the credit card abuses? That was all “innovation” in card pricing. It wasn’t boring. It was Andrew Kahr being the Smartest Guy in the Room. Consumer products ought to be boring—there really isn’t a need for bells and whistles. The overuse of option-ARMs wasn’t because of low margins. It was because it was profitable, period. It wasn’t the result of lack of talent.

        There is a different problem with retail banking: it’s become automated, and the automation is often very stupid. I’m doing some expert work in a set of class actions about property inspection and BPO fees on mortgages. The frickin’ contract says that the borrower can be charged if the fees are “reasonable and appropriate” for protecting the lender’s interest in the property and only funds actually disbursed. The problem is that property inspections and BPOs are ordered on an automated basis that doesn’t account for whether they are necessary, and some of the servicers do it in-house and don’t actually disburse funds, but they charge for them nonetheless. Smart automation would account for that, but it would require using a vendor that actually hires someone with real expertise in the issue, rather than the kind of low-life attorney that is going to be working for LPS or its renamed off-spring. Automation doesn’t work or jobs that require discretion. Most retail banking doesn’t require discretion, but the industry has tried to automate everything.

        Finally, if we just had bad retail banking, we wouldn’t have had a financial crisis. The problem is that retail banking is now financed by capital markets through securitization, so when bank A makes bad loans, it infects the whole market. It’s not a simple as bank A failing. And given that securitized paper is used as a money substitute (as in repos), bank A’s bad loans threaten the money supply. And then there’s a real financial crisis.”

        Skippy… as such the industry bribed, via lobbyists et al, the political, to incentivize control fruad w/ a smoke screen provided by some schools of economics… risk agency after that is moot….

      • Tmarsh,

        Self inflicted ignorance is how some like to operate, tends not to screw their bias, but, voters is stupid and boomers have stolen all the wealth.

        Skippy… how about self imposed ignorance is a condition to entering the Darwin Award contest.

        PS. TL:DR the glibertarian response for I have no answer to that, reality is to confusing, must believe my indoctrination at all costs.

      • The Russkies to play geopolitical checkers by buying Greece wholesale helping Greece out.

        It reminds me of an ad. GRAND SALE GRAND SALE GRAND SALE (I know the ethnicities are different)

      • The Duchy of Moscovy was born out of the Byzantines, and there have the same orthodox links.

        Putin can screw the Gopnik for a little bit more to make the Greeks feel loved and boom, the Black Sea looks a little bit more vulnerable to NATO.

        If this happens, we may as well hold the winter Olympics in Sochi every 4 years, what’s Team Progress going to do? Twitter ban Putin 🙂

  6. Greece should move their goverment to the island of Crete. Then hold a vote for independence from the Crete goverment.

    Greeks win independence from Crete, new currency, new goverment forms, new everything and the island of Crete declares bankruptcy.

    A few years later the Republic of Greece signs a deal to join the euro zone. 😉