The ‘Greek Debt Deal’ Is Already Starting To Fall Apart

Puzzle Pieces - Public DomainThe “deal that was designed to fail” has already begun to unravel.  The IMF, which was expected to provide a big chunk of the financing, has indicated that it may walk away from the deal unless Greece is granted extensive debt relief.  This is something that the Germans and their allies have resolutely refused to do.  Meanwhile, outrage is pouring in from all over Europe regarding what the Greek government is being forced to do to their own people.  Most of this anger is being directed at the Germans, but the truth is that without German money the Greek banking system and the Greek economy will completely and utterly collapse.  So even though Greek Prime Minister Alex Tsipras admits that this is a deal that he does not believe in, he is attempting to get it pushed through the Greek parliament, and we should know on Wednesday whether he was successful or not.  But even if the Greek parliament approves it, we could still see either the German or the Finnish parliaments reject it.  It seems as though nobody is really happy with this deal, and these negotiations have exposed very deep divisions within Europe.  Could this be the beginning of the end for the eurozone?

The Germans appear to believe that they can push the Greeks out of the eurozone and that everything will be okay somehow.  This is something that I wrote about extensively yesterday, and it turns out that a lot of other prominent voices agree with me.  For example, just consider what Paul Krugman of the New York Times had to say about this.  I am kind of amazed that he finally got something right…

Suppose you consider Tsipras an incompetent twerp. Suppose you dearly want to see Syriza out of power. Suppose, even, that you welcome the prospect of pushing those annoying Greeks out of the euro.

Even if all of that is true, this Eurogroup list of demands is madness. The trending hashtag ThisIsACoup is exactly right. This goes beyond harsh into pure vindictiveness, complete destruction of national sovereignty, and no hope of relief. It is, presumably, meant to be an offer Greece can’t accept; but even so, it’s a grotesque betrayal of everything the European project was supposed to stand for.

Greece desperately wants to stay in the euro, and they desperately want money from the rest of Europe to keep coming in.  At this point, they will agree to just about anything to keep from getting booted out of the common currency.  That is why the Germans and their allies had to make the deal so horrible.  They were attempting to find some way to make things so harsh on the Greeks that they would finally choose to walk away.

And to a certain extent it seems to be working.  Even some members of Syriza are publicly declaring that they are going to vote against this package.  The following comes from the Washington Post

Greek Energy Minister Panagiotis Lafazanis, who leads a hard-line leftist faction within Syriza, said in a statement Tuesday that the country’s creditors had “acted like cold-blooded blackmailers and economic assassins.”

Yet he also took indirect aim at Tsipras, calling on the Greek prime minister to reverse himself and tear up the agreement, which he described as a violation of the party’s ideals.

Even if Tsipras can pass the deal in Parliament, as he is expected to do, Lafazanis vowed that the Greek people would “annul it through their unity and struggle.”

Right now, the vote looks like it could be quite close.  Even though Greek Prime Minister Alex Tsipras has publicly admitted that this is a deal that “I do not believe in“, he is really pushing hard to get the votes that he needs.  In fact, according to Reuters he has been actively reaching out to opposition parties to secure votes…

Having staved off a financial meltdown, Tsipras has until Wednesday night to pass measures tougher than those rejected in a referendum days ago. With as many as 30-40 hardliners in his own ranks expected to mutiny, Tsipras will likely need the support of pro-European opposition parties to muster the 151 votes he needs to pass the law in parliament.

But even if this deal gets through parliament, it is highly questionable whether Greece will actually be able to do what is being required of them.  For instance, the 50 billion euro “privatization fund” seems to be something of a pipe dream

Privatisation agency Taiped has put out to tender assets with a nominal value of 7.7 billion euros since 2011, but has cashed in only just over 3.0 billion euros, according to 2014 figures.

On June 26 even the International Monetary Fund (IMF), one of Greece’s creditors, raised eyebrows over the idea of raking in lots of money from privatisations.

It stressed that the sale of public banking assets was supposed to raise tens of billions of euros but it was “highly unlikely that these proceeds will materialise” considering the high levels of nonperforming loans in the banking system.

It said that realistically only 500 million euros of proceeds were likely to materialise each year — at which rate it would take around 100 years to reach the 50 billion euro goal.

For the moment, though, let’s assume that the Greek parliament agrees to these demands and that by some miracle the Greek government can find a way to do everything that is being required of them.

And for the moment, let’s assume that this deal is approved by both the German and Finnish parliaments.

Even if everything else goes right, this deal can still be killed by the IMF

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, reports FT.

In the three-page memo, sent to EU authorities at the weekend and obtained by FT, the IMF said the recent turmoil in the Greek economy would lead debt to peak at close to 200 percent of economic output over the next two years. At the start of the eurozone crisis, Athens’ debt stood at 127 percent.

In order for the IMF to participate in this new Greek bailout, the IMF must deem Greek debt to be sustainable.  And at this point that does not appear to be the case

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.

But the Germans made it very clear that there would be no bailout unless the IMF was involved.

So what would satisfy the IMF?

The IMF study seems to indicate that massive debt relief for Greece would be required.  The following comes from Reuters

The study, seen by Reuters, said European countries would have to give Greece a 30-year grace period on servicing all its European debt, including new loans, and a dramatic maturity extension. Or else they must make annual transfers to the Greek budget or accept “deep upfront haircuts” on existing loans.

Needless to say, those kinds of concessions are anathema to the Germans.  There is no way that anything like that could ever get through the German parliament.

But to be honest, the Germans never intended for this deal to be successful anyway.  Just consider what German Finance Minister Wolfgang Schauble told reporters on Tuesday

German Finance Minister Wolfgang Schauble made clear in Brussels on Tuesday that some members of the Berlin government think it would make more sense for Athens to leave the euro zone temporarily rather than take another bailout.

This is what Schauble and his allies have wanted all along.  This entire “deal” was crafted with the intent of creating conditions under which Greece could be forced out of the euro.

By this time tomorrow, we should know what the Greek parliament is going to do.  However, that won’t be the end of the story.  One way or another, the Germans are going to get their wish.  But once they do, I think that they will be quite surprised by the chaos that is unleashed.

Are They About To Confiscate Money From Bank Accounts In Greece Just Like They Did In Cyprus?

Euros - Public DomainDo you remember what happened when Cyprus decided to defy the EU?  In the end, the entire banking system of the nation collapsed and money was confiscated from private bank accounts.  Well, the nation of Greece is now approaching a similar endgame.  At this point, the Greek government has not received any money from the EU or the IMF since August 2014.  As you can imagine, that means that Greek government accounts are just about bone dry.  The new Greek government continues to insist that it will never “violate its anti-austerity mandate”, but the screws are tightening.  Right now the unemployment rate in Greece is over 25 percent and the banking system is on the verge of collapse.  It isn’t going to take much to set off a panic, and when it does happen there are already rumors that the EU plans to confiscate money from private bank accounts just like they did in Cyprus.

Throughout this entire multi-year crisis, things have never been this dire for the Greek government.  In fact, Greece came thisclose to defaulting on a loan payment to the IMF back on May 12th.  And with essentially no money remaining at all, the Greek government is supposed to make several large payments in the weeks ahead

Athens barely made its latest payment (May 12) to the International Monetary Fund (IMF), and it managed to do so only when the government discovered that it could use a reserve account it wasn’t aware of, according to the Greek media.

Kathimerini, a Greek daily newspaper, reports that Prime Minister Alexis Tsipras wrote to the IMF’s Christine Lagarde warning that Greece would not be able to make that May payment, worth €762 million ($871 million, £554.2 million).

Pension and civil-servant pay packets are due at the end of the month, and based on this news Athens may struggle to pay them. Even if it does manage that, on June 5 the country owes another €305 million to the IMF.

In the two weeks following June 5 there are another three payments, bringing the June total to the IMF to over €1.5 billion.

The Germans and the other financial hawks in the EU are counting on these looming payment deadlines to force Greece into a deal.

Meanwhile, Greek banks also find themselves in very hot water.  Many of them are almost totally out of collateral, and without outside intervention some of them could start collapsing within weeks.  The following comes from Bloomberg

Greek banks are running short on the collateral they need to stay alive, a crisis that could help force Prime Minister Alexis Tsipras’s hand after weeks of brinkmanship with creditors.

As deposits flee the financial system, lenders use collateral parked at the Greek central bank to tap more and more emergency liquidity every week. In a worst-case scenario, that lifeline will be maxed out within three weeks, pushing banks toward insolvency, some economists say.

“The point where collateral is exhausted is likely to be near,” JPMorgan Chase Bank analysts Malcolm Barr and David Mackie wrote in a note to clients May 15. “Pressures on central government cash flow, pressures on the banking system, and the political timetable are all converging on late May-early June.”

If no agreement is reached, by this time next month Greece could be plunging into a Cyprus-style crisis or worse.

And if that does happen, there are already rumblings that a “Cyprus-style solution” will be imposed.  Just consider what James Turk recently told King World News

The troika of the EU, ECB and IMF have not yet pulled the plug on the Greek banks, but the following quote in the Financial Times from this weekend should be a warning to anyone who still has money on deposit in that country: “The idea of a “Cyprus-like” presentation to Greek authorities has gained traction among some eurozone finance ministers, according to one official involved in the talks.”

The ECB is up to its eyeballs swimming in unpayable Greek debt that it holds. The ECB is not going to take a loss on this Greek paper on its books. Because Greece does not have the financial capacity to repay what is now about €112 billion of credit exposure to Greece on the ECB’s books, the ECB has only two alternatives.

It can push the €112 billion of Greek debt it holds to the national central banks of the Eurozone and on to the backs of the taxpayers in those countries, which it politically untenable. Or it can confiscate depositor money in Greek banks, like it did in Cyprus and as the FT has now reported.

Needless to say, such a move would be likely to set off financial panic all over Europe.

Could we actually see such a thing?

Well, let’s recall that back in April we already saw the Greek government forcibly grab “idle” cash from the bank accounts of regional governments and pension funds.  The following is from a Bloomberg report about that event…

Running out of other options, Greek Prime Minister Alexis Tsipras ordered local governments and central government entities to move their cash balances to the central bank for investment in short-term state debt.

The decree to confiscate reserves held in commercial banks and transfer them to the Bank of Greece could raise as much as 2 billion euros ($2.15 billion), according to two people familiar with the decision. The money is needed to pay salaries and pensions at the end of the month, the people said.

“It is a politically and institutionally unacceptable decision,” Giorgos Patoulis, mayor of the city of Marousi and president of the Central Union of Municipalities and Communities of Greece, said in a statement on Monday.“No government to date has dared to touch the money of municipalities.”

Grabbing cash from the bank accounts of private citizens is just one step farther.

And what happened in Cyprus just a couple of years ago is still fresh in the minds of most Greeks.  That is why so many of them have been pulling money out of the banks in recent weeks.  The following comes from Wolf Richter

Greeks remember very well what happened in Cyprus in 2013, when local banks were given a big thumbs-up from Europe to help themselves to their depositors’ accounts. Cyprus and Greece are very closely tied, and many Greeks consider the island a “sister-nation.”

What little trust remained in banks in Greece died that day. People have been nervously looking for signs something similar may happen again in their home country. And they resolved to act at the first sign of danger: banks cannot confiscate money you have under your mattress. Cash can be hidden away.

Let’s certainly hope that what happened in Cyprus does not happen in Greece.

But right now, both sides are counting on the other side to fold.

The Germans believe that at some point the economic and financial pain will become so immense that it will force the new Greek government to give in to their demands.

The Greeks believe that the threat of a full blown European financial crisis will cause the Germans to back down at the last moment.

So what if they are both wrong?

What if both sides are fully prepared to stand their ground and take us over the cliff and into disaster?

For a long time I have been warning that a great financial crisis is coming to Europe.

This could be the spark that sets it off.

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