4/7/15: Timeline for Greece and Some Anchoring

Greece timeline for the weekend:

Greece has missed the IMF and ECB payments this week with both non-payments having potential for triggering a mother of all defaults for Greece: the ESM/EFSF loans call-in (EUR145bn worth of debt).

The EFSF/ESM decision so far has been to 'ignore' the arrears, noting that non-payment to IMF qualifies as "an event of default":

"The Board of Directors of the European Financial Stability Facility (EFSF) decided today to opt for a Reservation of Rights on EFSF loans to Greece, after the non-payment of Greece to the International Monetary Fund (IMF). Following the IMF Managing Director's notification of the IMF Executive Board, this non-payment results in an Event of Default by Greece, according to EFSF financial agreements with Greece."

Greece owes the EFSF EUR109.1bn in "Master Financial Assistance Facility Agreement" loans, plus EUR5.5bn in "Bond Interest Facility Agreement" loans and EUR30bn more in "Private Sector Involvement Facility Agreement" loans.

For now, EFSF decided not to call in loans, preferring to wait for Sunday vote outcome. Per EFSF statement: "In line with a recommendation by the EFSF's CEO Klaus Regling, the EFSF Board of Directors decided not to request immediate repayment of its loans nor to waive its right to action – the other two possible options. By issuing a Reservation of Rights, the EFSF keeps all its options open as a creditor as events in Greece evolve. The situation will be continuously monitored and the EFSF will consider its position regularly."

A 'No' vote in the Sunday referendum can change that overnight.

This adds pressure on Greece to pass a 'Yes' vote - a pressure that is most publicly crystallised in the form of ECB refusal to lift ELA to Greek banks. Athens imposition of capital controls (limiting severely cash withdrawals from the banks) has meant that the current level of ELA (CHART below) is still sufficient to hold the bank run, but the ELA cushion remaining in Greek banks was estimated at EUR500mln at the start of this week. Even with capital controls in place, this would have dwindled to around EUR250-300mln by the week end.

Again, a 'No' vote in the referendum risks crashing Greek banks as ECB will be unlikely to lift ELA any more. In an indirect sign of this, the ECB appears to be setting up swap lines and euro credit lines for EU member states outside the euro area. For example, as reported by Bloomberg, "European Central Bank is set to extend a backstop facility to Bulgaria and is ready to assist other nations in the region to ward off contagion from Greece, according to people familiar with the situation". Such a move is a clear precautionary measure to put into place firewalls around Greek system.

Meanwhile, here is a report suggesting that Greek banks are preparing for an aggressive bail-in of deposits in the case of a 'No' vote (assuming ELA cut off):

The Government denied the reports of preparations of bail-ins, and continues to insist that the banks will reopen on Tuesday, a day after the referendum results are published, but it is hard to imagine how this can be done (unless the banks start trading in drachma) without ECB hiking ELA, and it is even harder to imagine how ECB can hike ELA in current conditions.

Source: TheodoreZ

So far, public opinion polls in Greece show very tight vote for Sunday. The latest GPO poll has the "Yes" vote at 44.1% and "No" at 43.7%. Alco poll puts the “Yes” figure at 41.7% against 41.1% for “No”. All together, four opinion polls published yesterday put the 'Yes' vote marginally ahead, another poll fifth put the 'No' camp 0.5 percent in front. All polls results were well within the margin of error. At the same time, majority of polls also show Greeks favouring remaining in the euro by a roughly 75 percent margin.

REFERENDUM TIMELINE
Sunday 5th July:
Polls open – 0500BST/0000EDT
Polls close – 1700BST/1200EDT

First exit poll – Shortly after 1700BST/1200EDT

~20% of votes counted – 1900BST/1300EDT
~50% of votes counted – 2100BST/1600EDT
~70% of votes counted – 2200BST/1700EDT (markets open)
~90% of votes counted – 0000BST/1900EDT

Timeline source: Trading Signal Labs

The build up of tension ahead of the Sunday poll has been immense. Even international bodies are being convulsed by the potential for a 'No' vote. So much so, that, as reported by a number of media outlets, there was a major cat fight between European members of the IMF and other IMF board members.

As reported by Reuters at Wednesday board meeting of the IMF, European members of the board attempted to block IMF from publishing its analysis of debt sustainability for Greece.

Quoting from the report: ""It wasn't an easy decision," an IMF source involved in the debate over publication said. "We are not living in an ivory tower here. But the EU has to understand that not everything can be decided based on their own imperatives." The board had considered all arguments, including the risk that the document would be politicized, but the prevailing view was that all the evidence and figures should be laid out transparently before the referendum. "Facts are stubborn. You can't hide the facts because they may be exploited," the IMF source said."

If only European members of the IMF Board were as concerned with the reality of the Greek crisis on the ground as they are concerned with the appearances and public disclosures of that reality.

A neat reminder of how bad things are in Greece today, via @RBS_Economics

Source: @RBS_Economics

As numbers tell, Greece has posted one of the worst collapses in economy for any advanced economy since 1870, fourth worst for periods outside WW1 and WW2.


So what to expect?

• In the event of a 'Yes' we are likely to see a significant bounce in the markets from the current levels, with euro strengthening on the news in the short run. But real re-pricing will only take place when there is more clarity on post-referendum bailout agreement. The key risk to that outlook is that a 'Yes' vote can trigger early elections - which will (1) extend the current mess for at least another 1-2 months, and (2) put new sources of uncertainty forward - as outcome of such elections will be highly unpredictable. I do not expect the EU to re-start new deal negotiations until after the elections, which means that there will be mounting, not abating pressures on the Greek voters to vote in 'the right' Government, acceptable to the Troika.
• In the event of a 'No' we are likely to see serious run on the markets in Greece and some 'peripheral' states, especially Italy. Greek capital controls will have to be stepped up significantly. Euro is likely to weaken in the short run, especially if ECB aggressively moves to monetise risks via both accelerated QE purchases and lending to non-euro banks.

Beyond these two possible scenarios, everything else is in the realm of wild speculation.

3/7/15: Add ECB to IMF and Greek arrears can get ugly...

Ah, remember Brodsky's "Urania is old than sister Clio" bit? Well, not in finance. Apparently, or allegedly, as reported in press, Greece is now in arrears (err... default, or not or whatever) not only on IMF, but also on ECB. See this.

Which relates to 1993 loans, last repayment of which was due in June this year and amounted to EUR470mln. And which were not paid.

The gyrations of Greek and Troika positions are out of the league of the ordinary.

We had a threat to take EU to court over threats of forcing Grexit (see here). Which is quite bizarre (on the EU side), given the Institutions have already said that the very subject of the referendum is non-sensical as no deal exists to carry out referendum over (see here), though such statements did not preclude the EU leaders from calling for a 'Yes' vote in the referendum (see here).

And the EU and some internal Greek concerns about constitutionality of the Greek referendum (see here).

In simple terms, we have a mash of contradictions: a referendum that has no grounds in terms of its outcome is nonetheless of questionable constitutionality, though the voters should vote 'yes' regardless, because, presumably, an outcome that is not an outcome is preferred to a different outcome that is not a outcome... [someone should stop spinning the world around us]...

We also have IMF that was forced (by a leak) to release its (preliminary - aka... "we say so, but we don't say so") analysis of Greek debt sustainability (see simplified version here and full version from the source here). Surprise, surprise... those of us not paid lavish salaries by the IMF turned out to be right: Greek debt sustainability thesis is nonsense, a pipe dream made up of flour, feathers and water...

Meanwhile, the ECB - not to be outdone by the fellow jostlers or jousters - is entering a probabilistic game of guessing Greek banks solvency (condition for accessing ELA is solvency of the banks, which, until today was a concept of 0=insolvent, 1=solvent and is now 0.1%=solvent 49.9%='something of sorts' and the rest... err... well, we await holding our breath for a technical paper from the ECB staff on that one) on the basis of referendum outcome (see here).

Next turn will be for the EU or may be ESM/EFSF as ECB (rumoured above) default trigger for EFSF default is "Very Likely" and can only be 'corrected' for via a new deal agreement (see here).

Have fun deciphering the torrent of news, views and leaks that the Greek crisis has unleashed. In the mean time, the only conclusive statement to be made is that we are in a situation where headless chickens are trying to round up legless lambs... all performed in a quicksand pit...

25/6/15: Monetising Greece

Recently, I mused about cash balances in Greece being monetised by the ECB.

Here is some evidence. First Greek holdings of cash:

Next: Eurosystem ELA:

23/6/15: In the parallel Universe of Greece: Strangulation is Cure

Greece has been 'repaired' with an application of yet another plaster to a gaping shark wound.

ECB hiked ELA once again, this time, reportedly, by 'just under' EUR1bn.

The terms of 'repairs' are sketchy for now, but for the economy that shrunk 23% since pre-crisis peak in real terms, we have novel - nay, breakthrough novel - measures to support growth included in the deal:

1. Corporate tax is rising from rather un-competitive 26% to highly uncompetitive 29%
2. Corporate profits in excess of EUR500K/pa are hit with 'solidarity' levy of 12%
3. Personal taxes are up, VAT is up, pensions levies are up, property taxes are up
4. Debt relief is not on the cards, as per Angela Merkel, the 180% GDP debt mountain "...is not an urgent question".

Summary of key financials on the 'deal' is here:

In short, we have an equivalent of economic idiocy here: an economy chocked by too much debt is being given a green light to get more debt. In exchange for this debt, the economy will be chocked some more (by some 2.7% of GDP on full year basis), so that more debt given to it can be rolled over with a pretence of sustainability.

As European leaders celebrate this crowning achievement of statism by replaying the same song for the 5th time whilst hoping for a different result. One has to wonder if there is something fundamentally, deeply, inexplicably wrong with the EU logic.

Or may be, just may be, the Greek 'reforms' are a herald of things to come under the Juncker-proposed, ECB et al approved, new Federalismo 2.0 plan? Why, check the leaks on that one: 

http://www.wsj.com/articles/new-eurozone-plan-calls-for-greater-economic-cohesion-within-currency-bloc-1434919204.

21/6/15: ECB ELA for Greece: Welcome to a Daily Drip of 'Solvency'

Two days ago, I speculated on ECB's motives for drip-feeding ELA liquidity provisions to Greek banks (http://trueeconomics.blogspot.ie/2015/06/1962015-greek-ela-and-ecb-whats.html). And I have noted consistently that ELA is now running against available liquidity cushion, meaning Greek banks are now simultaneously, skirting close to ELA limits in terms of

• Eligible collateral, and
• ELA funds available to cover deposits outflows.

So, not surprisingly, two links come up today:

1. Ekathimerini reports that Greek banks have enough ELA-supported liquidity to sustain capital outflows through Monday only: http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_1_20/06/2015_551285 as on the day of EUR1.8 bn ELA extension approved by the ECB< Greek banks bled EUR1.7 billion in deposits, bringing week's total to EUR4.2 billion in outflows, and
2. Reuters report that the ECB has been all along planning to review/upgrade ELA after Monday emergency summit: http://www.reuters.com/article/2015/06/19/us-eurozone-greece-pm-idUSKBN0OZ0DP20150619

Thing is, Greek banks are now solvent solely down to an almost daily drip-feeding of liquidity by the ECB. Which, sort of, shows up the entire charade of the dysfunctional euro system: the pretence of monetary and financial systems stability is being sustained by not just extraordinary measures, but by an ICU-like mechanics of assuring that a patient is not pronounced dead too soon...

19/6/2015: Greek ELA and ECB... What's the Rationale?

The price of getting Greece ejected or pushed out of the euro has now risen once again as ECB added to the ELA provided to Greek banks amidst a bank run that is sapping as much as EUR800mln per day.

In basic terms, ECB is allowing lending via Eurosystem to Greek banks to fund withdrawals of deposits. Once deposits are monetised and shifted out of Greek banks, Eurosystem holds a liability, Greek depositors hold an asset and the latter cannot be seized to cover the former. ECB was very unhappy with doing the same for Ireland at the height of the crisis, resulting in a huge shift of ELA debt onto taxpayers' shoulders via Anglo ELA conversion into Government bonds.

But ECB continues to increase Greek ELA. Why? We do not know, but we can speculate. Specifically there can be only three reasons the ECB is doing this:

Reason 1: increase the cost of letting Greece go. If Greece crashes out of the euro zone, the ELA liabilities will have to be covered out of Eurosystem funds, implying - in theory - a hit on member-states central banks. In theory, I stress this bit, this means higher ELA, greater incentives to keep member states negotiating with intransigent Greece. Why am I stressing the 'in theory' bet? Because in the end, even if Greece does crash out of the euro area, ELA liabilities can be easily written off by the ECB or monetized (electronically) without any cost to the member states.

Reason 2: keep Greece within the euro area as long as possible, thus allowing the member states to hammer out some sort of an agreement. In theory, this implies that the ECB is buying time by giving cash to Greek depositors so they can run, in hope that they continue to run at a 'reasonable' rate (at, say, less than EUR2 billion per day or so). In practice, however, this is a very short-term position.

Reason 3: ECB is monetizing Greek run on the banks in hope that Greece does crash out of the euro. Here's how the scheme might work: increasing ELA for Greece weakens Greek banks and, simultaneously, strengthens the incentives for Greece to exit the euro once deposits left in the system become negligible and the economy is fully cashed-in. On such an exit, Greek residents will be holding physical euros that cannot be expropriated by the Eurosystem, and thus Greece can launch drachma at highly devalued exchange rate, while relying on a buffer of cash in euros held within the economy.

I am not going to speculate which reason holds, but I will note that all three are pretty dire.

Take your bets, ladies and gentlemen.

2/6/15: Greece: Back to the [Groundhog Day] Future

Couple of weeks back I posted a detailed list of ECB ELA hikes since February 2015. So here's an updated table:

- Feb 5, 2015 = EUR59.5 bn
- Feb 12, 2015 = EUR65.0bn
- Feb 18, 2015 = EUR68.3 bn
- Mar 5, 2015 = EUR68.8bn
- Mar 12, 2015 = EUR69.4bn
- Mar 18, 2015 = EUR69.8bn
- Mar 25, 2015 = EUR71.0bn
- Apr 1, 2015 = EUR71.7bn
- Apr 9, 2015 = EUR73.2bn
- Apr 14, 2015 = EUR74bn
- Apr 22, 2015 = EUR75.5bn
- Apr 29, 2015 = EUR76.9bn
- May 6, 2015 = EUR78.9bn
- May 12, 2015 = EUR80.0bn
- May 21, 2015 = EUR80.2bn
- May 27, 2015 = EUR80.2bn
- Jun 2, 2015 = EUR80.7bn

Now, that implies 3 weeks cumulative ELA rises of EUR700mln and reserve cushion on ELA below EUR2.5bn by my estimate. And for all that, Greek Central Bank recoverable assets are currently at EUR41 billion. Ugh… Oh… the proverbial nose is tightening… but on who's neck?

The neck is somewhere in here - within the Greek Target 2 liabilities debate, liabilities that continue to rise, prompting a fine, but esoteric debate:

• Sinn on his perpetual obsession, Target 2 liabilities an default: http://www.project-syndicate.org/commentary/varoufakis-ecb-grexit-threat-by-hans-werner-sinn-2015-05
• Bershidky (really - Karl Whelan) on Sinns perpetual misunderstanding of Target 2: http://www.bloombergview.com/articles/2015-06-02/does-greece-have-a-diabolical-plan-b-

I side with Karl Whelan on this. What is material is Sinn's assertion that the Greek residents' "stock of money sent abroad and held in cash having already ballooned to 79% of GDP". And Greece is facing big bills on debt redemptions and wages and pensions in the next 3 months (see timeline here: http://trueeconomics.blogspot.ie/2015/04/24415-greek-debt-maturities-through-2016.html) or:

One thing is clear from all of this: Credit Swiss estimate of 75% chance of a deal being done this month on Greek 'programme', while the CDS markets are pricing in 75% probability of Greek default over the next 5 years:

And we have equally conflicting 'proposals' on how such  programme might be arranged: http://www.zerohedge.com/news/2015-06-02/greece-troika-submit-conflicting-eleventh-hour-deal-proposals which can be summarised as "the bottom line seems to be that, fed up Syriza's unwillingness to concede its election mandate, the troika will now write the agreement for Greece and Tsipras can either sign it or not. Apparently, the IMF has scaled back its demands for EU creditor writedowns (another loss for Athens) but remains skeptical of the entire undertaking."

If this is true, the entire 'new deal' being offered to Greece amounts to a new can being kicked down the same road.

Map of the road? [note: the below table excludes short-term debt]

h/t to @NChildersMEP 

So to sum up today on the Greek front:

1. ELA is running tight, just as deposit flights goes on;
2. Target 2 liabilities continue to mount;
3. Probability of default remains material at present;
4. Choices available to Greek authorities are Plan A: horrible and Plan B: terrible; and
5. Absent debt write down, even the best case scenario still leads to high risk of a political crisis in the short run and a default in the medium (3 years) term. 

It's Back to the Future, in a Groundhog Day-like sorts of the Future...

27/5/15: No ELA Increase amidst Deposits Flight: Greece

Three quick updates to my earlier post on things getting crunch-time(y) in Greece:

Firstly, the U.S. is stepping up its pressure on the European 'leadership' to take Greek risks more seriously: U.S. Treasury Secretary Jack Lew : "My concern is not the good will of the parties -- I don't think anyone wants this to blow up -- but ... a miscalculation could lead to a crisis that would be potentially very damaging". Talks are going to be toasty at G7 summit and this time around not down to Vladimir Putin.


Secondly, as I said in the earlier post, we have EUR3 billion cushion left when it comes to Greek banks ELA and increases in ELA approvals by the ECB are getting smaller by week. So here's the bad news: "Greek banks have seen deposit outflows accelerate over the past week as fears rise that the euro zone country will default on debt, two banking sources said on Wednesday." This is via Reuters. Remember, last hike in ELA was EUR200 million. And today, ECB decided not to increase ELA limit - a sign that Frankfurt is getting edgy. Guess what: "The past week in May was more challenging compared to the previous ones in the month, with daily outflows of 200 to 300 million euros in the last few days," a senior Greek banker said. This might be mild after outflows of EUR12.5 billion in January and EUR7.57 billion in February, but the latest increase in outflows is coming on foot of already weak deposits and signals renewed increase in pressures. Outflows are up in April to ca EUR5 billion from EUR1.91 billion in March.

Thirdly, we now have rumours of real capital controls coming in: Athens introduced a 'small charge' on ATM withdrawals. Despite this glaringly 'capital control'-like measure, Athens subsequently said it has ruled out capital controls. But, two days ago, Greek opposition lawmaker Dora Bakoyianni said "the country could be forced into capital controls to stem deposit outflows if it did not reach a deal for aid with the government this week". And on May 20, Moody's issued a statement saying that capital controls in Greece are now "highly likely".

and CDS markets are not impressed, again...

Though the bond markets are actually pricing in continued ECB 'cooperation' - across all of the euro area peripherals:

The Euro Saga continues…

27/5/15: Crunch Time Timeline for Greece

Crunch time continues for Greece. Here is the schedule of the upcoming 'pressure points':

Source: Citi

And an update to the Greek ELA increases: +EUR200 million on May 21st, to EUR80.2 billion with remaining available cushion of just EUR3 billion. Note: earlier ELA extensions are summarised here: http://trueeconomics.blogspot.ie/2015/05/15515-greece-on-wild-rollercoaster-ride.html.

15/5/15: Greece on a Wild Rollercoaster Ride

Greece has become a BitCoin of Europe in terms of volatility, and, man, things are soaring and crashing on a daily basis now. Here are three snapshots of Greek Credit Default Swaps:

End of last week:

Mid-week this week:

Closing yesterday:

Meanwhile, the entire financial system of Greece is now on a weekly timeline courtesy of the ECB approvals of ELA:

One move by ECB down on ELA or laterally on collateral requirements, and the house of cards can come crashing.

Note: Sources: CMA and @Schuldensuehner.

21/4/15: Greece Heading for the Bust?

With capital controls starting to creep in and with a big peak in debt redemptions looming,  as per chart below, Greece is now entering the last stage of pre-default financial acrobatics.

Source: FT.com

The country bonds yields are now re-tracing previous peaks (more on this here):

Source: @Schuldensuehner 

And as cash transfers from the local governments to the Central Bank (see link above), plus continued depositors flight are blowing an ever widening hole in Greek balance sheets, the ECB is seriously considering to cut substantially Greek banks access to liquidity.  The cut will have to be along the ELA lines (ELA governing rules are available here). Meanwhile, Greek banks' shares are tanking, down some 50% in month and a half.

Here is the end-of-day chart for Greek banks shares index, showing historical low set today

Source: @Schuldensuehner 

and the opening levels for the same:

Source: @ReutersJamie 

All of which has, as a backdrop, pretty ominous (though entirely correct) ECB talk about the options for Greek default.

This is going to be an eventful day or two, folks.

Update 2: Meanwhile in the mondo bizzaro, the ECB is reportedly looking into dual currency regime for Greece. Which sort of makes sense as a transition out of euro area membership, but makes little sense as a tool for retaining Greece in the Euro. Which, in turn, may or may not be an indicator of ECB going the Ifo way. Go figure...

Update 1: A handy chart summing up ECB's 'headache'

Source: @Schuldensuehner 

And as @Schuldensuehner notes: "Grexit costs rise by the minute" as country Target2 liabilities have reached EUR110.4 billion, "mainly driven by ELA for banks".

Source: @Schuldensuehner 

Greek debt exposures by countries: http://trueeconomics.blogspot.ie/2015/04/19415-greece-in-or-out-ifo-aint-caring.html and across the official sector: http://trueeconomics.blogspot.ie/2015/04/15415-official-sector-exposures-to.html.

26/3/2014: 13 months on, the Promo Notes deal stinger is still in...

Back in September 2013 I wrote in Sunday Times that ECB might want to consider accelerated disposal of the Government bonds held by the Central Bank post-restructuring of the IBRC Promissory Notes: http://trueeconomics.blogspot.ie/2013/10/8102013-german-voters-go-for-status-quo.html

And now, guess what... http://www.irishtimes.com/business/economy/pressure-to-offload-long-term-bonds-in-promissory-note-deal-over-ecb-unease-1.1737924#.UzJ8fqxmKCE.twitter

Per Irish Times article linked above:

"Ireland is facing pressure to offload the long-term government bonds it issued as part of last year’s promissory note deal and at a faster pace than the timetable originally outlined, amid continuing concerns from the European Central Bank about the deal.

The ECB is reviewing the controversial promissory note deal as it prepares to publish its annual report for 2013.

… A crucial aspect of the promissory note deal agreed last year after months of negotiations was the length of time the Central Bank would hold the long-term bonds that replaced the promissory notes."

I have consistently argued that promo notes restructuring represented the perfect target for debt relief for the state. One example is here: http://trueeconomics.blogspot.ie/2012/03/2132012-anglos-promo-notes-perfect.html. And I highlighted our 'deal's' sensitivity to earlier disposal of bonds here: http://trueeconomics.blogspot.ie/2013/03/2332013-sunday-times-10032013.html (see bottom of the article for box-out).

20/12/2013: Are the bondholders' bailouts off the table now?

From late 2008 on through today, myself (including on this blog) and a small number of other economists and analysts have maintained a very clear line that burning of Anglo and INBS bondholders would have been a preferred option for Ireland.

Not to speak for others, I still maintain that writing off the Government bonds held by the ECB is the only course of action open to us today and that it should be pursued.

The ex-IMF's official statements yesterday concerning the preference for burning senior unsecured bondholders in Anglo and INBS, and the claim that this option is no longer viable for Ireland,  are neither new, nor material. For three reasons:

1. Anglo and INBS bondholders should have been bailed-in in full regardless of their status. Those who held secured bonds should have been bailed-in via equity swaps after the full bailing-in of unsecured bondholders. The action would have saved Irish taxpayers tens of billions, not just billions as the ex-IMF-er claims.
2. Other banks: AIB and ptsb bondholders should have bailed-in as well.
3. ECB objections to such a course of action were exceptionally robust, but Ireland should have pursued more aggressive stance with respect to the ECB. Not quite a full exit, but possibly a combination of a threat, plus a concerted push alongside other 'peripheral' countries in the European structures to force ECB engagement.
4. It is never too late to do the right thing: the debts are still there, only in a different form. Anglo-INBS debts are now held by the Central Bank in the form of sovereign bonds, converted into the latter by the acts of the current Government. These bonds should not be repaid. There are many ways in which such non-repayment can be structured, including with cooperation of the ECB and European officials. One example would be converting the bonds into perpetual zero coupon bonds.

In other words, late admission by the ex-IMF employee of the wrongs, backed by the claim that 'nothing more can be done' are not good enough. We need real corrective action from the EU.

Report on actual statement is here: http://www.breakingnews.ie/ireland/imf-ireland-could-have-saved-billions-by-burning-anglo-bondholders-617688.html

Update: H/T to @aidanodr for the following:
http://www.independent.ie/irish-news/politics/eu-chief-barroso-no-backdated-bank-debt-deal-for-ireland-29854504.html

This pretty much sums up the EU Commission's stance on the 'seismic' banks deal 'negotiated' by the Irish Government in June 2012. It is also wrong, offensive and belligerent. Mr Barroso's comments are simply economically illiterate. Assume Ireland did cause the euro area crisis. Can anyone (Mr Barroso?) explain how the euro can be deemed sustainable if it can be destabilised by a crisis in one of the smallest nations members of the union? Alternatively, imagine the US Dollar being as vulnerable to a banking crisis in New Hampshire in a way that euro (per Mr Barroso's claims) was allegedly vulnerable to the Irish crisis?

25/3/2013: Cyprus 'deal' - notes from the impact crater

What are the true 'innovations' of the Cypriot 'bailout' deal?

1. At this junction one must face the realisation that European 'leadership' vacuum has reached alarming proportions. Cyprus was pushed to the brink, literally hours away from ELA cut-off, with a deliberate and mechanical precision. This is hardly consistent with any spirit of subsidiarity and/or cooperation that the EU was allegedly built on. In a further affirmation of the mess that is EU policy-making, the markets must now be aware that the EU has no defined approach to dealing with debtors and creditors, nor with issues of assets or liabilities. In other words, five years into the crisis and numerous 'white papers' later, with acronym soup of various 'solutions' and new 'institutions' thicker than pasta fagioli - there is still no clarity, no legal or institutional commitment, no formula, no predictability, but rather politically-motivated swinging from one extreme (no bail-ins in Ireland) to the other (all bailed-in in Cyprus).
2. We now have bailed in uninsured bank deposits within the so-called 'open' economy with 'common currency' and 'common market' based on rules and laws. In other words, unlike in Ireland, Portugal and Greece, the EU has crossed another line.
3. We now have bailed in senior bank bondholders (and the sky did not fall)
4. We now have capital controls within 'common currency' area and within the 'common market' - kind of equivalent to Louisiana declaring its dollars purely domestic to Louisiana. 
5. Bail-ins under the Cypriot deal are non-transparent and not defined, showing that the entire package was put together is a half-brained fashion at the last minute. Surely this, if not the first but very much the most exemplary indicator of the complete mess in policymaking. It further reinforces the view of PSI measures - both in Greece and in Cyprus - as being politically motivated, rather than systemically and legally structured.
6. The fact that the Cypriot banking system will now be completely shut out of the funding markets reinforces my view that unwinding the 'emergency' measures deployed by the ECB during the crisis will be: a) risky, b) costly and c) protracted. As the result, the monetary policy risks missing the window for optimal interest rates reaction and either over-reaching on the inflationary side or over-tightening to the detriment to future growth. either way, peripheral countries will be the likely victims.

Overall, from the EU-wide point of view, Cypriot 'deal':

• Does not reduce the risk of contagion or re-amplification of the crisis in other peripheral states;
• Does not create or even enable a break between sovereign and bank crises; 
• Adds to the overall quantum of policy uncertainty; 
• Raises even more doubts as to the functionality of the cornerstone crisis-related institutions (ESM and OMT); and
• Acts to strengthen the hand of eurosceptic, nationalist and populist political movements and parties in the Euro area 'periphery'.

25/3/2013: Debt, Demand & Deposits: Cyprus 2013

Der Spiegel has a handy graphic detailing the extent and the depth of the Financial Services sector in Cyprus...

[link]

The above lumps together couple of things that should, really, be addressed:

1. Cyprus' financing needs only cover banks recapitalisations to the deposits base as provided by the end-of-January 2013 figures. Since then at least EUR3-5 billion and more likely even more fled the country. And selection bias suggests that larger depositors (potentially with more political connections) were more likely to avail of 'systemic' exemptions to withdrawals in recent days.
2. As termed deposits mature, more will leave, unless the Government imposes involuntary lock-in for depositors with termed contracts.
3. Cyprus' financing needs above do not include non-CB and non-deposit funding for the banks that is going to mature in months to come and has to be replaced by some other source of funds (presumably we can assume that ECB / ELA will step in, but I don't see how that arrangement in the medium term can be pleasing to the ECB).
4. The deposits above do not break out MFI deposits, corporate deposits and personal deposits. It is one thing to bail-in personal accounts and yet altogether another matter to bail-in corporations and other banks (the former are subject to more strict capital controls than the latter two).

These are material risks to the sustainability of the Cypriot 'bailout' programme.

25/3/2013: Bankrupted Cyprus, aka 'The Rescue'

While European 'leaders' celebrate the breakthrough 'bailout' agreement with Cyprus, let's get back to Planet Reality, folks. The 'deal' is based on a EUR10bn loan to the Cypriot Government for which the taxpayers will be on the hook.

EUR10bn = 56.2% of the country 2013 forecast GDP.

And now, let's begin counting the proverbial chickens:

1. IMF forecast for GDP - used above - is based on nominal GDP growth over the fiscal year 2013 of 0.33%. Even by IMF 'rosy' standards this is way off the mark, as other (EU Commission and Cypriot own) forecasts envisioned GDP contracting between 0.5% and 1.3% in 2013.
2. IMF forecast is based on pre-bailout assumptions with the banking sector returns to the economy being at the levels consistent with full functioning of the Cypriot financial services sector.
3. Even outside the above points, IMF forecast through 2017 saw Government debt/GDP ratio in Cyprus rising to 106.11%, prior to the current 'deal' on foot of forecast GDP growth of 2.87% per annum on average between 2013 and 2017.

Now, with the deal:

1. Shrinkage of the financial services sector will be immediate and deep;
2. Deficit financing of any capital investment by the Cypriot Government will cease;
3. New debt is going to be loaded onto the country;
4. Reduced savings and exits by larger depositors will mean reduced revenues for the economy, etc

Much of this was outlined in my previous post on debt sustainability in Cyprus (http://trueeconomics.blogspot.ie/2013/03/2432013-are-cypriot-debt-dynamics-worse.html)

Now, let's do simple exercise. Add EUR10bn to Cypriot debt pile and get scenario of Cyprus (post-crisis with no growth effects).

Then, adjust GDP growth from 2013 through 2017 to yield average rate of economic growth of -0.18% annually (note, this is much more benign than Greek forecasts for the first 5 years of the crisis which are equal to -2.94% annually on average). This yields scenario of Cyprus (post-crisis with growth effects).

The above two scenarios are compared in the chart below against Greek forecasts by the IMF and the pre-'bailout' forecast by the IMF for Cyprus:

This is what the EU leadership is currently celebrating - a wholesale, outright bankrupting of the entire country. Well done, lads!

24/3/2013: Few Cypriot Myths & Few Billions in Losses

Ever wondered why would the IMF (and reportedly the EU Commission) reject the proposed (Plan B) Cypriot Government raid on state pensions funds? Oh... ok... IMF review from November 2011:

Naughty, naughty little Cyprus...

And the very same IMF note also sheds some light on those 'oligarchs' deposits that are so vast, the entire EU is apparently chocking on chicken breasts at Herman von Frompuy's dinners:

"First, non-resident deposits (NRD) in Cypriot banks (excluding deposits raised  abroad by foreign affiliates) are €23 billion (125 percent of GDP), most of which are  short-term at low interest rates [note: ECB official data does not exclude foreign affiliates deposits, which are normally out of touch in levy imposition. Also note: much of bulls**t about Russian oligarchs deposits was about high interest rates allegedly collected by them on Cyprus deposits. Guess that wasn't really the case as chart below confirms: deposit rates decline sharply by nationality grouping for both corporates and individuals... so who was exactly earning 'high returns' on Cypriot deposits? oh, well... Cypriots...].

"These could prove unstable in the event of  further confidence shocks. [In other words, Cyprus requires very stringent capital controls if it is to avoid instantaneous bankruptcy even with ELA continuing]

"This risk is partly mitigated by the 70 percent liquid asset requirement against the €12 billion in NRD in foreign currency), and the 20 percent requirement for the €11 billion in euro-denominated NRD). [Wow, so apparently 'oligarchs' deposits carry massive safety cushions, whilst 'ordinary' depositors are not...]

"Second, €17 billion in deposits collected in the Greek branches of the three largest Cypriot-owned banks could be subject to outflows in response to difficult conditions in Greece. Outflows in the first half of 2011 were close to €3 billion (nearly 15 percent of the total), although a portion of these returned to the Cypriot parents as NRD. [Now, there was more of Greek money than 'oligarchs'?]

Now, couple more revealing charts:

Clearly, structuring PSI the EU authorities & IMF knew the above factoid, right? Just as they knew the following (which clearly highlights the fact that any substantial hit on Cypriot banks would have immediately spelled insolvency of the entire economy):

24/3/2013: Are Cypriot Debt Dynamics Worse than Greek?

A nice chart via Pictet (link) on the size of the banking sector in Cyprus and its dynamics since 2006:

Now, do notice, reducing the above to 300-330% of GDP as required by the Troika in Plan A (and so far not disputed by the Cypriot Government) will imply lowering liabilities by EUR66.6 billion. Overall, banking margins in Cyprus are running at around 1.2% net of funding costs, we can roughly raise that to double to include wages and other costs spillovers, which implies that EUR66.6bn deleveraging of liabilities should take out of the Cypriot GDP somewhere around EUR1.5bn annually or 9% of GDP. Auxilliary services, e.g. legal, accounting and associated expatriate community benefits that arise in relation to international banking services being offered from Cyprus will also have to be scaled back. Assuming that these account for 50% of the margin returns to the economy, overall hit on Cypriot economy from deleveraging can be closer to EUR2.2bn annually or 12.7% of GDP.

Now, consider the loans package of EUR10 billion that Cyprus is set to receive if it manages to close the EUR5.8 billion gap. Absent banking sector deleveraging, this will push Cypriot Government debt/GDP ratio to over 140% of GDP. However, with reduction in GDP, the debt/GDP ratio (assuming to avoid timing considerations assumptions a one-off hit to GDP) will rise to 161%.

Now, recall that IMF and Troika 'sustainability' bound for debt/GDP ratio used to be 120%. We are now clearly beyond that absolutely abstract number even without the banking sector deleveraging. And let's take the path of debt/GDP ratio forecast by the IMF which would have seen - absent the 'rescue' package - debt/GDP ratio in Cyprus rising 106.1% of GDP by 2017. With the 'rescue' package and banking sector deleveraging, this can now be expected to rise to 174% of GDP in 2017 against Greek debt of 153% of GDP.

In short, the EU 'rescue' is going to simply wipe Cyprus off the map in economic terms. All debt 'sustainability' consideration are now out of the window.

Here's the chart:

Of course, the above analysis is crude as it ignores:

1. Potential positive effects of replacement activity and the fabled 'gas revenues' etc - which presumably were already reflected in GDP growth figures in the IMF forecasts
2. Potential negative effects of tourism, real estate sales and other services declines due to the reduced activity in the banking sector, which can raise the above adverse impact of the banking sector deleveraging to 15% of GDP. Corporation tax increases can yield further losses.
3. Timing issues for the deleveraging which is not expected to happen overnight.

Nonetheless, all in, there have to be some severe doubts as to viability of the Cypriot debt path under the Troika Plan A, let alone under the Cypriot Plan B.

22/3/2013: Cypriot Plan B - any better than Plan A?

So the reports are that Cyprus has a Plan B. And the outlines of the Plan - filtering through yesterday - are quite delusional.

The Plan consists of 3 main bits:

1. Split Laiki bank (see below) into a good and a bad bank. The 'bad' bank will take on deposits of over 100K and deposits under 100K (guaranteed by the State) will be shifted into 'good' bank. Other banks will be recapitalised but there are no specific as to how, when or to what levels of capital. This stage of the Plan aims to reduce the recapitalisation costs by about €2.3bn. The problems with this stage are massive, however. First: smaller depositors are more likely to run on the bank as they are less likely to have termed deposits and as their withdrawals (even under capital controls to be imposed - see below) will be less restricted than for larger depositors. In other words, the Plan B is likely to reduce stability of deposits and funding in the resulting 'good' bank. Second: while Cypriot banking system losses are currently crystallised, reducing uncertainty for any recapitalization, there is no guarantee that depositors flight will not undermine their balance sheets beyond capital injections repair. Thirdly: the new 'good' bank will have a balance sheet (again, see table below) saddled with massive exposure to ELA & ECB funding at ca 40% of the total liabilities. If associated assets move along with larger depositors, it is likely that ECB funding ratio to Assets is going to be close to 50%. How on earth can this be called a 'good' bank beats me.

2. Step two in the delirious process of Plan B repairs of the Cypriot banking system will be the creation of a sovereign wealth fund backed by state, church, central bank and pension funds 'assets'. Even 'future gas revenues' are thrown into the pot. Put simply, the fund will be a direct raid on state pension funds, state properties and enterprises and gold reserves. It will also contain a direct link to the collective psychosis induced by the crisis - the pipe dream of Cypriot 'Saudi Arabia of the Mediterranean' Republic. Honestly, folks, this crisis has taught us one thing: the quantity of hope-for oil & gas reserves in the country is directly proportional to the degree of economic / financial / fiscal insolvency of the nation. So, having set up a bogus and bizarre fund (with hodgepodge of assets and a rich dose of 'dreamin in the night' claims to assets) the state will issue 6-year bonds against these 'assets' to raise some €2.5bn. Now, what idiot is going to voluntarily buy into this fund is quite unclear at this stage, but presumably, with bond yields set at crippling levels, the fund will find some ready buyers.

3. Step 3: the remaining shortfall of €1bn is to be covered through a small deposit levy on deposits above 100K.


Laiki bank latest balance sheet summary is provided (via Global Macro Monitor) here:

It is a whooper… with Assets at EUR30.375bn the bank is over 178% of Cypriot GDP. Deposits are at 105% of GDP.

The question is whether this plan, even if acceptable to the EU and ECB, will prevent or even restrict the deposits flight once the Cypriot banking system opens up. The EU Commission is working with Cypriot Government on developing capital controls to stem outflow of funds. But there are serious questions as to whether such capital controls can be imposed in the country that is part of the common market.

Another pesky problem is whether the bonds issued by the fund in Step 2 above will count toward Government debt. Presumably, EU can allow any sort of fudge to be created (e.g. Nama SPV in Ireland) to avoid such recognition. If not, then whole Plan B is a random flop of a dead whale beached on Cypriot shores…

Third pesky issue is what happens if the Fund goes bust. With pension funds committed to it, will the Cypriot state simply default on all of its pensions obligations? deport its pensioners to Northern Cyprus? whack the remaining (I doubt there will be any) Russian 'oligarchs' once again? or invade Switzerland? The Cypriot Government attempted to dress up the Plan B as the means to avoiding hitting small savers and ordinary people with the bank levy. It so far seems like risky leveraging of ordinary retirees and future retirees to plug the very same hole that would have been created in their budgets by the deposits levy.


Meanwhile, here's the question for those reading this blog in Ireland: According to the ESCB Statures Article 14.3, the Governing Council of ECB can make a determination to shut off liquidity assistance to the national banking system only on foot of a 2/3rd majority vote. The ECB Council did announce such a move for Cyprus comes Monday. This implies that at least one peripheral state National Central Bank governor casted the vote against Cyprus. Would that have been our Patrick Honohan, one wonders, given the frequent propensity of Irish officials to kick other peripheral states in order to gain small favours from the EU/ECB?

24/6/2012: IBRC 'repayment' of €1.14 billion

New wave of outrage: IBRC is about to repay €1,142 million worth of unguaranteed senior bonds this coming week.

Here's a link to the note by Brian Lucey (TCD) and a link to namawinelake post on same.

My view is simple: The repayment is madness - the country is bust & is being propped up by IMF, EU, bilateral and ECB loans. IBRC is a bust non-bank (it retains banking license, but has no meaningful banking activities and is not likely to acquire any of these at any time in the future). IBRC has 'assets' and liabilities (ex-deposits). Hence, IBRC should default on all debts, transfer underlying assets to creditors based on their seniority and close the shop. The bondholders should get no more and no less than the assets of the company. As ELA is super-senior lending secured against specific asset (Promo Notes), quasi-governmental debt (Promos) should remain within CBofI and no private bondholder should have a claim against them.

Of course, the above process would not involve the €1.14 billion worth of bonds to be repaid this week, as these are unsecured (no claim vis-a-vis assets) unguaranteed (not even a theoretical claim against the State) liabilities. And no moral / ethical impact (these are bonds held primarily by speculative  institutional investors). These should just burn to some cheer from the crowds to boot!