Acropolis Now

I love the smell of printing money in the morning.” Angela Merkel, July 6, 2015. Cue Ben and his helicopters. A scene only Robert Altman could love. If the Tsipras and his government are acting in a Kabuki style theater, the EU Parliament is acting in a Three Stooges style pretension. You’ve got to believe that EU Parliament President Martin Schult is channeling Larry when he advocates: On Thursday, Schulz told German daily Handelsblatt that the elected Syriza government should be replaced by “technocrat” government until stability is restored.

We should appoint governments of technocrats,” Martin Schulz told Handelsblatt. Nuck, Nuck, Nuck.

The Greek people has just given the collective middle finger to Schulz and Merkel. Of course as the EU ministers had said last Saturday, what is there to discuss if Greece votes no? And they’re right, what is there left to discuss? Well, that economic moron Jeffry Sacks has advice for both sides. The Greeks should vote a unanimous no and the creditors should generously offer large discounts or debt forgiveness. That seems to be his big solution to world poverty, debt reduction and more economic aid. The rich countries have deep pocket and the poor countries need to have their empty pockets filled. Yeah, right, just print more money and use helicopters, as Bernanke once advised, to spread the wealth.

The real problem with this suggestion from Sachs is that if Greece, whose debt the IMF via Christine Legarde, has determined that the debt is structurally too large and cannot be maintained (too much debt, too little GDP to pay it back or even services – interest payments) should have partial debt forgiveness then all the other EU countries will want the same treatment. In response to the IMF statement the Podemos party of Spain and the Five Star party of Italy have drafted letters to the IMF asking for a determination of the sustainability of their respective countries debt. Ireland, Portugal, and even France, whose debt to GDP is now at 100 percent, will be scurrying to get in line. The question then becomes, if the creditors all agree to forgive a portion of the respective debts, then who takes the losses? If I remember correctly, Italy holds about 30 billion in Spanish government bonds and Spain holds about 20 billion in Italian government bonds. Obviously, he who defaults first wins. Debt forgiveness cannot be placed on the table and Syriza knew that going into the discussions. Greece played Europe like a fish.

He last player in the game for the EU is Mario Draghi and the ECB. George Saravelos has the simplest answer on this question. The ECB is scheduled to meet tomorrow morning to decide on ELA policy. An outright suspension would effectively put the banking system into immediate resolution and would be a step closer to Eurozone exit. All outstanding Greek bank ELA liquidity (and hence deposits) would become immediately due and payable to the Bank of Greece. The maintenance of ELA at the existing level is the most likely outcome, at least until the European political reaction has materialized. This will in any case materially increase the pressure on the economy in coming days.

The problem of trying to squeeze Greece out of the Eurozone, since it cannot be voted out, Greece would have to vote in agreement, is that Greece still has one last trump card, a printing press. On the other hand Varoufakis has indicated that government will issue a parallel script. This script will be used within Greece and paid to contractors and others as a kind of IOU. You may remember that the State of California did that very same thing during the Lehman collapse when there was very little cash liquidity in the state treasury. The revival of the Drachma would go against the EMU since only the Euro is recognized as the legal tender for the member states.

The other play is for the Greek government to nationalize the banks, if only temporarily, so as to avoid the ECB forcing a bail-in by depositors, something that would surely unseat the present government. This amounts to a sort of guerrilla warfare against the EU Parliament and the last step may be the declaration of a national emergency. Of course the irony will be the charges filed by both sides before the Lisbon EU Court and the possibility of Greece suing the ECB for dereliction of duty. He outcome should prove interesting and keep the markets in a good roil. But the fact remains that no matter the morally indefensible position of the EU creditors not granting an appropriate debt forgiveness, the reality is that they cannot. The moral hazard of having created far too much credit and allowing member states to indulge in debt to the extreme means that once debt forgiveness starts the entire financial house of cards collapses. Extend and pretend has just gotten deadly for the EMU.

Of course if Greece finally leaves the Eurozone then the problem for those members who are left is to pay for that final act of defiance. The current ELA funds that have been “lent” to the Greek Central Bank for liquidity purposes are about 130-140 billion euros now and could go much higher. The total debt, which I doubt Greece will make some if any effort to repay weight in around 360 euros. As one US Senator once said, “A billion here, a billion there, soon it adds up to real money.” The loses in ELA and other EU fund will be shared by the remaining countries. Can Spain really afford to pay out 20 billion or so to cover the Greek exit? A single domino never believes it’s to blame for the falling of all the others. This is the beginning of the fall and this slow motion train wreck called the Greek problem is about to speed up quite quickly and derail the other trains in the freight yard.

I would expect the ECB and Greek government to play their respective games with a view that Greece leaves the Eurozone by the end of the year. I say this because it is really up to the Germans as to how long Greece stays. It will cost the ECB a considerable amount of funds to keep the ELA funds going more than six months at the maximum and Germany, while it needs Greece to stay, is not willing to bear that burden beyond a very short term. The political climate in Germany that Greece must go and if Merkel is to have any chance of completing her term as Chancellor, she cannot afford to burden the people or her own party with the Greek problem. And while German could weather a Greek default, it cannot overcome defaults or even debt forgiveness to the other PIGS. This is the problem. Everyone has skin in the game and everyone gets hurt. The German problem is that for years, decades, they have made a tidy living exporting goods and services and financing those exports. Unfortunately they, like the Japanese, gave far too much credit and not those past profits are turning into present losses. If fact, Europe is on the verge of a great depression due to excessive credit. Greece is just one domino. Look to the east and China. When the People’s Bank of China starts buying up stocks in the markets trying to stabilize prices and failing because the markets are fantastically over sold, then one can watch the destruction of an indestructible economy. Chinese imports are way down and that means Germany is not exporting as it was before. Already the manufacturing index for Germany shows no growth, only decline. Her exports are in decline. Internal consumption has not risen to take the slack. I would believe that sometime in 2016 Europe will be in a depression. True, they might hold out an extra year, much depends of China.


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