Greece is saved? All over the planet, news headlines are boldly proclaiming that a “deal” has been reached which will give Greece the money that it needs and keep it in the eurozone. But as you will see below, this is not true at all. Yesterday, when I wrote that “there never was going to be any deal“, I was not exaggerating. This “deal” was not drafted with the intention of “saving Greece”. As I explained in my previous article, these negotiations were all about setting up Greece for eviction from the euro. You see, the truth is that Greece desperately wants to stay in the euro, but Germany (and allies such as Finland) want Greece out. Since Germany can’t simply order Greece to leave the euro, they need some sort of legal framework which will make it possible, and that is what this new “deal” provides. As I am about to explain, there are all kinds of conditions that must be satisfied and hurdles that must be crossed before Greece ever sees a single penny. If there is a single hiccup along the way, and this is what the Germans are counting on, Greece will be ejected from the eurozone. This “deal” has been designed to fail so that the Germans can get what they have wanted all along. I think that three very famous words from Admiral Ackbar sum up the situation very well: “It’s a trap!”
So why is this “Greek debt deal” really a German trap?
The following are three big reasons…
#1 The “Deal” Is Designed To Be Rejected By The Greek Parliament
If Germany really wanted to save Greece, they would have already done so. Instead, now they have forced Greek Prime Minister Alexis Tsipras to agree to much, much harsher austerity terms than Greek voters overwhelmingly rejected during the recent referendum by a vote of 61 percent to 39 percent. Tsipras has only been given until Wednesday to pass a whole bunch of new laws, and another week to make another series of major economic changes. The following comes from CNN…
Greece has to swiftly pass a series of new laws. Prime Minister Alexis Tsipras has until Wednesday to convince Parliament to pass the first few, including pension cuts and higher taxes.
Assuming that happens, Greek lawmakers have another week, until July 22, to enact another batch of economic changes. These include adopting European Union rules on how to manage banks in crisis, and do a major overhaul to make Greece’s civil courts faster and more efficient.
Can Tsipras actually get all this done in such a short amount of time?
The Germans are hoping that he can’t. And already, two of Syriza’s coalition partners have publicly declared that they have no intention of voting in favor of this “deal”. The following is from a Bloomberg report…
Discontent brewed as Tsipras arrived back in the Greek capital. Left Platform, a faction within Syriza, and his coalition partners, the Independent Greeks party, both signaled they won’t be able to support the deal. That opposition alone would wipe out Tsipras’s 12-seat majority in parliament, forcing him to rely on opposition votes to carry the day.
The terms of the “deal” are not extremely draconian because the Germans want to destroy Greek sovereignty as many are suggesting. Rather, they are designed to provoke an overwhelmingly negative reaction in Greece so that the Greeks will willingly choose to reject the deal and thus be booted out of the euro.
And this is what we are seeing. So far, the response of the Greek public toward this deal has been overwhelmingly negative…
Haralambos Rouliskos, a 60-year-old economist who was out walking in Athens, described the deal as “misery, humiliation and slavery”.
Katerina Katsaba, a 52-year-old working for a pharmaceutical company, said: “I am not in favour of this deal. I know they (the eurozone creditors) are trying to blackmail us.”
On Wednesday, the union for Greek public workers has even called a 24 hour strike to protest this “agreement”…
Greece’s public workers are being called to stage a 24-hour strike on Wednesday, the day their country’s parliament is to vote on reforms needed to unlock the bankster eurozone plan agreed to by Greek Prime Minster Alex Tsipras.
Their union, Adedy, called for the stoppage in a statement issued today, saying it was against the agreement reached with the eurozone.
The Greek government is not guaranteed any money right now.
According to Bloomberg, the Greek government must pass all of the laws being imposed upon them by the EU “before Greece can even begin negotiations with creditors to access a third international bailout in five years.”
The Germans and their allies are actually hoping that there is a huge backlash in Greece and that Tsipras fails to get this package pushed through the Greek parliament. If that happens, Greece gets ejected from the euro, and Germany doesn’t look like the bad guy.
#2 Even If The “Deal” Miraculously Gets Through The Greek Parliament, It May Not Survive Other European Parliaments
The Greek parliament is not the only legislative body that must approve this new deal. The German and Finnish parliaments (among others) must also approve it. According to USA Today, it is being projected that the German and Finnish parliaments will probably vote on this new deal on Thursday or Friday…
Thursday/Friday, July 16/17: Eurozone parliaments must also agree to the plan for Greece’s $95 billion bailout. The biggest tests may come from Finland and Germany, two nations especially critical of Greece’s handling of the crisis. Berlin has contributed the most to Greece’s loans.
Either Germany or Finland could kill the entire “deal” with a single “no” vote.
Finnish Finance Minister Alexander Stubb has already stated that Finland “cannot agree” with a new bailout for Greece, and it is highly questionable whether or not the German parliament will give it approval.
I think that the Germans and their allies would much prefer for the Greeks to reject the deal and walk away, but it may come down to one of these parliaments drawing a line in the sand.
#3 The Deal Makes Implementation Extraordinarily Difficult
If Greece fails to live up to each and every one of the extremely draconian measures demanded in the “deal”, they will be booted from the eurozone.
And if you take a look at what is being demanded of them, it is extremely unrealistic. Here is just one example…
For instance, the Greek government agreed to transfer up to 50 billion euros worth of Greek assets to an independent fund that will raise money from privatization.
According to the document, 25 billion euros from this fund will be poured into the banks, 12.5 billion will be used to pay off debt, and the remaining 12.5 billion to boost the economy through investment.
The fund will be based in Greece and run by the Greeks, but with supervision from European authorities.
Where in the world is the Greek government going to find 50 billion euros worth of assets at this point? The Greek government is flat broke and the banks are insolvent.
But if they don’t find 50 billion euros worth of assets, they have violated the agreement and they get booted.
This whole thing is about setting up Greece for failure so that there is a legal excuse to boot them out of the euro.
And it actually almost happened very early on Monday morning. The following comes from Business Insider…
As the FT tells it, German Chancellor Angela Merkel and Greek Prime Minister Alexis Tsipras rose from their chairs at 6 a.m. on Monday and headed for the door, resigned to a Greek exit from the euro.
“Sorry, but there is no way you are leaving this room,” European Council president Donald Tusk reportedly said.
And so a Grexit was avoided.
For the moment, Greece has supposedly been “saved”.
But anyone that believes that this crisis is “over” is just being delusional.
The Germans and their allies have successfully lured the Greek government into a trap. Thanks to Tsipras, they have been handed a legal framework for getting rid of Greece.
All they have to do now is wait for just the right moment to spring the trap, and it might just happen a lot sooner than a lot of people may think.
There never was going to be any deal. All along, Germany has been seeking to establish conditions that would never be met so that they could force Greece out of the eurozone. But the Germans had to do this subtly so that they would end up looking “reasonable” and would not turn the rest of the eurozone against them. So why does Germany want to get rid of Greece? Well, to be honest, it is because the Germans are sick and tired of paying for Greek mistakes. In Germany, there is an obsession with having a balanced budget. They even have a term for it – “the black zero“. So it absolutely infuriates the Germans that the Greeks can never seem to get their act together and that German citizens have to keep paying for it. At this point, the amount of money that Germany has already poured into Greece breaks down to more than 700 euros per citizen, and now Greece is going to need a new bailout of somewhere between 82 billion and 86 billion euros over the next three years. Needless to say, the Germans are fed up with pouring money down a financial black hole, and they know that if they keep bailing Greece out that it is only a matter of time before they will have to bail out Italy, Spain, Portugal, France, etc.
So, no, it hasn’t been the Greeks holding up a deal all this time.
It has been the Germans.
And now that we have reached the endgame, the Germans are pushing for what they have always wanted from the very beginning…
The German government has begun preparations for Greece to be ejected from the eurozone, as the European Union faces 24 hours to rescue the single currency project from the brink of collapse.
Finance ministers failed to break the deadlock with Greece over a new bail-out package, after nine hours of acrimonious talks as creditors accused Athens of destroying their trust…
Should no deal be forthcoming, the German government has made preparations to negotiate a temporary five-year euro exit, providing Greece with humanitarian aid while it makes the transition….
The Germans are sick and tired of having the Greeks be so financially dependent on them. So the Germans would really like to cut them off and have them go fend for themselves.
So that is why the EU laid out such draconian conditions for the Greeks over the weekend. The following is how Zero Hedge summarized where things currently stand…
For those who missed today’s festivities in Brussels, here is the 30,000 foot summary: Europe has given Greece a “choice”: hand over sovereignty to Europe or undergo a 5 year Grexit “time out”, which is a polite euphemism for get the hell out.
As noted earlier, here are the 12 conditions laid out as a result of the latest Eurogroup meeting, which are far more draconian than anything presented to Greece yet and which effectively require that Greece cede sovereignty to Europe, this time even without the implementation of a technocratic government.
- Streamlining VAT
- Broadening the tax base
- Sustainability of pension system
- Adopt a code of civil procedure
- Safeguarding of legal independence for Greece ELSTAT – the statistics office
- Full implementation of autmatic spending cuts
- Meet bank recovery and resolution directive
- Privatize electricity transmission grid
- Take decisive action on non-performing loans
- Ensure independence of privatization body TAIPED
- De-Politicize the Greek administration
- Return of the Troika to Athens (the paper calls them the institutions… for now)
Greece has been given until Wednesday to pass all of the legislation necessary to implement all of those conditions.
And if Greece does somehow get all that done, it still won’t get them a deal. All it will do is allow them to come back and restart negotiations.
Needless to say, the Greeks are steaming mad at this point. This new “deal” is being called “very bad” and “insulting” by Greek politicians.
But what they may not understand is that Germany does not actually want any deal to happen. Instead, they are working very, very hard to get the Greeks booted out of the euro. The following comes from the Washington Post…
The simple story is that Germany and the other hardline countries don’t trust Greece’s anti-austerity Syriza party to actually implement, well, austerity. And so rather than coughing up another 60 or 70 or 80 billion euros, they seem to want to push to kick Greece out of the common currency instead. That, at least, was the plan that leaked on Saturday. And now it’s part of the actual plan on Sunday. Indeed, it’s tentatively been included in the European finance ministers’ latest joint statement. This isn’t just what Germany is considering. It’s what Germany is trying to get the rest of Europe to go along with.
If anyone still doubts what the Germans are trying to do, here it is in black and white…
And this is not an idea that is new. In fact, some hardliners in Germany have been pushing for a “temporary Greek exit” since at least 2012…
This weekend’s events in Europe have clarified who is really running the show across the ‘union’. Hans-Werner Sinn, Chairman of the Ifo Institute for Economic Research, vehemnt euroskeptic, and head of the so-called ‘five wise men’ advising the German government and specifically Angela Merkel, confirmed his call from 2012 for a “temporary grexit from the euro.” The right wing economist previously explained “Greece and Portugal have to become 30-40% less expensive to be competitive again. This is being attempted through excessive austerity measures within the euro zone, but it won’t work. It will drive these countries to the brink of civil war before it succeeds. Temporary exits would very quickly stabilize these countries, create new jobs and free the population from the yoke of the euro.”
The Germans absolutely hate having to open up their wallets for someone else’s mess. And they know that if they endlessly bail out Greece that it won’t end there. Eventually, much of the rest of the continent will come to them for bailouts too. I think that Nigel Farage nailed it when he summed up what Germany is thinking this way…
“The German thinking is: ‘Let’s get rid of this mess,'” Farage said. Expressing what he thought Germany was thinking about other troubled peripheral euro zone economies, he added: “‘let’s send a message to Italy, France, Spain and Portugal that actually, if you’re members of this club, you got to abide by our rules.'”
But I believe that Germany is greatly, greatly underestimating the damage that a “Grexit” is going to do to Greece and to the rest of the members of the EU.
In Greece, the banking system is already on the verge of total collapse. We are being told that capital controls will remain in place “for at least six months”, and now Greek politicians are even talking about “a possible forced ‘bail-in’ of depositors”…
Capital controls will stay in place at Greek banks for at least six months, senior officials in Athens warned yesterday, as the government fights to keep lenders afloat.
Leaders of the four main banks and finance ministry officials will meet tomorrow to discuss how to save the banking system from collapse after a run on deposits.
Options under consideration include a consolidation of four main banks down to two, creation of a “bad bank” to house toxic loans, and a possible forced “bail-in” of depositors.
Hmmm – I seem to recall someone warning about this exact scenario nearly two months ago: “Are They About To Confiscate Money From Bank Accounts In Greece Just Like They Did In Cyprus?”
The economic depression in Greece is about to accelerate. But things are also going to get hairy for the rest of the continent as well. As I have warned about so many times, the euro is going to plunge like a rock, European stocks are going to crater, European bond yields are going to soar, and eventually we are actually going to see “too big to fail” banks all over Europe start to fail.
This is the big flaw in the German plan. They truly believe that they can remove the “cancer” of Greece without causing any lasting damage to the rest of the eurozone.
Sadly, they are dead wrong.
Is this the beginning of the end for the eurozone? For years, European officials have been trying to “fix Greece”, but nothing has worked. Now a worst case scenario is rapidly unfolding, and a “Grexit” has become more likely than not. On Sunday, the European Central Bank announced that it was not going to provide any more emergency support for Greek banks. But that was the only thing keeping them alive. In order to prevent total chaos, Greek banks have been shut down for at least a week. ATMs are still open, but it is being reported that daily withdrawals will be limited to 60 euros. Of course nobody knows for sure if or when the banks will reopen after this “bank holiday” is over, so needless to say average Greek citizens are pretty freaked out right about now. In addition, the stock market in Greece is not going to open on Monday either. This is what a national financial meltdown looks like, and the nightmare that has been unleashed in Greece will soon start spreading to much of the rest of Europe.
This reminds me so much of what happened in Cyprus. Up until the very last minute, politicians were promising everyone that their money was perfectly safe, and then the hammer was brought down.
The exact same pattern is playing out in Greece. For example, just check out what one very prominent Greek politician said on television on Saturday…
“Citizens should not be scared, there is no blackmail,” Panos Kammenos, head of the government’s coalition ally, told local television. “The banks won’t shut, the ATMs will (have cash). All this is exaggeration,” he said.
One day later, the banks did get shut down and ATMs all over the country started running out of cash. The following comes from CNBC…
Despite a tweet from Greek Finance Minister Yanis Varoufakis that his government “opposed the very concept” of any controls, Greek Prime Minister Alexis Tsipras said later Sunday that he had forced the country’s central bank to recommend a bank holiday and capital controls.
The Athens stock exchange will also be closed as the government tries to manage the financial fallout of the disagreement with the European Union and the International Monetary Fund. Greece’s banks, kept afloat by emergency funding from the European Central Bank, are on the front line as Athens moves towards defaulting on a 1.6 billion euros payment due to the International Monetary Fund on Tuesday.
So what is the moral of this story?
Never trust politicians – especially when a major financial crisis is looming.
All over Greece, people are taking photos of very long lines at the ATMs that actually do still have some cash. Here are just a couple of examples…
Of course those that were smart enough to see this coming took their money out of the banks long ago. And even as late as last week, people were pulling more than a billion euros out of the banks every single day. Without direct intervention by the European Central Bank, most Greek banks would have totally collapsed by now…
Customers have been withdrawing money in vast quantities ever since Syriza came to power, fearing that if Greece is thrown out of the single currency their euro savings will be converted into drachma – likely to be worth far less.
In the last week, the sums being taken out have risen to well over one billion euros a day, moved either to foreign banks or stashed in notes under mattresses.
It has been a slow and steady run on Greece’s banks which is now speeding up – for the finish line may well be in sight. Until now, the country’s banks have been kept afloat by €88 billion in loans from the European Central Bank.
So now that the banks are shut down, what happens next?
Needless to say, economic activity in Greece is going to come to a grinding halt. In addition, very few foreigners are going to want to travel to Greece or deal with Greece financially until this crisis is resolved somehow…
An extended bank shutdown and tough capital controls will likely wreak further havoc on the Greek economy by scaring away tourists and chilling commercial activity.
And with Greece unable to borrow from financial markets, and apparently unwilling to strike a deal with the only institutions prepared to lend it money, it will find itself sliding rapidly towards exit from the euro.
When the Greek banks finally do reopen, which of them will still be solvent?
Will some of them need “bail-ins”?
Will account holders be forced to take “haircuts” like we saw in Cyprus?
For the moment, what we do know is that the banks will all be shut down until at least July 6th. Greek Prime Minister Alexis Tsipras has called for a national referendum to be held on July 5th. The Greek people will get a chance to vote on whether or not the latest creditor proposals should be accepted. But the funny thing is that Tsipras and the rest of Syriza are already encouraging the Greek people to vote no…
Greece’s parliament has voted in favor of Prime Minister Alexis Tsipras’ motion to hold a referendum on the country’s creditor proposals for reforms in exchange for loans, the Associated Press reported. Tsipras and his coalition government have urged people to vote against the deal, throwing into question the country’s financial future.
The vote is to be held next Sunday, July 5. It has raised the question of whether Greece can remain in Europe’s joint currency, the euro.
So why hold a referendum if you just want everyone to vote no?
It is because Tsipras does not want to solely shoulder the blame for what comes next. A “no vote” would essentially be a vote to leave the euro and go back to the drachma. The following comes from the Daily Mail…
Should Greeks vote against the new bailout, most economists believe Greece will be forced to quit the single currency and return to the drachma. The country could even eventually be forced out of the EU, though Greek politicians have long argued a Grexit would not be the automatic result of default.
However, next week’s referendum is likely to be billed as, in effect, an in-out vote on the euro.
If Greece does default and ends up leaving the euro, the short-term economic consequences for Greece will be catastrophic.
But the rest of Europe will feel a tremendous amount of pain as well. In fact, we are already getting a sneak peek at coming attractions. As we approach Monday morning in Europe, Asian stocks are crashing big time, and European futures are absolutely cratering. It should be very interesting to see how Monday plays out.
In addition, the euro is already way down in early trading. If Greece does ultimately leave the euro, the value of the euro is going to plunge like a rock. As I have warned repeatedly, the euro is heading for parity with the U.S. dollar, and at some point it will drop below parity.
And once Greece is out, everyone is going to be speculating who the “next Greece” will be. Expect bond yields for Italy, Spain, Portugal and France to go skyrocketing.
Just a couple of days ago, I issued a red alert for the second half of 2016. We are entering a period of time when the global financial system is beginning to unravel. Most people still have a tremendous amount of faith in the system and assume that those running it are fully capable of keeping it from collapsing. In fact, many have accused me of being crazy for suggesting that the global financial system is in imminent danger of imploding.
A very wise man once said that “pride goeth before destruction”. Our arrogance and our blind faith in the fundamentally flawed systems that we have established will contribute greatly to our undoing.
Events are starting to accelerate greatly now, and it is just a matter of time before we see who was right and who was wrong.
According to the Wall Street Journal, Greece staying in the eurozone is no longer “the base case” for European officials, and one even told the Journal that “literally nothing has been achieved” in negotiations with the new Greek government since the Greek election almost three months ago. In other words, you can take all of that stuff you heard about how the Greek crisis was fixed and throw it out the window. Over the next few months, a big chunk of Greek government bonds held by the IMF and the European Central Bank will mature. Unless negotiations produce a load of new cash for Greece, there will be a default, and right now there is very little optimism that we will see an agreement any time soon. In fact, as I wrote about the other day, behind the scenes banks all over Europe are quietly preparing for a Grexit. European news sources are reporting that the Greek banking system is on the verge of collapse, and over the past couple of weeks Greek bond yields have shot through the roof. Most of the things that we would expect to see in the lead up to a Greek exit from the eurozone are happening, and now we will wait and see if the Greeks actually have the guts to pull the trigger when push comes to shove.
At this point, many top European officials are quietly admitting that it is more likely than not that Greece will leave the euro by the end of this year. The following is an excerpt from the Wall Street Journal article that I mentioned above…
It’s still possible that Greece can remain in the eurozone—though that is no longer the base case for many policy makers. At the very least, most fear the situation is going to get much, worse before it gets any better. No one now expects a deal to unlock Greek bailout funding at this week’s meeting of eurozone finance ministers in Riga—originally set as the final deadline for a deal. The new final, final deadline is now said to be a summit on May 11.
But among European politicians and officials gathered in Washington DC last week for the International Monetary Fund’s Spring Meetings, there was little optimism that a deal will be agreed by then.
The two sides are no closer to an agreement than when the Greek government took office almost three months ago. “Nothing, literally nothing has been achieved,” says an official.
Literally nothing has been achieved?
That is not what the mainstream media has been telling us over the past few months.
They kept telling us that agreements were in place and that everything had been fixed.
I guess not.
The Germans believe that the risks of a “Grexit” have already been priced in by the financial markets and that a Greek exit from the euro can be “managed” without any serious risk of contagion.
So they are playing hardball with the Greeks.
On the other hand, the Greeks believe that the risk of contagion will eventually force the Germans to back down…
Greece’s Finance Minister Yanis Varoufakis said in an interview broadcast on Sunday that if Greece were to leave the euro zone, there would be an inevitable contagion effect.
“Anyone who toys with the idea of cutting off bits of the euro zone hoping the rest will survive is playing with fire,” he told La Sexta, a Spanish TV channel, in an interview recorded 10 days ago.
“Some claim that the rest of Europe has been ring-fenced from Greece and that the ECB has tools at its disposal to amputate Greece, if need be, cauterize the wound and allow the rest of euro zone to carry on.”
In this case, I believe that the Greeks are right about what a Grexit would mean for the rest of Europe and the Germans are wrong.
Once one country leaves the euro, that tells the entire world that membership in the euro is only temporary. Immediately everyone would be looking for the “next Greece”, and there are lots of candidates – Italy, Spain, Portugal, etc.
There is a very good chance that a Grexit would set off a full-blown European financial panic. And once a financial panic starts, it is very hard to stop. The danger that a Grexit poses is so obvious that even the Obama administration can see it…
A Greek exit from the euro zone would carry significant risks for the global economy and no one should be under the impression that financial markets have fully priced in such an event, the chairman of the White House Council of Economic Advisers said.
The comments by Jason Furman in an interview with Reuters in Berlin are among the strongest by a senior U.S. official and are at odds with those of German Finance Minister Wolfgang Schaeuble, who told an audience in New York last week that contagion risks from a so-called “Grexit” were limited.
“A Greek exit would not just be bad for the Greek economy, it would be taking a very large and unnecessary risk with the global economy just when a lot of things are starting to go right,” Furman said.
Meanwhile things continue to get even worse inside Greece. If you have any money in Greek banks, you need to move it immediately. The following comes from Zero Hedge…
Things for insolvent, cashless Greece are – not unexpectedly – getting worse by the day.
Following yesterday’s shocking decree that the government will confiscate local government reserves and “sweep” them into the central bank to provide the country more funds as it approaches another month of heavy IMF repayments, earlier today Bloomberg reported that the ECB would add insult to injury and may increase haircuts for Greek banks accessing Emergency Liquidity Assistance, thus “reining in” the very critical emergency liquidity which has kept Greek banks operating in recent weeks as the bank run sweeping the domestic banking sector has gotten worse by the day.
And many Greeks don’t even have any money to put in the banks because they haven’t been paid in months…
Meanwhile, the reality is that for a majority of the Greek population, none of this really matters because as Greek Ta Nea reports, citing Labor Ministry data, about one million Greek workers see delays of up to 5 months in salaries payment by their employers. The Greek media adds that about 45% of salaried workers in Greece make no more than €751 per month, the country’s old minimum wage; which also includes part-time workers.
No matter what European officials try, things just continue to unravel in Greece and in much of the rest of Europe.
We stand on the verge of the next great global economic crisis. The lessons that we should have learned from the last crisis were never learned, and instead global debt levels have exploded much higher since then. In fact, according to Doug Casey, the total amount of global debt is 57 trillion dollars higher than it was just prior to the last crisis…
In 2008, excess debt pushed the global financial system to the brink. It was a golden opportunity for governments and banks to reform the system. But rather than deal with the problem, they papered over it by issuing more debt. Worldwide debt levels are now $57 trillion higher than in 2008.
The eurozone as it is constituted today is doomed.
That doesn’t mean that the Europeans are going to give up on social, economic and political integration. It just means that we are entering a time of transition that is going to be extremely messy.
And once the European financial system begins to fall apart, the rest of the world will quickly follow.
Is this the beginning of the end for the eurozone? On Thursday, Germany rejected a Greek request for a six-month loan extension. The Germans insisted that the Greek proposal did not require the Greeks to adhere to the austerity restrictions which previous agreements had forced upon them. But Greek voters have already very clearly rejected the status quo, and the new Greek government has stated unequivocally that it will not be bound by the current bailout arrangement. So can Germany and Greece find some sort of compromise that will be acceptable to both of them? It certainly does not help that some Greek politicians have been comparing the current German government to the Nazis, and the Germans have fired back with some very nasty comments about the Greeks. Unfortunately for both of them, time is running out. The Greek government will run out of money in just a couple of weeks, and without a deal there is a very good chance that Greece will be forced to leave the euro. In fact, this week Commerzbank AG increased the probability of a “Grexit” to 50 percent. And if Greece does leave the eurozone, it could spark a full blown European financial crisis which would be absolutely catastrophic.
What the Greeks want right now is a six month loan extension which would give them much more economic flexibility than under the current agreement. Unfortunately for the Greeks, Germany has rejected this proposal…
Germany rejected a Greek proposal for a six-month extension to its euro zone loan agreement on Thursday, saying it was “not a substantial solution” because it did not commit Athens to stick to the conditions of its international bailout.
Berlin’s stance set the scene for tough talks at a crucial meeting of euro zone finance ministers on Friday when Greece’s new leftist-led government, racing to avoid running out of money within weeks, will face pressure to make further concessions.
As the biggest creditor and EU paymaster, Germany has the clout to block a deal and cast Greece adrift without a financial lifeline, potentially pushing it toward the euro zone exit.
Even though Germany is already saying no to this deal, Greece is still hoping that the Eurogroup will accept the deal that it has proposed…
“The Greek government submitted a letter to the Eurogroup asking for a six-month extension of the loan agreement. Tomorrow’s Eurogroup has only two options: either to accept or reject the Greek request,” a government official said. “It will then be clear who wants to find a solution and who doesn’t.” Earlier on Thursday, the German finance ministry rejected Athens’ request for an extension by saying it fell short of the conditions set out earlier this week by the euro zone.
At this point, the odds of a deal going through don’t look good.
But there is always next week. It is possible that something could still happen.
However, if there is no deal and Greece is forced out of the euro, the consequences for Greece and for the rest of the eurozone could be quite dramatic.
The following is how the Independent summarized what could happen to Greece…
An immediate financial crisis and a new, deep, recession. Without external financial support the country would have to default on its debts and, probably, start printing its own currency again in order to pay civil servants. Its banks would also lose access to funding from the European Central Bank.
To prevent these institutions collapsing Athens would have impose controls on the movement of money out of the country. The international value of the new Greek currency would inevitably be much lower than the euro. That would mean an instant drop in living standards for Greeks as import prices spike. And if Greeks have foreign debts which they have to pay back in euros they will also be instantly worse off. There could be a cascade of defaults.
That doesn’t sound pretty at all.
The most frightening part for those that have money in Greek banks would be the capital controls that would be imposed. People would have to deal with strict restrictions on how much money they could take out of their accounts and on how much money they could take out of the country.
In anticipation of this happening, people are already pulling money out of Greek banks at a staggering pace…
In the midst of the dramatic showdown in Brussels between the new Greek government and its European creditors, many Greek depositors—spooked by the prospect of a Greek default or, worse, an exit from the euro zone and a possible return to the drachma—have been pulling euros out of the nation’s banks in record amounts over the last few days.
The Bank of Greece and the European Central Bank won’t report official cash outflows for January until the end of the month. But sources in the Greek banking sector have told Greek newspapers that as much as 25 billion euros (US $28.4 billion) have left Greek banks since the end of December. According to the same sources, an estimated 900 million euros flowed out of Greek banks on Tuesday alone, the day after the talks broke up in Brussels, sparking fears that measures will be taken to stem the outflow. On Thursday, by mid-afternoon, deposits had shrunk by about 680 million euros (US $77.3 million).
“If outflows reach 1 billion euros, capital controls might need to be imposed,” said Thanasis Koukakis, a financial editor for Estia a conservative daily, and To Vima, an influential Sunday newspaper.
And if we do indeed witness a “Grexit”, the rest of Europe would be deeply affected as well.
The following is how the Independent summarized what could happen to the rest of the continent…
There would probably be some financial contagion as financial investors wake up to the fact that euro membership is not irreversible. There could a “flight to safety” as depositors pull euros out of other potentially vulnerable eurozone members such as Portugal, Spain or Italy to avoid taking a hit. European company share prices could also fall sharply if investors panic and divert their cash into the government bonds of states such as Germany and Finland.
The question is how severe this contagion would be. The continent’s politicians and regulators seem to think the impact would be relatively small, saying that Europe’s banks have reduced their cross-border exposure to Greece and that general confidence in the future of the eurozone is much stronger than it was a few years ago. But others think this is too complacent. The truth is that no one knows for sure.
To be honest, I think that the rest of the eurozone is being far too complacent about what Greece leaving would mean.
There are all kinds of implications that most people are not even discussing yet.
For example, just consider what a “Grexit” would mean for the European interbank payment system known as Target2. The following comes from an article by Ambrose Evans-Pritchard…
In normal times, Target2 adjustments are routine and self-correcting. They occur automatically as money is shifted around the currency bloc. The US Federal Reserve has a similar internal system to square books across regions. They turn nuclear if monetary union breaks up.
The Target2 “debts” owed by Greece’s central bank to the ECB jumped to €49bn in December as capital flight accelerated on fears of a Syriza victory. They may have reached €65bn or €70bn by now.
A Greek default – unavoidable in a Grexit scenario – would crystallize these losses. The German people would discover instantly that a large sum of money committed without their knowledge and without a vote in the Bundestag had vanished.
And in a previous article, I discussed some of the other things that are at stake…
If there is no deal, we could see a Greek debt default, Greece could be forced to leave the eurozone and go back to the drachma, the euro could collapse to all time lows, all the banks all over Europe that are exposed to Greek government debt could be faced with absolutely massive losses, and the 26 trillion dollars in derivatives that are directly tied to the value of the euro could start to unravel. In essence, if things go badly this could be enough to push us into a global financial crisis.
At the end of the day, there are essentially only two choices for Europe…
#1) Find a way to make a deal, which would maybe keep the current financial house of cards together for another six months.
#2) A horrifying European financial crisis starting almost immediately.
In the long-term, nothing is going to stop the economic horror which is coming to Europe, and once it starts it is going to drag down the entire planet.
What was considered unthinkable a few months ago has now become probable. All over the globe there are headlines proclaiming that a Greek exit from the euro is now a real possibility. In fact, some of those headlines make it sound like it is practically inevitable. For example, Der Spiegel ran a front page story the other day with the following startling headline: “Acropolis, Adieu! Why Greece must leave the euro”. Many are saying that the euro will be stronger without Greece. They are saying things such as “a chain is only as strong as its weakest link” and they are claiming that financial markets are now far more prepared for a “Grexit” than they would have been two years ago. But the truth is that it really is naive to think that a Greek exit from the euro can be “managed” and that business will go on as usual afterwards. If Greece leaves the euro it will set a very dangerous precedent. The moment Greece exits the euro, investors all over the globe will be asking the following question: “Who is next?” Portugal, Italy and Spain would all see bond yields soar and they would all likely experience runs on their banks. It would only be a matter of time before more eurozone members would leave. In the end, the whole monetary union experiment would crumble.
As I have written about previously, New York Times economist Paul Krugman is wrong about a whole lot of things, but in a blog post the other day he absolutely nailed what is likely to soon unfold in Greece….
1. Greek euro exit, very possibly next month.
2. Huge withdrawals from Spanish and Italian banks, as depositors try to move their money to Germany.
3a. Maybe, just possibly, de facto controls, with banks forbidden to transfer deposits out of country and limits on cash withdrawals.
3b. Alternatively, or maybe in tandem, huge draws on ECB credit to keep the banks from collapsing.
4a. Germany has a choice. Accept huge indirect public claims on Italy and Spain, plus a drastic revision of strategy — basically, to give Spain in particular any hope you need both guarantees on its debt to hold borrowing costs down and a higher eurozone inflation target to make relative price adjustment possible; or:
4b. End of the euro.
By itself, Greece cannot crash the eurozone. But the precedent that Greece is about to set could set forth a chain of events that may very well bring about the end of the eurozone.
If one country is allowed to leave the euro, that means that other countries will be allowed to leave the euro as well. This is the kind of uncertainty that drives financial markets crazy.
When the euro was initially created, monetary union was intended to be irreversible. There are no provisions for what happens if a member nation wants to leave the euro. It simply was not even conceived of at the time.
So we are really moving into uncharted territory. A recent Bloomberg article attempted to set forth some of the things that might happen if a Greek exit from the euro becomes a reality….
A Greek departure from the euro could trigger a default-inducing surge in bond yields, capital flight that might spread to other indebted states and a resultant series of bank runs. Although Greece accounts for 2 percent of the euro-area’s economic output, its exit would fragment a system of monetary union designed to be irreversible and might cause investors to raise the threat of withdrawal by other states.
In fact, yields on Spanish debt and Italian debt are already rising rapidly thanks to the bad news out of Greece in recent days.
What makes things worse is that a new government has still not formed in Greece. It looks like new elections may have to be held in June.
Meanwhile, the Greek government is rapidly running out of money. The following is from a Bank of America report that was released a few days ago….
“If no government is in place before June when the next installment (of loan money) from the European Union and International Monetary Fund is due, we estimate that Greece will run out of money sometime between the end of June and beginning of July, at which point a return to the drachma would seem inevitable”
In the recent Greek elections, parties that opposed the bailout agreements picked up huge gains. And opinion polls suggest that they will make even larger gains if another round of elections is held.
The Coalition of the Radical Left, also known as Syriza, surprised everyone by coming in second in the recent elections. Current polling shows that Syriza is likely to come in first if new elections are held.
The leader of Syriza, Alexis Tsipras, is passionately against the bailout agreements. He says that Greece can reject austerity because the rest of Europe will never kick Greece out of the eurozone. Tsipras believes that the rest of Europe must bail out Greece because the consequences of allowing Greece to go bankrupt and fall out of the eurozone would be far too high for the rest of Europe.
A spokesman for Syriza, Yiannis Bournos, recently told the Telegraph the following….
“Mr Schaeuble [Germany’s finance minister] is pretending to be the fearless cowboy on the radio, saying the euro is secure [against a Greek exit]. But there’s no way they will kick us out”
So Greece and Germany are playing a game of chicken.
Who will blink first?
Will either of them blink first?
Syriza is trying to convince the Greek people that they can reject austerity and stay in the euro. Syriza insists that the rest of Europe will provide the money that they need to pay their bills.
And most Greeks do actually want to stay in the euro. One recent poll found that 78.1 percent of all Greeks want Greece to remain in the eurozone.
But a majority of Greeks also do not want anymore austerity.
Unfortunately, it is not realistic for them to assume that they can have their cake and eat it too. If Greece does not continue to move toward a balanced budget, they will lose their aid money.
And if Greece loses that aid money, the consequences will be dramatic.
Outgoing deputy prime minister of Greece Theodoros Pangalos recently had the following to say about what would happen if Greece doesn’t get the bailout money that it needs….
“We will be in wild bankruptcy, out-of-control bankruptcy. The state will not be able to pay salaries and pensions. This is not recognised by the citizens. We have got until June before we run out of money.”
If Greece gets cut off and runs out of money, it will almost certainly be forced to go back to using the drachma. If that happens there will likely be a “bank holiday”, the borders will be secured to limit capital flight and new currency will be rapidly printed up. It would be a giant mess.
In fact, there are rumblings that the European financial system is already making preparations for all this. For example, a recent Reuters article had the following shock headline: “Banks prepare for the return of the drachma”
But a new drachma would almost certainly crash in value almost immediately as a recent article in the Telegraph described….
Most economists think that a new, free-floating drachma would immediately crash by up to 50 percent against the euro and other currencies, effectively halving the value of everyone’s savings and spelling catastrophe for those on fixed incomes, like pensioners.
A Greek economy that is already experiencing a depression would get even worse. The Greek economy has contracted by 8.5 percent over the past 12 months and the unemployment rate in Greece is up to 21.8 percent. It is hard to imagine what Greece is going to look like if things continue to fall apart.
But the consequences for the rest of Europe (and for the rest of the globe) would be dramatic as well. A Greek exit from the euro could be the next “Lehman Brothers moment” and could plunge the entire global financial system into another major crisis.
Unfortunately, at this point it is hard to imagine a scenario in which the eventual break up of the euro can be avoided.
Germany would have to become willing to bail out the rest of the eurozone indefinitely, and that simply is not going to happen.
So there is a lot of pessimism in the financial world right now. Nobody is quite sure what is going to happen next and the number of short positions is steadily rising as a recent CNN article detailed….
After staying quiet at the start of the year, the bears have come roaring back with a vengeance.
Short interest — a bet on stocks turning lower — topped 13 billion shares on the New York Stock Exchange at the end of last month. That’s up 4% from March and marks the highest level of the year.
If the eurozone is going to survive, Greece must stay a part of it.
Instead of removing the weakest link from the chain, the reality is that a Greek exit from the euro would end up shattering the chain.
Confidence is a funny thing. It can take decades to build but it can be lost in a single moment.
If Greece leaves the euro, investor confidence in the eurozone will be permanently damaged. And when investors get spooked they don’t behave rationally.
A common currency in Europe is not dead by any means, but this current manifestation is now operating on borrowed time.
As the eurozone crumbles, it is likely that Germany will simply pull the plug at some point and decide to start over.
So what do you think?
Do you think that I am right or do you think that I am wrong?
Please feel free to post a comment with your thoughts below….