June 2015: Greece: Baby, Bundle Up, It’s Cold Outside

The news these past few days sounds like advertisements for a credit card debt solution company.  We can bundle all your old payments into one easy and affordable monthly payment.  The EU creditors won’t even look at the last Greek proposals and instead, crafted their own proposal, I mean ultimatum.  The new proposal by the EU creditors is essentially the same one they have been trying to make Greece accept since January.  What was that Einstein said about insanity?  Doing the samething over and over again and expecting different results is insane.  Not that the Greeks are that much saner with their proposals, although I don’t think they ever really expected the EU creditors and the IMF to really accept anything but strict adherence to the old agreement no matter haw impoverished the Greek people may become until the total debt is paid off in 2057.  Oh, but yes, the Greeks are expected to sign on for more debt to pay off the old debt and that may run in perpetuity unless the ECB president, Mario Draghi gets the four or five percent perpetual inflation that will make all of Europe wealthy beyond their fondest dreams.  But as we all know, or should know, inflation is a tax on the poor and the greater the inflation rate the exponentially greater is that tax.  With inflation we shall always have the poor with us.  So for all you fighting against income or wealth inequality, remember that very fact.

But back to the Greeks bearing free proposals in the form of costly wooden horses.  The Greek political part, Syriza, is playing a masterful game that has many of the EU creditors baffled.  While so many in Europe and the rest of the world have seen Greece as being in a very weak no-win political situation, I would believe that a few of those same people are starting to see the such is not the case.  You see, the last “original” Greek bail out was in 2012 and almost all that money went to the Greek bondholders.  You may remember that if Greece had defaulted on any of those government and corporate bonds the issuers of credit default swaps and other instruments of financial mass destruction would have been on the hook for the face value of those bonds.  Unfortunately most of those issuers didn’t have the reserves to soak up that much debt.  Hence, the IMF, the ECB, and The EU forced a weak Greek government to accede to the Creditors terms.  But that was not the first time Greece had trouble meeting their financial obligations.  Like a never ending story, we go back to 2010, then 2009, and even to 2002 when Goldman Sachs helped to restructure the Greek government finances and hide all the debt that government had contracted just to get Greece into the EMU.  That bit of inflation was good for Greece because they traded a weak currency for a strong one and the debts were denominated in the values of the Drachma, not the Euro.  So the game of extend and pretend went on.  But when the economic downturn came in 2008, Greece’s largest industry and economic contributor to its GDP headed south.  Follow the Baltic Dry Index, an index of prices for the transportation of bulk goods.  It is no secret that bulk transportation has been decreasing along with container traffic.  The Greek flag ships have been losing income ever since and that means a steady loss of revenue for the Greek government.

The agreements reached in 2012 changed many of the bonds from denomination in Drachmas or other old currencies to denomination in Euros.  And the stronger the Euro became in the world currency market, the more it hurt Greece in terms of competition in the world markets.  It also made exit from the EMU far more expensive than the Greeks could ever afford.  The problem of going back to the Drachma meant an immediate devaluation of their currency and having to repay loans in Euros instead of Drachmas made for an extremely expensive debt repayment.  And without an ally to help them through the hard times and exit was thought impossible.  Hence the confidence of the EU creditors and the IMF that Greece could be forced to bend to their rule.  But five years is a long time in the eyes of the Greek people when having to deal with austerity and the problems that come with such programs.  People stop paying taxes, start using currency to avoid records of business transactions, and otherwise interfere with the government’s ability to “earn a living” in order to pay those EU debts.  If the EU, the ECB, and the IMF give any slack to the Greeks, let alone take any sort of haircut on the collective debt, then other countries such as Portugal, who is ten feet under water at the moment, and Spain, and possibly Italy , will demand their share of debt forgiveness.  That would mean that the International Derivative (something) Association would have to declare credit events and those holders of derivatives would claim their insurance against those who issued those derivatives, against which there are no reserves for payment.  In short, this game of chicken is not so much about bonds not being repaid as it is that derivative contracts will not be honored and hence the breakdown of the financial world, first in Europe, and then in the Far East, in particular China.

Well, having on your team a grand master in Game Theory should have put the EU creditors, the ECB, and the IMF on notice that their politics as usual would never suffice.  Call Varoufakis am ammature in politics, if you will, but the policies the Finance ministry are following tells me otherwise.  They have just rejected the EU creditors latest collective agreement, which offers nothing new and certainly no relief for Greece, and now are faced with the ball back in their court.  By asking/telling the IMF to bundle the payments due by Greece to the IMF they are telling the world that perhaps they don’t have 300 million euros in the checking account at the moment but might have 1.5 billion to pay out at the end of the month.  I would doubt that they will have even a quarter of that by the end of the month.  So the game continues.  The EU, with the exception of German, which is divided as to keep or kick the Greeks out, know they have to keep the Greeks in the EMU if they are ever to see their money.  They should know that they can’t keep grinding the people’s faces in poverty and still expect them to pay up, common sense would dictate that acknowledgement.  But large sums of money, relatively speaking for what is large to some is miniscule to others, blinds many to the exercise of good judgment.  For the Greeks the game is tow fold.  Give us hair cuts on our debt and we stay, which is want we really want.  Or kick us out and then we will have no compunction about defaulting.  We acted in good faith and you are the bad guys who deserve your loses.  You might call this the Sam Spade Dilemma,  “You’ll do anything to know what I know.  And I’ll make it a point to die first.  See what I mean? ”  Yes, I do picture the EU creditors as a number of very fat Gutman’s sitting in their wingback chairs with a glass of whiskey in one hand and a big black cigar in the other, saying, “No sir, that just won’d do.  In the heat of anger men are most likely to forgot what is in their interest.”  I picture Christine Legarde as Wilmer, the cheap gunsel.  Well, Spade is hardly a Greek name but their is the Bogart quality to Varoufakis.  I can imagine telling Ms Merkel that he is sending her over for killing his country, That he won’t play the sap for her.  Many times fiction is much better at explaining politics and economics real life.  Of course that may be that both are fictions invented to masquerade as truth.  My vote is for the EU creditors to kick Greece out of the EMU.  I don’t see them backing down.  And they will take the losses that come with the Greek exit because to take haircuts and keep them will encourage the other PIGS (there used to be two I’s but Iceland left both the EU and defaulted on the illegal debt contracted by her bankers) to want more of the same.  The irony is that Spain, Portugal, and Ireland are committed to backstopping the losses.  Do you see the problems?  We’ll see long haired Greeks given the boot before we see them given haircuts.


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