Greece Rejects Bailout Deal – Deadline To Avoid Financial Chaos In Europe Is March 1st

No - Public DomainEurope is on the verge of a horrifying financial meltdown, and there are only a few short weeks left to avert total disaster.  On Monday, talks that were supposed to bring about yet another temporary “resolution” to the Greek debt crisis completely fell apart.  The new Greek government has entirely rejected the idea of a six month extension of the current bailout.  The Greeks want a new deal which would enable them to implement the promises that have been made to the voters.  But that is not going to fly with the Germans, among others.  They expect the Greeks to fulfill the obligations that were agreed to previously.  The two sides are not even in the same ballpark at this point, and things are starting to get very personal.  It is no secret that the new Greek government does not like the Germans, and the Germans are not particularly fond of the Greeks at this point.  But unless they can find a way to work out a deal, things could get quite messy very rapidly.  The Greek government has about three weeks of cash left, and any changes to the current bailout arrangement would have to be approved by parliaments all over Europe by March 1st.  And the stakes are incredibly high.  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.

On Monday, eurozone officials tried to get the Greeks to extend the current bailout package for six months with the current austerity provisions in place.  Greek government officials responded by saying that “those who bring this back are wasting their time” and that those negotiating on behalf of the eurozone are being “unreasonable”

A Greek government official said that a draft text presented to eurozone finance ministers meeting in Brussels on Monday spoke of Greece extending its current bailout package and as such was “unreasonable” and would not be accepted.

Without specifying who put forward the text to the meeting chaired by Dutch Finance Minister Jeroen Dijsselbloem, the official said: “Some people’s insistence on the Greek government implementing the bailout is unreasonable and cannot be accepted.”

Most observers have speculated that the new Greek government would give in to the demands of the rest of the eurozone when push came to shove.

But these new Greek politicians are a different breed.  They are not establishment lackeys.  Rather, they are very principled radicals, and they are not about to be pushed around.  I certainly do not agree with their politics, but I admire the fact that they are willing to stand up for what they believe.  That is a very rare thing these days.

On Monday, Greek finance minister Yanis Varoufakis shared the following in the New York Times

I am often asked: What if the only way you can secure funding is to cross your red lines and accept measures that you consider to be part of the problem, rather than of its solution? Faithful to the principle that I have no right to bluff, my answer is: The lines that we have presented as red will not be crossed.

Does that sound like a man that is going to back down to you?

Meanwhile, the other side continues to dig in as well.

Just consider the words of the German finance minister

Wolfgang Schaeuble, the German finance minister, accused the Greek government of “behaving irresponsibly” by threatening to tear up agreements made with the eurozone in return for access to the loans which are all that stand between Greece and financial collapse.

“It seems like we have no results so far. I’m quite skeptical. The Greek government has not moved, apparently,” he said.

“As long as the Greek government doesn’t want a program, I don’t have to think about options.”

Global financial markets are still acting as if they fully expect a deal to get done eventually.

I am not so sure.

And without a doubt, time is running short.  As I mentioned above, something has got to be finalized by March 1st.  The following comes from the Wall Street Journal

Any changes to the content or expiration date of Greece’s existing €240 billion ($273 billion) bailout have to be decided by Friday, to give national parliaments in Germany, Finland and the Netherlands enough time to approve them before the end of the month. Without such a deal, Greece will be on its own on March 1, cut loose from the rescue loans from the eurozone and the International Monetary Fund that have sustained it for almost five years.

So what happens if there is no deal and Greece is forced to leave the eurozone?

Below, I have shared an excerpt from an article that details what Capital Economics believes would happen in the event of a “Grexit”…

  • The drachma would be back. The euro would be effectively abandoned, and Greece would return to the drachma, its previous currency (it might take a new name). The drachma would likely tumble in value against the euro as soon as it was issued, and how much the government could print quickly would be a big issue.
  • It would have to be fast, with capital controls. There would be people trying to pull their money out of Greece’s banks en masse. The Greek government would have to make that illegal pretty quickly. The European Central Bank drew up Grexit plans in 2012, and might be dusting them off now.
  • European life support for Greek banks would be withdrawn. Greek banks can currently access emergency liquidity assistance from the ECB, which would be removed if Greece left the euro.
  • Likely unrest and disorder. Barclays expects that this sudden economic collapse would “aggravate social unrest”, and notes that historically similar moves have caused a 45-85% devaluation of the currency. Capital Economics suggests that the drop could be more mild, closer to 20%, and Oxford Economics says 30%.
  • Greece would resume economic policymaking. Greece’s central bank would probably start doing its own QE programme, and the government would likely return to running deficits, no longer restrained by bailout rules (though investors would probably want large returns, given the risk of another default).
  • Inflation would spike immediately, but both Capital Economics and Oxford Economics say that should be temporary. It might look a bit like Russia this year — with the new currency in freefall until it finds its level against the euro, prices inside Greece would rise at dramatic speed. The inflation might be temporary, however, because with unemployment above 20%, Greece has plenty of spare labour slack to produce more.

That certainly does not sound good.

And once Greece leaves, everyone would be wondering who is next, because there are quite a few other deeply financially troubled nations in the eurozone.

David Stockman believes that Spain is a prime candidate…

In spite of the “recovery” in Spain, close to 24% are still unemployed. That statistic explains Pessimism in the Streets.

The crisis is here to stay according to significant majority of Spaniards. The general perception is that the current situation in which the country is negative and far from getting better, can only stay stagnant or even worse.

A Metroscopia poll published in El País makes it clear that the Spanish are unhappy with the current state of the country. Five out of six (83%) see the economic situation as “bad”, while more than half of the remaining perceive “regular”.

Right now, Europe is already teetering on the brink of an economic depression.

If this Greek debt crisis is not resolved, it could set in motion a chain of events which could start collapsing financial institutions all over Europe.

Yes, we have been here before and a deal has always emerged in the end.

But this time is different.  This time very idealistic radicals are running things in Greece, and the “old guard” in Europe has no intention of giving in to them.

So let’s watch and see how this game of “chicken” plays out.

I have a feeling that it is not going to end well.

Eurobonds: The Issue That Could Shatter Europe

Would you pool your debt with a bunch of debt addicts that have no intention of reducing their wild spending habits?  Of course you wouldn’t.  But that is exactly what Germany is being asked to do.  Increasingly, “eurobonds” are being touted as the best long-term solution to the financial crisis in Europe.  These eurobonds would represent jointly issued debt by all 17 members of the eurozone.  This debt would also be guaranteed by all 17 members of the eurozone.  This would allow all countries in the eurozone to enjoy the same credit rating that Germany does, and borrowing costs for nations such as Greece, Portugal, Italy and Spain would plummet.  But borrowing costs for Germany would rise substantially.  In fact, it is being estimated that Germany could be facing an extra 50 billion euros a year in interest expenses.  So over ten years that would come to about 500 billion euros.  Needless to say, Germany is not thrilled about this idea.  But new French President Francois Hollande is pushing eurobonds very hard, and he has the support of the OECD, the IMF and many top Italian politicians.  In the end, this could be the key to the future of the eurozone.  If the Germans give in and decide that they are willing to deeply subsidize their profligate neighbors indefinitely, then the euro could potentially be saved.  If not, then this issue could end up shattering Europe.

It is easy to try to portray the Germans as the “bad guys” in all this, but try to step into their shoes for a minute.

If you had some relatives that were spending wildly and that had already run up $100,000 in credit card debt, would you be a co-signer on their next credit card application?

Of course not.

The recent elections in France and Greece made it abundantly clear that the populations of those two countries are rejecting austerity.

Instead, they want a return to the debt-fueled prosperity that they have always enjoyed in the past.

Unfortunately, they need German help to be able to do that.

That is why new French President Francois Hollande is pushing so hard for eurobonds.  He wants the rest of the eurozone to be able to “piggyback” on Germany’s sterling credit rating so that everyone can return to the days of wild borrowing and spending.

But Germans greatly fear what a co-mingling of eurozone debt could eventually mean.  Not only would Germany’s borrowing costs rise dramatically, but there is also a concern that the rest of the eurozone could eventually pull Germany down with them.

Austria, Finland and the Netherlands are also against eurobonds, but the key is Germany.

For now, Germany is not budging on the issue of eurobonds at all.  The following is a statement that German Chancellor Angela Merkel made during a recent speech in Berlin….

“It’s just about not spending more than you collect. It’s astonishing that this simple fact leads to such debates”

And she is right.

Why is it so controversial to insist that people not spend more than they bring in?

But this is the problem that is created when you create a false lifestyle fueled by debt that goes on for decades.  People become accustomed to that false standard of living and they throw hissy fits when that false standard of living begins to disappear.

The Germans don’t want to make great sacrifices just so the Greeks, the French and the Italians can go back to borrowing and spending wildly.

Why would the Germans want to do that?

And as a recent CNN article noted, German politicians believe that eurobonds are explicitly banned under existing EU treaties anyway….

“There is no way of introducing them under the current [EU] treaties. Indeed, there is an explicit ban on them,” one senior German official said, adding Berlin would not drop its opposition in the foreseeable future. “That’s a firm conviction which will not change in June.”

But politicians such as Hollande are complaining that austerity could seriously damage living standards throughout Europe.

And Hollande is right about that.

When you inflate your standard of living with borrowed money for many years, eventually there comes a time when you must pay a great price.

Anyone that has ever been in trouble with credit card debt knows how painful that can be.

It is shameful for the rest of Europe to be pleading and begging Germany to help them.

They should take care of themselves.

As I wrote about the other day, Greece would be much better off in the long run if it left the euro and created a new financial system based on sound financial principles.

But in the financial press all over the world there are calls for someone to come up with a “plan” to “rescue” Europe.  For example, the following is from a recent Wall Street Journal article….

There have been two main responses to the crisis: austerity, and kicking cans down roads. Austerity, in case you haven’t noticed, is so last year. It’s out. Which means that unless something else is found, some other comprehensive plan, the other main response, can kicking, is going to run out of road.

Just about everybody backed the idea of eurobonds, except for the Germans, and since they’re the ones with all the money, they’re kind of the only ones whose vote counts anyway. So, it’s time to go to plan B. Only there’s no Plan B, and there’s no time, either.

If Germany does not agree to subsidize the rest of the eurozone, will that ultimately mean that the eurozone will be forced to break up?

Probably.

And that would cause a huge amount of pain in the short-term.

But the euro never was a good idea in the first place.  It was foolish to expect a monetary union to work smoothly in the absence of fiscal and political union.

And to be honest, the entire world would be a better place with less European integration.  The EU has become a horrifying bureaucratic nightmare and it would be wonderful if the entire thing broke up.

But for now, the only thing that is in danger is the euro.

Increasingly, it is looking like Greece may be the first country to exit the euro.

This week, former Greek Prime Minister Lucas Papademos admitted that the Greek government is considering making preparations for Greece to leave the euro.

Not only that, Reuters is reporting that top officials in the eurozone are now working on “contingency plans” for a Greek exit from the euro….

Each euro zone country will have to prepare a contingency plan for the eventuality of Greece leaving the single currency, euro zone sources said on Wednesday.

Officials reached the consensus on Monday afternoon during an hour-long teleconference of the Eurogroup Working Group (EWG).

As well as confirmation from three euro zone officials, Reuters has seen a memo drawn up by one member state detailing some of the elements that euro zone countries should consider.

So obviously a Greek exit from the euro has become a very real possibility.

A recent Bloomberg article detailed how a Greek exit from the euro could play out during the 46 hours that global financial markets are closed over the weekend….

Greece may have only a 46-hour window of opportunity should it need to plot a route out of the euro.

That’s how much time the country’s leaders would probably have to enact any departure from the single currency while global markets are largely closed, from the end of trading in New York on a Friday to Monday’s market opening in Wellington, New Zealand, based on a synthesis of euro-exit scenarios from 21 economists, analysts and academics.

Over the two days, leaders would have to calm civil unrest while managing a potential sovereign default, planning a new currency, recapitalizing the banks, stemming the outflow of capital and seeking a way to pay bills once the bailout lifeline is cut. The risk is that the task would overwhelm any new government in a country that has had to be rescued twice since 2010 because it couldn’t manage its public finances.

Right now, nobody is quite sure what is going to happen next and panic is spreading throughout the European financial system.

At this point, everyone is afraid of what is going to happen if Greece is forced to start issuing drachmas again.  As CNBC is reporting, some big European corporations are already beginning to implement their own “contingency plans”….

Big tourism operators like TUI of Germany and Kuoni of Britain are demanding the addition of so-called drachma clauses to contracts with Greek hoteliers should the euro no longer be in use here. British newspapers are filled with advice columns for travelers worried about the wisdom of planning a vacation in Greece, or even Portugal and Spain, should the euro crisis worsen. Large multinational companies like Vodafone Group, Reckitt Benckiser and Diageo have taken to sweeping cash every day from euro accounts back to Britain to limit their exposure.

Sadly, this is probably only a small taste of the financial anarchy that is coming.

France is likely to keep pushing hard for the creation of eurobonds.

Germany is likely to keep fiercely resisting this.

At some point, a moment of crisis will arrive and a call will have to be made.

Will Germany give in or will political turmoil end up shattering Europe?

It will be interesting to see how all of this plays out.

Ack! They Are Actually Going To Let Greece Default!

I wish that I had an “aha moment” to share with you today, but instead all I have is an “ack moment” to share.  As I was analyzing all of the info coming out of Europe in recent days, I came to the following realization: “Ack! They are actually going to let Greece default!”  The only question is whether it is going to be an orderly default or a disorderly default.  Of course the EU (led by Germany) could save Greece financially if it wanted to.  But Germany has decided against that course of action.  Many in the German government are sick and tired of pouring bailouts into Greece and then watching Greek politicians fail to fully implement the austerity measures that were agreed upon.  At this point a lot of German politicians are talking as if a Greek default is a foregone conclusion.   For example, Michael Fuchs, the deputy leader of Angela Merkel’s political party, recently made the following statement: “I don’t think that Greece, in its current condition, can be saved.”  But that is not entirely accurate.  Greece could be saved, but the Germans don’t want to make the deep financial sacrifices necessary to save Greece.  So instead they are going to let Greece default.

Many prominent voices in the financial world that have been watching all of this play out are now openly declaring the Greece is about to default.  Moritz Kraemer, the head of S&P’s European sovereign ratings unit, made the following statement on Bloomberg Television on Monday: “Greece will default very shortly. Whether there will be a solution at the end of the current rocky negotiations I cannot say.”

You might want to go back and read that again.

One of the top officials at one of the top credit rating agencies in the world publicly declared on television that “Greece will default very shortly.”

That should chill you to your bones.

If the EU allows Greece to default, that would be a signal to investors that the EU would allow Italy, Spain and Portugal to all default someday too.

Confidence in the bonds of those countries would disintegrate and bond yields would go through the roof.

Right now, confidence in government debt is one of the things holding up the fragile global financial system.  Governments must be able to borrow gigantic piles of very cheap money for the system to keep going, and once confidence is gone it is going to be incredibly difficult to rebuild it.

That is why a Greek default (whether orderly or disorderly) is so dangerous.  Investors all over the world would be wondering who is next.

At the end of last week, negotiations between the Greek government and private holders of Greek debt broke down.  Negotiations are scheduled to resume Wednesday, and there is a lot riding on them.

The Greek government desperately needs private bondholders to agree to accept a “voluntary haircut” of 50% or more.  Not that such a “haircut” will enable the Greek government to avoid a default.  It would just enable them to kick the can down the road a little farther.

But if Greece is able to get a 50% haircut from private investors, then why shouldn’t Italy, Spain, Portugal and Ireland all get one?

Once you start playing the haircut game, it is hard to stop it and it rapidly erodes confidence in the financial system.

This point was beautifully made in a recent article by John Mauldin….

So our problem country goes to its lenders and says, “We think you should share our pain. We are only going to pay you back 50% of what we owe you, and you must let us pay a 4% interest rate and pay you over a longer period. We think we can do that. Oh, and give us some more money in the meantime. And if you refuse, we won’t pay you anything and you will all have a banking crisis. Thanks for everything.”

The difficult is that if our problem country A gets to cut its debt by 50%, what about problem countries B, C, and D? Do they get the same deal? Why would voters in one country expect any less, if you agree to such terms for the first country?

But if Greece is able to negotiate an “orderly default” with private bondholders, that would be a lot better than a “disorderly default”.  A disorderly default would cause mass panic throughout the entire global financial system.

One key moment is coming up in March.  In March, 14 billion euros of Greek debt is scheduled to come due.  If Greece does not receive the next scheduled bailout payment, Greece would default at that time.

But the EU, the ECB and the IMF are not sure they want to give Greece any more money.  There are a whole host of austerity measures that the Greek government agreed to that they have not implemented.

Since the Greeks have not fully honored their side of the deal, the “troika” is considering cutting off financial aid.  The following comes from the New York Times….

Officials from the so-called troika of foreign lenders to Greece — the European Central Bank, European Union and International Monetary Fund — have come to believe that the country has neither the ability nor the will to carry out the broad economic reforms it has promised in exchange for aid, people familiar with the talks say, and they say they are even prepared to withhold the next installment of aid in March.

But the austerity measures that Greece has implemented so far have pushed the Greek economy into a full-blown depression.  Greece is experiencing a complete and total economic collapse at this point.  The following comes from the New York Times….

Greece’s dire economic condition can hardly be overstated. After two years of tax increases and wage cuts, Greek civil servants have seen their income shrink by 40 percent since 2010, and private-sector workers have suffered as well. More than $75 billion has left the country as people move their savings abroad. Some 68,000 businesses closed in 2010, and another 53,000 — out of 300,000 still active — are said to be close to bankruptcy, according to a report issued in the fall by the Greek Co-Federation of Chambers of Commerce.

“It’s an implosion — it’s an endless sequence of implosions from bad to worse, to worse, to worse,” said Yanis Varoufakis, an economics professor at the University of Athens and commentator on the Greek economy. “There’s nothing to stop the Greek economy losing 60 percent of its G.D.P., given the path it is at.”

But Greece is not the only one in Europe with major economic problems.  The unemployment rate for those under the age of 25 in the EU is an astounding 22.7%.  And as I have written about previously, there are a whole host of signs that Europe is on the verge of a major recession.

Greece is just the canary in the coal mine.  The truth is that the entire European financial system is in danger of collapsing.

Today, it was announced that S&P has downgraded the European Financial Stability Facility.  It is pretty sad when even the European bailout fund is getting downgraded.

Of course most of you know what happened on Friday by now.  Very shortly after U.S. financial markets closed, S&P downgraded the credit ratings of nine different European nations.

Only four eurozone nations (Germany, Luxembourg, Finland, and the Netherlands) still have a AAA credit rating from S&P.

But even more importantly, the nightmarish decline of the euro is showing no signs of stopping.

Right now, the EUR/USD is down to 1.2650.  It is hard to believe how fast the EUR/USD has fallen, but if a major financial crisis erupts in Europe it is probably going to go down a whole lot more.

So what happens next?

Well, if there is a Greek default all hell will break loose in Europe.

But even if Greece does not default, the coming recession in Europe is going to put an incredible amount of strain on the eurozone.

Many have been speculating that Greece or Italy could be the first to leave the euro, but actually it may be the strongest members that exit first.

The number of prominent voices inside Germany that are calling for Germany to leave the euro continues to increase.

In addition, public opinion in Germany is rapidly turning against the euro.  One recent poll found that only 47 percent of Germans were glad that Germany joined the euro, and only 36 percent of Germans want “a more federal Europe”.

As this crisis continues to unfold, there will probably be even more “ack moments”.  European leaders have mismanaged this crisis very badly from the start, and there is no reason to believe that they are suddenly going to become much wiser.

Once again, it is important to emphasize the role that confidence plays in our financial system.  The entire global financial system runs on credit.  Banks and investors lend out money because they have confidence that they will be paid back.  When you take that confidence away, the system does not work.

Let us hope that the folks over in Europe understand this, because right now we are steamrolling toward a credit crunch that could potentially make 2008 look tame by comparison.

***Epilogue***

Now another of the three major credit rating agencies, Fitch, is publicly saying that Greece will default….

“It is going to happen. Greece is insolvent so it will default,” Edward Parker, Managing Director for Fitch’s Sovereign and Supranational Group in Europe, the Middle East and Africa told Reuters on the sidelines of a conference in the Swedish capital. “So in that sense it shouldn’t be a surprise to anyone.”

Do NOT follow this link or you will be banned from the site!