27/2/15: Of a momentary surrender and a longer fight: Greece v Eurogroup

Couple more earlier comments on Greek situation for print edition of Expresso, 31.12.2015 pages 8-9 and online http://expresso.sapo.pt/os-trabalhos-herculeos-de-varoufakis-mercados-financeiros-a-espera-da-lista-de-reformas=f911931, February 22, 2015.


English version of some of the comments:


# In which points did Greek delegation change its position?

Last night Eurogroup saw significant changes to the Greek Government position vis-a-vis the current bailout. Firstly, the Government has now abandoned its elections promises to achieve a debt write down and end the agreement with the Troika. Instead, the old agreement has been extended until the end of June on the basis of Greece committing to full implementation of the original Master Financial Assistance Facility Agreement (MFAFA) and, thus, Memorandum of Understanding (MOU). The dreaded austerity programme remains in place, despite the Greek Government claims to the contrary. The dreaded Troika is still there, now referenced as Institutions. Secondly, Greece failed to secure control over banks recapitalisation funding. A major point of Government plans was to use of some of these funds for the purpose of funding public investment and/or debt redemptions. This is no longer an option under the new bridging Agreement. Thirdly, the Greek Government failed to secure any concessions on the future programme. The Eurogropup conceded to allow the Greece to present its proposals for the future pos-MOU agreement, but any proposals will have to be with the parameters established by the current programme.


# In which points Germany change its hard position?

So far, Germany and the Eurogroup conceded nothing to the Greek Government. The much-discussed references in the Eurogroup statement that allow for some flexibility on fiscal targets, principally recognition of the economic conditions in computing the target primary surplus for 2015, is not a new concession. Under the MOU, present conditions were always a part of analysis performed to establish deficit targets and the current programme always allowed for some flexibility in targets application. Crucially, Greece went into the negotiations with two objectives in sight: reduction in the debt burden and reduction in the austerity burden. The fist objective was abandoned even before last night's Eurogroup meeting. The second objective was severely diluted when it comes to the Eurogroup statement and the bridging programme. There are no concessions relating to the future (post-June 2015) programme. In a sense, Germany won. Greece lost.


# What do you expect for the list of reforms to be presented on Monday?

We can expect the Greek Government to further moderate its position before Monday. The new set of proposals is likely to contain request for delays (not abandonment, as was planned before) of privatisations, a request for the primary deficit target for 2015 to be lowered to around 2-2.5% of GDP, and a request to allow for some of the past austerity measures to be frozen, rather than reversed, for the duration of 2015. The Greek Government is likely to present new short term growth strategy based on a promise to enforce more rigorously taxation, set higher tax rates on higher earners, in exchange for using the resulting estimated 'savings' to fund public spending and jobs programme. The final agreement on these will likely be in the form of a temporary programme, covering 2015, and possible extension of this programme will be conditional on 2015 debt and deficit dynamics. Beyond Monday, however, a much more arduous task will be to develop a new programme. In very simple terms, Greece still requires a debt restructuring to cancel a significant quantum of current debt. This now appears to be off the table completely. As the result, any new agreement achieved before June 2015 will be inadequate in terms of restoring Greek economy to any sustainable growth path. Both Greece and Europe, today, are at exactly the same junction as two weeks ago: an insolvent economy is faced with the lenders unwilling to recognise the basics of financial realities.  

27/2/15: Running out of cash: Greece heading into March

My comments to Portuguese Expresso on Greek agreement:

http://leitor.expresso.pt/#library/expressodiario/26-02-2015/caderno-1/temas-principais/divida-portuguesa-com-juros-em-minimos-mas-grecia-arrisca-se-a-entrar-em-incumprimento-em-marco

Unedited version here:

"Over the next four months, Greece is facing significant debt redemption pressures. In March, EUR5.83 billion of T-bills and IMF loans maturing and requiring a re-financing. Between now and the end of April, Greece will require to roll over EUR8.1 billion of T-bills and refinance EUR2 billion worth of IMF loans.

Currently, Greece has no money to cover its debt maturity redemptions in March and it is quite questionable if the country can find cash, outside the Programme extension facilities agreed last week but are yet to be ratified by the Eurogroup members and the Institutions, to do so in the markets. Currently Greek 10 year bonds are priced at 65.354, with a yield of 9.23% and rising. This suggests there is unlikely to be significant appetite in the markets to cover a substantial issue of new debt by Greece. At the same time, internal reserves available to the Government are virtually non-existent, especially given the rate of tax receipts deterioration in recent months. December 2014 tax revenues were 14 percent below target, January 2015 tax revenues fell 20% below target, implying a monthly shortfall close to EUR1 billion. In all likelihood, shortfall was at least as big in February as the new Government was tied up in negotiations with the Troika and deposits fled from the banks.

The key problem is that Greece has no option when it comes to delaying repayment of the above funds. IMF is the super-senior lender of last resort and T-bills markets are the bloodline for the Greek Government. Failing to redeem maturing T-bills will be a disaster for the country. In short, Syriza urgently needs to secure new funds to cover these redemptions."

27/1/15: Greek Debt: Non-Crisis Porkies Flying Around

There is an interesting sense of dramatic contradictions emerging when one considers on the one hand the outcome of the Greek elections, and on the other hand the statements from some EU finance ministers (for example see this: http://www.bloomberg.com/news/2015-01-27/schaeuble-says-greece-needs-no-debt-cut-due-to-no-interest-phase.html). The basic contradiction is that one set of agents - the new Greek government and the Greek electorate - seem to be insisting on the urgency of a debt writedowns, while the other set of agents - majority of the European finance heads - seem to be insisting on the non-urgency of even discussing such.

What's going on?

Here is a neat summary of official (Government) debt redemptions coming up, by the holder of debt (source: @Schuldensuehner):

This clearly, as in daylight clear, shows 2015 as being a massive peak year for redemptions.

Note to the above: GLF debt reference covers GDP-linked bonds - see https://www.diw.de/documents/publikationen/73/diw_01.c.488644.de/diw_econ_bull_2014-09-5.pdf.

Alternative way of looking at the burden of debt is to compare debt dynamics and debt funding costs dynamics. Here these are for Greece, based on IMF data:

Take a look at the above blue line: in effect, this measures the cost of carrying Government debt. This cost did improve, significantly in 2012 and 2013, but has been once again rising in 2014. It is projected to continue to rise into 2019. So Greece can run all the primary surpluses the Troika can demand, the cost of servicing legacy debts is on the upward trend once again and Herr. Schaueble and his ilk are talking tripe.

Now, consider the red line in the chart above: in absolute terms, there is no reduction in Greek debt to-date compared to 2012. But do note the third argument advanced by Herr. Schaueble in the link above, the one that states that Greek debt reductions have exceeded those forecast under the programme. Did they? Chart below shows the reality to be quite different from that claim:

What the chart above shows is that 2015 projections for debt/GDP ratio (the latest being published in october 2014) range quite a bit across different years when forecast was made. Back in October 2010, the IMF predicted 2015 level of debt/GDP ratio to be 133.9%, this rocketed to 165.1% in October 2011 forecast, rose again to 174.0% forecast published in October 2012, declined to 168.6% in forecast published in October 2013 and rose once again in forecast published in October last year to 171% of GDP.  In other words, debt outlook for Greece for 2015 did not improve relative to 3 forecast years and improved only relative to one forecast year. Rather similar case applies to 016 projections and 2017 projections and 2018 projections. So where is that dramatic improvement in debt profile? Ah, nowhere to be seen.

And then again we keep hearing about the fabled end of contagion, 'thank God', that Herr. Schaeuble likes referencing. I wrote about this before, especially about the fact that risk liabilities have not gone away, but were shifted over the years from the shoulders of German banks to the shoulders of German taxpayers. But you don't have to take my word on this, here's a German view: http://www.cesifo-group.de/de/ifoHome/policy/Haftungspegel/Eurozone-countries-exposure.html#losses.

26/1/15: Markets v Greece: Too Cool for School... for now

There is much talk about the impact (or rather lack thereof) of Greek elections on the markets.

In fact, the euro continued to price in the effects of a much larger factor - the QE announcement by the ECB, the stock markets did the same. Only bonds and CDS markets reacted to the Greek elections, and even here the re-pricing of Greek risks was moderate so far (see chart below and the day summary for CDS - both courtesy of CMA).

The reason for this reaction is two-fold.

Firstly, Greece is a small blip on the overall radar map of Euro area's problems. Even in terms of Government debt. Here is the summary of the Government debt overhang levels (over and above 60% of debt/GDP benchmark) across the Euro area:

In simple terms, real problems for the euro, in terms of risk pricing, are in Italy, France and Spain.

Secondly, Greece is a political risk, not a financial risk to the Euro area. And it is a risk in so far, only, as yesterday's election increases the probability of a Grexit. But increasing probability of a Grexit does not mean that this increase is worth re-pricing. It is only worth worrying about if (1) increase in probability is significant enough, and (2) if elections changed the timing of the possible event, bringing it closer to today compared to previous markets expectations.

Now, here is the problem: neither (1) nor (2) have been materially changed by the Syriza victory last night. My comments to two publications yesterday and today, summarised below, explain.


Greek elections came as a watershed for both the markets analysts and the European elites, both of which expected a much weaker majority for the Syriza-led so-called 'extreme left' coalition. The final outcome of yesterday's vote, however, is far from certain, and this has been now fully realised by the markets participants.

The confrontation with the EU, ECB and the IMF, promised by Zyriza, is but one part of the dimension of the policy course that Greece will take from here on. Another part, less talked about today in the wake of the vote is accommodation.

Let me explain first why accommodation is a necessary condition for both sides in the conflict to proceed.

Greece is systemically important to the euro area, despite all claims by various European politicians to the contrary. Greece is carrying a huge burden of debt, accumulated, in part due to its own profligacy, in part due to the botched crisis resolution measures developed and deployed by the EU. It's debt is no longer held by the German, French and Italian banks, so much is true. German and French banks held some EUR27 billion worth of Greek Government debt at the end of 2010. This has now been reduced to less than EUR100 million. There is no direct contagion route from Greek official default to the euro area banking sector worth talking about. But Greek private sector debts still amount to roughly EUR10 billion in German and French banking systems (with more than EUR8 billion of this in German banks alone). Greek default will trigger defaults on these debts too, blowing pretty sizeable hole in the euro area banks.

However, lion's share of Greek public debt is now held in various European institutions. As the result, German taxpayers are on the hook for countless tens of billions in Greek liabilities via the likes of the EFSF and Eurosystem.

And then there is the reputational costs: letting Greece slip out into a default and out of the euro area will mark the beginning of an end for the euro, especially if, post-Grexit, Greece proves to be a success.

In short, one side of the equation - the Troika - has all the incentives to deal with Syriza.

One the other side, we can expect the fighting rhetoric of Syriza to be moderated as well. The reason for this is also simple: the EU-IMF-ECB Troika contains the Lender of Desperate Resort (the ECB) and the Lender of Last Resort (the IMF). Beyond these two, there is no funding available to Greece and Syriza elections promises make it painfully clear that it cannot entertain the possibility of a sharp exit from the euro, because such an exit would require the Government to run a full-blown budgetary surplus, not just a primary surplus. For anyone offering an end to austerity, this is a no-go territory.

So we can expect Syriza to present, in its first round of talks with the Troika, some proposals on dealing with the Greek debt overhang (currently this stands at around EUR 210 billion in excess debt over the 60% debt/GDP limit), backed by a list of reforms that the Syriza government can put forward in return for EU concessions on debt.

These reforms are the critical point to any future negotiations with the EU and the IMF. If Syriza can offer the EU deep institutional reforms, especially in the areas so far failed by the previous Government: improving the efficiency and accountability of the Greek public services, robust weeding out of political and financial corruption, and developing a functional system of tax collections, we are likely to see EU counter-offers on debt, including debt restructuring.

So far, Syriza has promised to respect the IMF loans and conditions. But its rhetoric about the end of Troika surveillance is not helping this cause of keeping the IMF calm - IMF too, like the ECB and the EU Commission, requires monitoring and surveillance of its programme countries. Syriza also promised to balance the budget, while simultaneously alleviating the negative effects of austerity. In simple, brutally financial terms, these sets of objectives are mutually exclusive.

With contradictory objectives in place, perhaps the only certainty coming on foot of the latest Greek elections is that political risks in Greece and the euro area have amplified once again and are unlikely to abate any time soon. Expect the Greek Crisis 4.0 to be rolling in any time in the next 6 months.

So in the nutshell, don't expect much of fireworks now - we all know two deadlines faced by Greece over the next month:

• The IMF review, to start as soon as the new Government is in place;
• February Euro Group meeting (tomorrow one will not be of much substance) with Greek bailout expiring February 28th, although the EU is already signaling, less than 24 hours after Greek election, willingness to extend maturity of the programme (http://uk.reuters.com/article/2015/01/26/uk-greece-election-eu-idUKKBN0KZ0ZB20150126)

These are the markers for the markets to worry about and these are the timings that will start revealing to us more information about Syriza policy stance too. Until then, ride the wave of QE and sip that kool-aid lads... too cool to worry about that history lesson, for now...

16/1/2015: Where did Greek 'bailout' funds go?

Given the gyrations of the Greek crisis or crises, it might be handy to get a handle on where all the bailout funds extended to Greece have gone. Here are two charts illustrating the said:

Update: source for the charts data: http://www.macropolis.gr/?i=portal.en.the-agora.2080 and my own calculations based on the same.

So in simple terms, Government debt 'solutions' took up 133 billion euros of 'rescue' funds - much of this going to the private sector foreign holders of bonds (PSI) and to private investors in bonds (many foreign) via interest and redemptions. Banks chewed through another 83 billion euros. Total of 81 percent of the funds went to these liabilities.

The fabled Greek deficits (careless spending meme et al) got only 6 percent of the total allocations, of which a small share went to, undoubtedly, support the 'most vulnerable'.

4/1/2015: Greek Crisis 4.0: Politics 1 : Reality 0

With hundreds of billions stuffed into various alphabet soup funds and programmes, the EU now thinks that Greece has been isolated, walled-in, that contagion from the volatile South to the sleepy North is no more (http://www.reuters.com/article/2015/01/03/us-eurozone-greece-germany-idUSKBN0KC0HZ20150103). Backing these beliefs, the EU and core European states have gone on the offensive defensive when it comes to Greek latest iteration of the political mess.

Yet, for all the 'measures' developed - from European Banking Union, to 'Genuine' Monetary Union, to EFSF, EFSM, ESM and ECB's OMT, LTROs, TLTROs, ABS, etc etc - the EU still lacks any clarity on what can be done to either facilitate or force exit of a member state from the EMU.

The state of the art analysis of the dilemma still remains December 2009 ECB Working Paper on the subject, available here: http://www.ecb.europa.eu/pub/pdf/scplps/ecblwp10.pdf which is, frankly put, a fine mess. Key conclusion, however, is that "a Member State’s exit from EMU, without a parallel withdrawal from the EU, would be legally inconceivable; and that, while perhaps feasible through indirect means, a Member State’s expulsion from the EU or EMU, would be legally next to impossible."

So much for all the reforms, then - lack of clarity on member states' ability to exit the euro, whilst lots of clarity on measures compelling and incentivising a member state to submit to the euro area demand (e.g. bail-ins, access to Central Bank funding etc) - all the evidence indicates that the entire objective of 2009-2014 reforms of the common currency space has been singular: an attempt to simply lock-in member states' into the euro system even further. Disregarding any monetary or fiscal or financial or economic or social realities on the ground.

Which brings us back to the starting point: at 175% debt/GDP ratio, Greece cannot remain within the euro area (for domestic and international financial, economic and social reasons). Yet, it cannot exit the euro area (for domestic and international political reasons). Politics 1 : Reality 0, again.

3/1/2015: Greek Crisis 4.0: Timeline

Neat timeline of the Greek Crisis 4.0 forward, via @zerohedge

Click on the chart to enlarge

The above shows key points of uncertainty and pressure, with all of these hanging in the balance based on January 25th national elections.

Prepare for loads of politically-induced volatility.

Meanwhile, Greek manufacturing PMI remain in contraction territory:

25/4/2014: A stretch of numbers here... a bond sale there... Greek Deficit in 2013

This week we had the data release by Eurostat showing the fiscal position of the euro area sovereigns for 2013, followed by the statement by the Troika (EU Commission, the ECB and the IMF) on Greece's fiscal position.

Based on data-driven Eurostat conclusions (see details here: http://trueeconomics.blogspot.ie/2014/04/2342014-some-scary-reading-from-eurostat.html) Greek fiscal deficit was 12.7% of GDP in 2013. Based on the Troika conclusions, Greece has managed to generate a budget surplus of 0.8% of GDP in 2013. The two numbers are so widely apart that the case of 'thou shalt not spin too much' comes to mind.

In reality, to arrive at 0.8% surplus, the Troika had to do some pretty extreme dancing around the real figures: they took out non-recurring spending out of the Greek deficits (all banks measures and all interest paid on gargantuan 175.1% of GDP Government debt). Just how on earth can debt interest payments be non-recurring is anyone's guess. But even removing that (to arrive at normal definition of primary deficits), the official primary deficit for Greece at the end of 2013 stands at 8.7% of GDP. The swing of 9.5% of GDP bringing this to a surplus of 0.8% is 'banks measures'.

The problem is that with 12.7% of GDOP deficit and 8.7% primary deficit in 2013 and with debt of 175.1% of GDP, Greece is plain simply and undeniably an insolvent state. This is precisely why exactly at the time of the above data publication and at the time when the Troika was extolling the virtues of the fiscal surplus in Greece, the very same European authorities praising Greek Government were announcing that they have engaged in a new round of debt relief negotiations with Greece (http://www.ft.com/intl/cms/s/0/9ec817d8-cadf-11e3-9c6a-00144feabdc0.html#axzz301XTTXyT).

Meanwhile, bust, bankrupted and in new default talks, Greek Government is hell-bent on buying votes into the upcoming European elections. Per FT account linked above:

"About 70 per cent of the [bogus Greek] primary surplus has already been allocated for current expenses rather than for writing down existing debt, according to the finance ministry. The government has set aside €524m as a one-off payment to low-income families and pensioners ahead of next month’s European elections. Another €320m will cover a projected deficit this year at IKA, the main social security organisation, following a decision agreed with international lenders to cut employers’ contributions."

This is truly epic: European authorities praising national Government for bogus surpluses that are explicitly being used to fund giveaways to vulnerable voters groups at the time of elections. This is 'reformed Europe'?

This is precisely the circus that is driving up valuations of peripheral bonds (http://mobile.bloomberg.com/news/2014-04-23/samaras-met-dimon-for-greek-bonds-on-way-to-a-400-return.html?alcmpid=markets) and that has an exactly negative correlation with the underlying strength / structural health of some of the peripheral economies (see my comment on this here: http://trueeconomics.blogspot.ie/2014/04/2542014-ecb-denmark-negative-rates.html).

11/2/2014: Greek Bailout 3.0 or a Fix 1.4: Ifo Assessment

In light of Bloomberg report on new package of supports for Greece being planned (http://www.bloomberg.com/news/2014-02-05/eu-said-to-weigh-extending-greek-loans-to-50-years.html), German institute Ifo issued a neat summary note.

The core supports being discussed in the EU are: extending term of the loans to 50 years, and lowering the interest cost of loans by 50bps.

Here's a summary via Ifo:

• As of December 2013 "Greece had received 213.4 billion euros from two bailout packages."
• First package was May 2010 Greek Loan Facility (GLF) comprising a loan of ca 73 billion euros, disbursed in December 2011. "Of this sum 52.9 billion euros was loaned in the form of bilateral credit between Greece and the other countries of the Eurozone (excluding Slovakia, Estonia and Latvia), while a further 20.3 billion euros was provided by the International Monetary Fund (IMF)."
• Second package was extended in February 2012 in the form of credit from the European Financial Stability Facility (EFSF). "By December 2013 133.6 billion euros of this second package had been paid out. Moreover, the IMF also increased its financial assistance to Greece by 6.6 billion euros during this period."

In addition, Greece already restructured 52.9 billion euro of the GLF. Original loans were issued for 5 years term at an interest rate equivalent to the 3-month Euribor plus an interest rate margin of 3 percentage points for the first three years and 4 percentage points for the remaining years.

• "The term of all loans was subsequently extended to 7.5 years in June 2011 and the interest rate margin was reduced by 1 percentage point." 
• Subsequently, in February 2012 "the term was extended to 15 years and the margin was reduced to 1.5 percentage points for all further interest payments". 
• In November 2012 the GLF lenders "doubled the term of the loans to 30 years and reduced the interest rate margin to 0.5 percentage points. 

So in effect, Greece had: 2 Bailouts and 3 adjustments to-date.

By Ifo estimates, the above revisions reduced real debt under the GLF by 12 billion euros.
"The envisaged further relaxation of credit conditions for the 52.9 billion euros of the Greek Loan Facility - with an extension of the term to 50 years and a reduction of the margin to 0 percentage points would entail further losses of around 9 billion euros for European creditors." 

8/7/2013: The More Things Change... in Greece

So Greece - off-the-charts in terms of not meeting its 'Programme' requirements has been fudged:

Now, recall:

• Privatizations penned in for 2012-2013 are not happening - at all,
• IMF requirement for at least full year funding held in reserves - not fulfilled at all,
• 12,500 public sector workers that were to be put into 're-allocation or redundancy' pool are not there,
• There is a massive overspend in a number of areas, including health, with a shortfall of EUR1bn at the state-owned EOPYY health insurer,
• Income tax, property tax and corporate tax are not being enforced in full, despite numerous promises...

Earlier this am I predicted that:

And per IMF release above, this is exactly what has happened - fudging complete... And what fudging!

While Troika says that outlook for the country remain uncertain, there has been a staff-level (technocrats) agreement on new 'reforms' on top of the old one on which Greece failed to deliver. And these new reforms - hold your breath - are more cuts in health spending, repeated promises to cut 12,500 public employees, and more tax reforms... The more things change...

"The More Things Change the more the stay the same

The more things change the more the stay the same

Ah, is it just me or does anybody see

The new improved tomorrow isn't what it used to be

Yesterday keeps comin' 'round, it's just reality

It's the same damn song with a different melody

The market keeps on crashin' "...

Well, at least markets are not yet crashin' cause 'Greece really doesn't matter anymore' theory, right?..


Updated: 

The Eurogroup continued the endless parade of statements, comments and instructions today with this: http://www.eurozone.europa.eu/newsroom/news/2013/07/eurogroup-statement-on-greece/ which is largely the same drivel as already released by the Troika.

Some exceptions:

The Eurogroup also takes note that the economic outlook is largely unchanged from the previous review and is encouraged by the early signals pointing to a gradual return to growth in 2014.

I mean, ok, the logic is iron-clad: for months we've noticed that things are largely unchanged, but we've had rounds and rounds of changes made to T&Cs of the 'bailout' because things are largely unchanged. Still, our expectations never stopped changing... the recovery previously penciled in for 2012 has been moved to H2 2012, then H1 2013, then H2 2013 and now to H1 2014 or maybe H2 2014...

and more:

The Eurogroup commends the authorities for their continued commitment to implement the required reforms

But obviously, these are not enough and are not being implemented, so the commendations are for what?.. Alternatively - they are enough and are bing implemented, in which case why is Eurogroup issuing any statements on Greece?

At the same time, significant further work is needed over the next weeks to fully implement all prior actions required for the next disbursement

Aha, now I understand - 'further work' is needed... except, wait a second, the 'further work' is the 'prior-agreed work' that... per above statement is a part of 'commitment to implement'... which Greece either has delivered (per commendation) or failed to deliver (per rather urgent 'need for further work')... so which one?..

Much of the rest in the statement is rather specific and make sone wonder - if Greece is being asked to do in the next two weeks what it has failed to do in last 12 months, why on earth is Greece deserving and commendations or, alternatively, how on earth can it be expected to deliver that?!

Never mind, all of it is pure fudge - Greece will not deliver 12,500 souls to the Purgatorio and it will not be able to tighten tax collection (something it failed to do over close to 50 years) in time for October 2104. And the Eurogroup is not expecting it to. Instead, there will be noise of compliance, sound of cash register emptying, followed by 3 months of calm and German elections.

To quote another musician:

So long, Marianne, it's time that we beganTo laugh and cry and cryAnd laugh about it all again
Laugh about it, folks... for following the Eurogroup statement, the IMF Chief, Christine Lagarde went out to face the public with a claim that, hold your breath, Euro area needs growth and ... deep gulp of air, please... jobs.

So long, Marianne, it's time that we began...

8/5/2013: Olli Rehn Departs Reality Once Again

If one needs an example of out-of-touch, reality-denying and self-satisfied EU Commissioner, travel no further than Olli Rehn. Here's the latest instalment from Court's Favourite Entertainer of Things Surreal:
http://europa.eu/rapid/press-release_SPEECH-13-394_en.htm

The speech focuses on what went wrong in Cyprus.

In the speech, Mr Rehn commits gross omissions and conjures gross over-exaggerations.

Nowhere in his speech does Mr Rehn acknowledge that Cypriot banks were made insolvent overnight by the EU (including EU Commission, where Mr Rehn is in charge of Economic and Monetary affairs) mishandling of PSI in Greek government bonds.

Nowhere in his speech does Mr Rehn acknowledge that Cypriot banks were massively over-invested in 'core tier 1 capital' in the form of zero risk-weighted sovereign bonds (Greek bonds) on the basis of direct EU and Basel regulations that treated this junk as risk-free assets. Mr Rehn states that "The banking problems were aggravated by poor practices of risk management. Lacking adequate oversight, the largest Cypriot banks built up excessive risk exposures." But Cypriot banks largest risk mispricing took place on their Greek Government bond holdings and this was (a) blessed by the EU regulators and (b) made more egregious in terms of risks involved by the EU madness of Greek PSI.

Mr Rehn claims that "The problems of Cyprus built up over many years. At their origin was an oversized banking sector that thrived on attracting foreign deposits with very favourable conditions." Nowhere is Mr Rehn making a statement that the size of Cypriot banking sector was never an issue with the EU, neither at the point of Cyprus admission into the euro, nor at the accession to the EU, nor in any prudential reviews of Cypriot financial system. Mr Rehn flat out fails to relate his statement on deposits to the fact that the EU is currently pushing banks to hold higher deposits / loans ratios, not lower, and that higher deposits / loans ratio is normally seen to be a sign of banking system stability. Mr Rehn is also plain wrong on his claims about the nature of deposits in Cyprus. Chart below shows that Cypriot banks' deposits more than doubled in Q1 2008-Q1 2010 on foot of the EU-created mess in Greece and the rest of the periphery.

Source: @Steve_Hanke

And here's proof that Cypriot banks were running a shop with deposits well in excess of loans, implying low degree of risk leveraging, until Mr Rehn and his colleagues waltzed in with their botched 'rescue' efforts:

Source: Washington Post.

Olli Rehn could not be bothered to read IMF assessment of Cypriot economy from November 2011 (Article IV report) - despite him citing EU Commission June 2011 'warnings' - where IMF clearly states that the core problems faced by Cypriot banking system stem from Greece (page 14) and local commercial banks' loans, not depositors or foreign depositors. On deposits, IMF states (page 17 paragraph 21) "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." Thus, IMF directly, explicitly and incontrovertibly contradicts Mr Rehn's statement about foreign deposits having been extended on "very favourable conditions".

IMF further states that when it comes to deposits, significant risk is also poised by "€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 2011were close to €3 billion (nearly 15 percent of the total), although a portion of these returned to the Cypriot parents as NRD." ECB chart below confirms this risk materialising in the wake of Mr Rehn's structured disaster in Greece:

This outflow knocked out billions out of deposits cushion that Cypriot banks needed to reduce their financing needs. And Mr Rhen - the architect in charge of this disaster - has nothing to say about it.

I can go on and on. Virtually every paragraph of Mr Rehn's statement is open to critical examination. 

That is hardly news - Mr Rehn has made so many gaffes and outright bizarre statements in the past (including his assertions at every pre-bailout junction that each peripheral country heading into bailout was fully solvent, fiscally sustainable, etc), he became not just a laughing stock of the markets, but a contrarian indicator for reality. What is of concern is that Mr Rehn is still being given the task of speaking for the Commission on Monetary and Fiscal affairs.

Olli Rehn should read something more cogent than his own speeches on what has happened in Cyprus (e.g. business.financialpost.com/2013/03/28/seeds-of-cyprus-disaster-planted-months-ago-by-eu/ and www.reuters.com/article/2013/04/02/us-eurozone-cyprus-laiki-insight-idUSBRE9310GQ20130402 or http://online.wsj.com/article/SB10001424127887323501004578386762342123182.html) and preferably do so free of charge to European taxpayers, on his own time, while up-skilling for his next job.

11/1/2013: Greek Tax Revenues: Bad to Worse aka 2009-2012

And if scary charts from Ireland are not enough for you when it comes to Friday Horror Pics diet, here's one from Greece, via Fabrizio Goria ( @FGoria ):

So things went from poor in 2009 to bad in 2012... but, hey, the worst is over for the euro...

1/12/2012: Greek Deal 3.0

If you need to read anything at all on Greek 'Deal' 3.0 signed in November this year, go no further than this post from Yanis Varoufakis. Lethally direct & brutally correct assessment, in my view.

If you want to understand why 120% debt/GDP ration by 2020 or 2022 is not attainable absent OSI, see my note here.

21/11/2012: Brave Face of the Eurogroup is not enough

Headlines from yesterday's eurogroup summit hitting this morning wires are far from encouraging:


Dutch finance minister Dijsselbloem says Greece may cost extra money
Says: Not in a hurry on Greece.
20 Nov 2012 - Economic commentary -
09:12 EU's Van Rompuy is to present a new EU budget proposal at start of summit
09:03 Greece PM Samaras and EU's Juncker are to meet in Brussels tomorrow
09:00 German Chancellor Merkel tells lawmakers Greece's financing hole through 2016 can be filled with combination of lower rates and increased EFSF according to a source
08:42 According to Schäuble, eurogroup finance ministers and the IMF could not agree how to fill the €14bn shortfall in Athens' finances over the next two years. There was also disagreement on whether Greece had to achieve debt sustainability by 2020 or 2022.
08:26 German finance minister tells lawmakers ECB believes Greece can raise EUR 9bln through T-bill issues according to a source
08:19 German finance minister tells lawmakers it is still open question whether 2020 or 2022 is benchmark for Greek debt sustainability according to a source
... and so on.

It means that the EU is once again finding itself lacking any real means for dealing with the Greek crisis. Here's the summary of what solutions have been floated and why none of them are dealing with the problem at hand:

- Greek haircuts/writedowns (see my note on these here: http://trueeconomics.blogspot.ie/2012/11/15112012-impossibility-of-greek-2020.html) are for now off the table. This is the major problem with the summit. As I explained in my earlier note, Greek crisis cannot be resolved without a major writedown of the Greek debt held by the EFSF and the ECB. 'Major' here references 25% writedown on EFSF and 75% writedown on ECB. Even these levels of writedowns will not bring Greece to 120% debt/GDP limit in 2020.

- The Fin Mins more open to extending Greek debt maturity structure, including doubling these from 15 to 30 years. Assuming this action was interest rate neutral, the resulting reduction in debt financing burden will be minor, and will be offset by the two factors: (1) extending maturity will not make debt levels any lower at any point in time to 2020-2022, so it is hard to see how this measure can have anything but a marginal improvement effect on debt target sustainability for Greece; and (2) extending maturity will make debt profile flatter in period post-2020 or post-2022 depending on which target date you take. In other words, saving a little today will mean longer debt overhang and higher debt levels in the future. Lastly, extending maturity profile will only increase probability of Greek Governments in the future reneging on their budgetary commitments - the longer the enforcement period, the more likely the enforcement will come against future recessionary pressures (we are not abolishing business cycles to 2040 are we?) and/or changes in political outlook.

- The Fin Mins are luke warm to the idea of interest rate reductions on Greek debt held by the EFSF. Currently, Greece is charged ca 3.5% on the EFSF funds it borrows. Cutting these by a half can yield savings of around 3-3.2% of GDP at the peak point for debt. Given current projections, by 2020 these savings can be running at an annual rate of 2.4% of GDP. These are significant - enough to fund current paydowns on the debt that would be consistent with the status quo scenario of dropping Greek debt from  ca 180% of GDP to 144% of GDP by 2022. But these will not be enough to cover debt reductions repayments required to drive it down to 120% of GDP.

So here we are: the euro zone's Greek 'can' is now a full oil drum filled with cement and the road is sloping uphill. Good luck kicking…

Now, go back to the drawing board: In the Greek case, OSI is not only unavoidable, it actually might not be enough, if carried via ECB-held debt alone. Which has some seriously grave implications for EFSF and thus to the ESM.

These implications are:

1) Greek restructuring of EFSF-held debts and/or alteration to maturity duration of Greek borrowings from EFSF will mean changes in the ESM profile as well or changes in the ESM position as the ultimate crisis resolution mechanism. For example, if EFSF funds carry maturity of 30 years, ESM either becomes secondary (non-structural) vehicle with lower maturities or it alters its funding maturity to match EFSF. Furthermore, any Greek deal will have to be open to Ireland, Portugal and Cyprus, and potentially to Spain and even Italy.

Now, let me remind you that EFSF/ESM set up is structural to the entire EU response to the crisis (not only Greek case). That's a hefty hurdle to jump: rescue Greece and risk weakening ESM?

2) Lowering interest rates charged on greek debt by official holders - although in itself still a form of restructuring - presents some added risks not mentioned above. Suppose we half Greek current costs of funding to 1.8% or so. Currently, EFSF can borrow at around 1%. But that borrowing rate is not guaranteed. To fund longer maturity for Greece, EFSF/ESM will either have to borrow longer (in which case cost of funding rises) or will have to carry maturity mismatch risk (in which case expected future cost of funding rises). Add to that the fact that current low interest rate environment is most likely abnormal. With these considerations, expected future cost of funding 1.8% loans to Greece might run into negative margin scenario, where ESM funding costs will exceed Greek interest rates.

Worse, one can easily make an argument that ESM funding costs are endogenous to Greek funding costs and to absence of OSI risk. Hence, if Greek situation (and 'no OSI' conditions) deteriorates, ESM cost of funding can rise too.

So far, after yet another eurogroup meeting, we are still where we were - on the road to a spectacular Greek risks unraveling...

23/7/2012: Eurozone, Greece and the IMF - Part 2

On foot of my previous post on Greece and the IMF, the Fund has issued the following statement, quoted in full:

"We have received a number of inquiries related to the Der Spiegel report on Greece. You can attribute the following to an IMF spokesperson:

“The IMF is supporting Greece in overcoming its economic difficulties. An IMF mission will start discussions with the country’s authorities on July 24 on how to bring Greece’s economic program, which is supported by IMF financial assistance, back on track.”"

Key words here are "...to bring Greece's economic programme... back on track" which is a de facto admission by the Fund that the programme is 'off track' now. Another key issue with the statement is that it does not directly reject the claims made in Der Spiegel that the IMF is considering exiting the programme funding Greece.

Now, here's a problem the Fund is facing: it has two options now:

1. Admit that the programme is off track and hope that meetings with Greek authorities will put it back on track via some new additional measures to deliver more savings. In which case Greece buys few months more until that new sub-programme gets off track again, or
2. Admit that the programme is off track and cannot be restored to any reasonable level of performance. In which case the Fund must exit the programme.

Economically, (2) is the only rational choice. Politically (1) is the only feasible option. 

So long and thanks for all the fish, as they say...

23/7/2012: Eurozone, IMF and Greece

One must treat seriously the possibility that Greece will see its funding from the IMF cut-off or suspended. For a number of reasons, extending well beyond the simple financial arithmetics of aid.

Here are the details of the report.

Assuming the report is true, the questions it raises are:

• Validity of the Troika assessment during the structuring of the 'aid' packages: Greece received two 'bailouts' including a partial debt restructuring. Both packages were heavily criticised during their structuring as being insufficient in scope and excessively restrictive / ambitious in terms of fiscal adjustments required. In all cases, Troika rejected any criticism and pursued adjustments as planned.
• Validity of the Troika monitoring: since May 2010, there were ample signs that Greece will not be able to deliver on the 'bailouts' targets due to: (1) political constraints, (2) lack of real policy enforcement by Troika, (3) structural economic failures in the economy incapable of generating growth, (4) nature of the 'bailouts' that did not correct for debt overhang, and (5) social breakdown within the Greek society. Yet, the Troika continued to insist on compliance with the programmes that were clearly misfiring.
• Validity of the Troika assessments: since May 2010 numerous Troika reports were issued, all in effect (albeit with caveats) confirming that the programme in Greece was 'on track'. There was not a single report that sounded an outright alarm. Prior to each report publication, Greece was pressured to deliver on targets, with some marginal noises from the Troika that the programme is at risk. However, every tranche of loans was delivered in the end. With every bogus report being published, Greek authorities and international markets received a wrong and purposefully deceitful signal that no matter what, Greece will be provided loans to cover its ongoing obligations.
• Validity of the Troika capacity to design functional economic programmes: since May 2010, Greek economy continued to accelerate in the rates of decline - as measured by growth, unemployment, and growth components metrics. Objective assessment of the Greek situation can only conclude that an outright and full default on the country debts back in 2010 would have by now corrected the major debt imbalances and most likely restored economy to some positive expansion path. Objective assessment of the Greek situation also clearly shows that the Troika measures have not only failed to do this, but actually made the situation far worse.

Now, given that the Troika programmes for Greece were effectively driven by European, not the IMF, structuring, the questions above clearly reinforce the view of the EU authorities as being (a) incapable of economic policy formation, (b) unwilling to be honest and transparent in the assessment of the economic, political and social conditions in the member states, and (c) completely out of touch with reality of what is happening within a member state.

And at this stage, the IMF is left with few options but to present this exact assessment of the situation to the EU counterparts in a hope that they wake up and smell the roses. Unfortunately, to do so would require the IMF to exit the programme of assistance to Greece. Doing so might rescue the IMF reputation. Or it might not. But doing so will also clearly expose the EU's failure, with implications not only for Greece, but also for the rest of the euro area 'periphery'. Contagion will, therefore, be carried over straight to Spain and Italy - the heart of the EU core.

4/5/2012: Fitch Bells: Ringing de Panic?

Yesterday, Fitch Ratings issued an interesting report, titled "The Future of the Eurozone: Alternative Scenarios". The report sounds alarm bells over what some markets participants have thought of as a 'past issue' - the risks of contagion from Greece to the Euro area periphery.

Fitch Ratings core view is that the eurozone will 'muddle through' the crisis, surviving in its current composition,  while taking 'gradual steps towards closer fiscal and economic integration'. 


The interesting bit comes in the discussion of possible alternatives and the associated probabilities of these alternatives. According to Fitch, there is rising (not falling, as we would expect were LTROs and Greek debt restructuring, plus the Fiscal Compact and the ESM working) risk of a protracted growth slowdown or political shock or some other shock triggering either a possible facilitated Greek exit from the Euro or a disorderly Greek exit from the common currency.


And, crucially, according to Fitch, this risk cannot be discounted. 


This bit is where Fitch's assessment is identical to mine and contradicts that of the majority of Irish 'green jersey' economists: the tail risk of a disorderly unwinding of the euro is non-zero and rising, while the disruption or cost associated with such a outcome is by far non-trivial. Prudent risk management policy would require us to start contingency planning and addressing the possible realisation of such a risk. Instead, we are preoccupied in navel gazing through the lens of the Fiscal Compact, and not even at our own 'navel', but at the European one.


Fitch view is that a full break-up and demise of the euro is probabilistically highly unlikely. This belief is based on Fitch foreseeing large financial, economic and political costs of a break-up. More interestingly, Fitch determines that a partial break-up of the euro zone - with one or more countries exiting the common currency -  would "risk severe systemic damage, although cannot be discounted". 


For those thinking we've done much to resolve the systemic euro crisis (by doing much we usually mean creation of EFSF and agreeing ESM, deploying LTROs and restructuring Greek debts, and putting in place the Fiscal Compact), Fitch has some nasty surprises. Basically, Fitch believes (and I agree with their assessment here), that "additional measures will be needed to resolve the crisis. These are likely to include some dilution of national fiscal sovereignty [beyond the current austerity programmes and Fiscal Compact], potentially some partial mutualisation of sovereign liabilities [basically - euro bonds of sorts] and resources [some transfers to peripheral states], as well as measures to enhance pan-eurozone financial supervision and intervention, combined with further institutional reforms to strengthen eurozone economic governance". Basically, you can read this as: little done, much much much more to do still...


It gets worse.


Of all the alternative scenarios presented, Fitch believes that the most likely scenario will involve a Greek exit, with Greece re-denominating its debt in a new currency and default on its bonds again. Per Fitch, the core danger will be to Cyprus, Ireland, Italy, Portugal and Spain based on:

1. Greek exit creating an 'exit precedent' for the already distressed economies
2. Greek default impacting adversely other peripheral countries banks (especially true for Cyprus)
3. Greek default increasing the risk of capital flight from the countries
4. Greek default triggering a run on peripheral bonds just around the time when the 2013 'return to markets' horizon is in the crosshair.

Just as I usually do in my presentations on the topic, Fitch distinguishes two potential paths to Greek 'exit' - a structured and unstructured or 

• an "orderly variation with an effective eurozone policy response and minimal contagion" and 
• a "disorderly variation", involving "material contagion to the periphery and a significant increase in contingent liabilities facing the core".

Ouch, I must say, for all the folks who lost their voice arguing that my views are 'unreasonable' and 'scaremongering'. Sorry to say it, risk management approach to dealing with reality requires taking a probabilistically-weighted expected costs scenarios of the downside into the account. Simply shouting "all is sustainable here, nothing to bother with" won't do.

26/02/2012: Some numbers on Greek Deals 1 and 2

So the number for Greece Deals 1 & 2 are finally emerging and it's a massive one. Here's the tally to-date:

• Deal 1 = €110 billion extended May 2010
• Deal 2 Loans package = €130 billion (though Troika report implies €145 billion requirement)
• Deal 2 PSI package = €107 billion bonds swap
• Deal 2 ECB package = no writedown, but a rebate of profits to NCBs - current level of profits estimated at €11 billion (€50 billion face value of bonds against €39 billion purchase value of bonds)
• Deal 2 Banks support package = the stand by arrangement for Euro area banks €30 billion

Grand total so far: €388 billion (although if NCBs rebate under ECB package above were to go to funding €130 billion Loans package, and if there is no call on Banks support package, this number falls to €347 billion). For comparison, Greek current prices GDP stood at (estimated) €163 billion at the end of 2011 or 42% of the Deals 1 & 2 combined worth.

20/02/2012: Greece, Europe, Ireland and the crisis: Max Keiser interview

My conversation with Max Keiser last week on Euro, Greece, Ireland etc.
Link here.

26/1/2012: IMF's latest statement on Greece

Here's an interesting statement:

Given widespread press speculation and rumors regarding IMF views, the following can be attributed to an IMF spokesman, William Murray:

"To ensure debt sustainability for Greece, it is essential that a new program be supported by a combination of private sector involvement and official sector support that will bring debt to 120 percent of GDP by 2020. The Fund has no view on the relative contribution of private sector involvement and official sector support in achieving this target. In line with this view, the IMF has not asked the ECB to play any specific role."

So IMF is making a pre-emptive announcement of 'neutrality' on the issue of the day - who'll be blamed when Greek PSI talks eventually end up in the courts and Greek debt/GDP ratio shoots past 150% mark.

And here's IMF own December 2011 report on Greece (available here)"

Page 13:
"The previous July 21 financing package [agreed for Greece] would not work. Public debt would peak at 187 percent of GDP in 2013 and fall to 152 percent of GDP by 2020. Net external debt would peak at 128 percent of GDP in 2012 and fall to 96 percent of GDP by 2020. These already weak downward trajectories would not be robust to shocks.

The precise outcome of the PSI exercise has an important bearing on public debt dynamics and how robust any improvement would be (the external debt sustainability analysis shows a similar pattern):

• With near-universal participation in a debt exchange targeting a 50 percent face value haircut and offering a low coupon, and European support at an interest rate of about 4 percent, debt could be brought to 120 percent of GDP by 2020 (the maximum level considered sustainable for a market access country). The trajectory would also be less susceptible to shocks (including to the official sector funding cost), although a longer period of time would be required to bring debt-to-GDP below 120.
• However, with low participation in the debt exchange and a significant amount of hold outs to be amortized with European support—a real risk under a purely voluntary approach (i.e., an approach not involving any measures to induce higher participation levels)—debt could stick above 145 percent of GDP in 2020. Moreover, the trajectory would no longer be robust to the usual range of shocks.  

Thus, securing a sustainable debt position will depend on whether PSI negotiations deliver the targeted €100 billion in debt reduction, in particular on the ability of the features of the exchange to deliver near-universal participation."

So in other words, why issue pre-emptive statements now? Because a month ago IMF has already washed its hands on Greece, basically saying that, 'look, if all goes really well, things might get to sustainable scenario (assuming Greece delivers on all structural reforms and privatizations and there are no slippages in growth and external balances, etc), but we don;t quite believe they will...'