Delightful News Out of Greece This Morning (for bankers)

Traders in New York this morning were greeted with this happy headline from The Wall Street Journal:

US Stock Futures Higher; Buoyed by Greece

greece austerity protestYes indeed, the Dow Jones index is set to open at least 70 points higher because the Greek parliament approved the additional austerity measures demanded by the European Union, the European Central Bank, and the International Monetary Fund. In exchange for €130 million in a second bailout by the “Troika”, as the three lending institutions are called, Greece will have to cut its minimum wage by 22% and the government will have to lay off an additional 150,000 workers. This is in a country that is in its fifth year of recession, with an official unemployment rate of 21%. Business has virtually collapsed, with many private sector companies on the verge of bankruptcy. The health system is so starved for funds that a bacteria resistant to all medicines is raging through hospitals, forcing the chronically ill to decide whether to even risk seeking professional care. Poverty is reaching extreme levels and is well-entrenched among what used to be the middle class. Children are sent to school so hungry that they are fainting in the classrooms. As of last night, the crowds that were storming through Athens and other large cities no longer were content to throw rocks at the police; Molotov cocktails were used to set at least forty buildings in Athens on fire. The police in Athens, facing crowds estimated from 80,000 to 100,000 people, were forced off Syntagma Square, and appeared to have run out of tear gas. Journalists described the business center of Athens as a war zone. The country is slipping into social disorder, if not anarchy. But stock markets in Europe were up today on the happy news that the Greek parliament approved the additional austerity measures.

One reason equity traders were so delighted with the news out of Greece is because 80% of the bailout money isn’t going to Greece at all; the German and French governments, which are the puppet masters for the Troika, have required that most of the money be sequestered in a fund kept outside of Greece, and used to pay the banks and other bondholders of Greek debt. The bailout, in other words, isn’t really fresh money; it is to be used to allow Greece to make its next principal and interest payment on its debt. Left to its own devices, Greece is out of cash and clearly would have to default on this payment.

A second reason for joy is that most professional traders don’t like Greece (the borrower – they love to vacation there). Most European politicians don’t like the Greek government. Wolfgang Schauble, the Finance Minister for Germany, told a Reuters reporter this morning that “Greek promises on austerity measures are no longer good enough because so many vows have been broken and the country that has been a ‘bottomless pit’ has to dramatically change its ways.” It was Germany that insisted that the Greek parliament approve the new austerity measures, despite the political risk in doing so, before one additional euro would be paid out.

Why don’t the Greek politicians just call it a day and default, pulling themselves out of the euro at the same time so that a reinstituted drachma can give the country a devalued currency with which to build up an export sector? A good many Greeks would like to know the answer to this, since watching the country burn down around them doesn’t seem to impress these politicians. The ostensible reason given by the government for proceeding with one austerity program after another, thereby avoiding default, is that the economic privation resulting from default would be unimaginable. Greek economists are quick to point out that Argentina ten years ago went into default and never suffered the social breakdown Greece is experiencing before default. The more popular reason the public tends to give is that the politicians are all corrupt; there has been no cut in the pay for members of parliament despite several rounds of cuts in the minimum wage. Perhaps a more subtle way of explaining this is that the Greek politicians always liked being part of “Europe”, as members of various commissions in Brussels, and as equals to the Germans and the French. The problem now is that there isn’t one politician in Greece who doesn’t feel they are being forced into this situation by the Germans and the French, who are acting very superior to the lazy and profligate Greeks.

Germany in particular is very unpopular now in Greece. The New York Times quotes one 82 year old women out protesting in Athens, Stella Papafagou, a survivor of the Nazi occupation of Greece during World War II:

We’ve fought several times for liberation,” she told the New York Times. “But this slavery is worse than any other. This is worse than the ’40s. I would prefer to die with dignity than with my head bent down.

This is one reason why Greece’s situation is not comparable to that of Argentina. Greece is tied by long and sometimes difficult relations with its European neighbors. As a member of the euro, Greece has the potential to break up the single currency experiment, opening the door to other countries seeking a competitive foreign exchange rate to help overcome chronic trade deficits. These countries, of course, won’t admit to that. Portugal, rumored to be next on the list to need a bailout, has been very quiet about the Greek situation. A German official even said nice things about Portugal last week, though he left no doubt there are economic troubles ahead. Yesterday the Italian government rushed out a press statement letting everyone know they are not like Greece at all. Except everyone knows they are exactly like Greece. They have the same bloated public sector filled with union members who think five hours of labor constitutes a hard day’s work. They are running low on cash to be able to pay their government debt. The only difference with Greece – and it is a big one – is that La Dolce Vita has not come cheap; Italy has the third largest government debt in Europe, dwarfing Greece’s problems altogether.

The Portuguese, the Italians, the Spaniards, the Irish – they all must be watching the Greek situation closely, and asking themselves whether it is really worth going down the road of austerity just to keep bondholders and equity traders 100% happy. Is a collapse of the country worth it all, especially since the worst scenario under default is a collapse of the country, followed by a recovery because now the country would be in charge of its own currency and its own destiny. See Iceland to understand how this can work out with far less social pain.

For now, stock markets are happy because they get their periodic injection of heroin – oops, make that “liquidity” – to keep the game going. The game is the one we have all lived through our whole lives – the one where capitalism continues to grow by taking on more and more debt, until now every country is at the point where only the government is big enough to take on the enormous amounts of new debt necessary to keep paying principal and interest on the old debt. At least some countries are: the United States, the UK, Germany, France. Greece of course lost that privilege several years ago, and now even big borrowers like Italy are allowed into the markets only for very short term maturities.

The game, in short, is about over, choking to death on too much debt, kept on a resuscitator by politicians and central bankers who know the public has no way to stop them from raising trillions of dollars or euros with new bond issues. Only the market can stop an out-of-control debtor. Greece has found that out, Italy and Spain and Portugal are close to finding that out, and the UK and the United States are on the list, being no more virtuous than the Greeks. Once the government can no longer borrow, default in some form is inevitable, and austerity follows. The Greeks have austerity handed to them by the Germans; everyone else will be able to choose their own forms of austerity, as different economic and social forces fight with each other in a country that has run out of borrowing capacity and must live off the taxes it is able to raise.

If the stock market had a long term view, it would think about these things. It would look at Greece as a combination horror story and warning sign. Instead, the stock market lives for the day only, and for now the debt binge continues, and the fix of easy credit is being pumped into the financial system once more. Let the celebrations continue.



debt burdens

"…paying principal and interest on the old debt…"

"We" don't pay principle on our old debt - the bondholders still have possession of an asset (T-bills) that is cash-equivalent. It can't be used to purchase consumer goods directly but is available for corporate transactions and is easily convertible to cash.

"We" don't "pay" interest on the debt either since the interest is a government balance-sheet accounting entity and that payment comes from new money creation (from the stock of numbers that exist in the universe, i.e. infinity).

I think I see your point

Under normal circumstances, the government meets its interest obligations by issuing new debt rather than raising money through taxes. For something like a zero coupon bond, principal is not paid at all until the final maturity of the bond. Theoretically, if the bond was "rolled over" a new one would be issued so that the net effect is that bond obligations never are extinguished, they just get melded into an ever-growing pool of indebtedness. That sounds, of course, like a Ponzi scheme.

In practical terms, there are government bonds which pay principal and interest every six months. The holder of the bond sees these payments flow into their account. If they do not wish to participate in buying a new bond on the roll-over date, they will see their particular holding extinguished. I've owned US notes through Treasury Direct and certainly seen some of these liquidated by maturity, with the principal paid in full (irrespective of whether I bought it at a premium or discount I still get the amount of principal on the note paid to me), and with interest also paid along the way.

That's just looking at it from the investor point of view. From the government point of view, since the pool of debt is getting larger by the day, the retirement of old bonds is a mechnical thing that only counts as an offset to the amount of new money brought in through further debt issuance.

Politicians Sold the People Out

I like the way Iceland had been dealing with there issues via referendum. They are already turning it around but maybe their problem wasn't so bad to begin with.

It seems the Greek people have been sold out.

The austerity will lead them into long term recession or even depression. Bankruptcy may do the same thing but for different reasons and at least that way the internal economy will work such as tourism etc.

Way I perceive it all

There is a bunch of events happening right now. The IMF is denying funds, the Greece prime minster is rushing to Brussels to "secure a bail out", more cuts, more delays. I think we've been say from day one to have an organized default, orderly.

Europe (no more colonies) feeds on itself

Sound familiar?
“The ostensible reason given by the government for proceeding with one austerity program after another, thereby avoiding default, is that the economic privation resulting from default would be unimaginable.” Brings to mind Paulson selling TRAP to the American politicians.

More interesting is a phrase used by a RT news commentator –“Financial Occupation”. They pointed out that Europeans have for centuries extracted wealth from third world countries by physically occupying the country. Now Europe is ‘feeding on itself” Greece is nouveau third world with the rest of the PIGS waiting in the wings. But, they don’t need armies to get the wealth. The politicians are the instruments of financial extraction. Who sold the bonds in the first place and who decided what to do with the borrowed money? Certainly, not the people in the streets!

Credit Default Swaps, by nation, U.S. Exposure to Greek Debt

Last tally I heard on actual bond holdings, exposure by U.S. banks was about 29%. Dealbook has the most recent tally:

Five large American banks, including JPMorgan Chase and Goldman Sachs, have more than $80 billion of exposure to Italy, Spain, Portugal, Ireland and Greece, the most economically stressed nations in the euro currency zone, according to a New York Times analysis of the banks’ financial disclosures.

They say there are $602 billion in CDSes associated with PIIGS (doesn't list the breakdown).

On CDSes, Business week from last November:

As the European financial crisis worsened during the first half of 2011, U.S. banks increased sales of insurance against credit losses to holders of Greek, Portuguese, Irish, Spanish, and Italian debt. Guarantees provided by U.S. lenders on government, bank, and corporate debt in those countries rose by $80.7 billion, to $518 billion, according to the Bank for International Settlements.

BIS doesn’t report which firms sold how much or to whom. Almost all of those guarantees are credit-default swaps, according to two people familiar with the numbers who asked not to be identified because they weren’t authorized to speak. Five banks—JPMorgan, Morgan Stanley, Goldman Sachs, Bank of America, and Citigroup — write 97 percent of all credit-default swaps in the U.S., according to the Office of the Comptroller of the Currency.

To me, it's obvious Greece should default, leave the EU and hit the reset button or do what Iceland did. Iceland is now just humming along. They have high inflation and their economy is growing by leaps and bonds. I guess that's what happens when a nation is run by the people instead of the banks.

That said, it sure seems this is all about not triggering those CDSes so banks can continue using sovereign nations as their casino chips in the great international sovereign debt trading hall. Now it seems they are trying to claim Greece is isolated, wouldn't cause contagion. All I see is a nation being caught by the short hairs, being destroyed.

This insanity is condemning Greece, which is essence what I wrote in the short piece, Greece on Fire with Austerity.

Great piece Numerian, yes our Wall Street pals cannot think past one day, never mind one quarter and this short-term frenzy has wrought more pain on people than just what's going on in Greece.

Germany is a little nuts too. Not everybody can be a major exporter and manufacturing hub.

now "Greece struggles" to get bail out?

This is just unreal, the headlines are Greece is "struggling" to get bail out funds due to Europe's demand for more budget cuts, plus the declaration, default is not an option.

Bloomberg story gives the latest.