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.

9/5/15: Politico and 'Spice Me Up, Scotty' Headlines for Grexit

Europe's latest media arrival, Politco.eu is an outfit made to thrill... or to add thrill to the banal, boring, grey, stodgy (you name it) world of Brussels. And it is off with a flying start: http://www.politico.eu/article/a-crazy-european-storm/ The headline reads "A Carzy European Storm" and promises the risks of Grexit, Greefault, with some pepper garnish of Brexit too. It is as if someone at a gas station in Washington DC picked an old newspaper and gave it a 'Look wha's up in old crazy Europe!' yelp.

The premise is that Greece is about to face EUR774 mln payment to the IMF. No, we did not know this until the Politico.eu told us.

The thesis is that Greece might not repay it. No, we did not know that this was a possibility and we had no idea that the Greek Government officially said they will repay it.

The theorem is that if it is not repaid, there can be forced (by other member states) exit of Greece from the Euro.

Quote: "On May 12, after several weeks of barrel-scraping, Greece will pay back a €774 million loan to the IMF. Or maybe not. Which would then trigger the dreaded debt-default spiral that could push Greece out of the monetary union."

Proof [Politico.eu styled]: "“In 30 years here I’ve never seen such a crazy climate,” says a former merger-and-acquisition banker and hedge fund manager now running a corporate-finance advisory boutique." Which begs a question, was this lad asleep in 2008, 2009, 2010, 2011, 2012, 2013, 2014... to have missed an even 'crazier' 'climate'. Or were his measures of 'crazy' somewhat at odds with normal financial markets and public opinion polling indicators?

Never mind that Politico's only data-focused source, the Grant Thornton survey says that... err... no, there is not quite panic yet about Grexit, though concerns are rather high.

Of course, no one would dispute the risk of Grexit is serious. But Politico.eu might want to actually consult direct sources on whether it is feasible and whether it can be linked (over 'next 2 months' as one source alleges) to a reasonable likelihood of Greece leaving the Euro. And, finally, they might want to rethink as to whether it is possible at all to 'push Greece out of the monetary union'.

Here are two links worth considering:

• ECB position on potential mechanics for member state exit from the Euro: see second link in this post: http://trueeconomics.blogspot.ie/2015/01/412015-greek-crisis-40-politics-1.html. For the impatient media spicers: summary is that per ECB view, "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."
• And here is the IMF official procedures for dealing with arrears: http://trueeconomics.blogspot.ie/2015/04/1415-greek-crisis-gaining-rhetorical.html. Again, for trigger happy journos a summary: first 3 months after arrears arising will be taken up by 'strongly worded' letters. It takes up to 15 months before a declaration on non-cooperation can be issued. Which is (1) hell of a lot longer than 2 months and (2) gives plenty of time to 'sort something out'.

Yep. An already crazy European storm that has been blowing over Greece and the euro area since mid-2008, uninterrupted, is pretty... well... crazy. But do we need another 'Spice Me Up, Scotty' media headline about it out on the web? Neah... not really...

6/5/15: Crunch Time in Greece: Day -t or -t-1

Just as Greece barely made today's payment of EUR200 million to the IMF (there's much more coming up - http://trueeconomics.blogspot.ie/2015/04/24415-greek-debt-maturities-through-2016.html) even if only by not paying its own internal bills (http://businessetc.thejournal.ie/greek-debt-crisis-update-2087392-May2015/), the ECB continued to pretend that all is fine in the solvent world of Greek banks. As there exult, the ECB hiked Greek ELA by another EUR2 billion to EUR78.9 billion, which means that some 60% of Greek deposits are now covered out of ELA.

Per FT report (http://www.ft.com/intl/fastft/319051/ecb-mulls-tougher-greek-lending-rules), the ECB's governing council discussed whether "to impose tougher haircuts on the collateral Greek lenders are using to secure emergency loans from Greece's central bank. The council …voted against raising the haircuts, but is likely to revisit the issue should Monday's Eurogroup meeting of eurozone finance ministers disappoint." Which means that should the Greeks continue to play hard ball with the Eurogroup, the ECB can raise collateral requirements on ELA and force Greek banks into panic search for new collateral eligible to be pawned into the ELA.

And while the Greek savers continue to hold deposits in Greek banks - yes, clear evidence of infinite irrationality of retail investors - currency dealers are cutting credit lines extended to Greek banks for trading in forex markets (http://www.bloomberg.com/news/articles/2015-05-06/greece-s-banks-said-to-face-curbs-to-foreign-exchange-trading-i9d1an9v). That's because the Eurosystem et al can fool some of the people some of the time (depositors for now) but can't fool all of the people all of the time.

The whole shift in markets sentiment is not missing on the Credit Default Swaps traders either:

Meanwhile, do recall that Greece is at a risk of running primary deficit in place of primary surplus for 2015: http://trueeconomics.blogspot.ie/2015/05/5515-imf-greece-europe-more-bickering.html (although this FT piece seems to suggest they are not, yet… http://blogs.ft.com/brusselsblog/2015/05/06/is-this-how-greece-is-avoiding-bankruptcy/) and you have a potent cocktail of explosives wired together and the clock's ticking... EUR200 million 'Tick'… EUR800 million 'Tock'… before June EUR1.5 billion 'Kaboom!'

5/5/15: IMF, Greece & Europe: More Bickering, Less Tinkering?

An interesting article on Greece in FT: http://www.ft.com/intl/cms/s/0/72b8d2ae-f275-11e4-b914-00144feab7de.html#ixzz3ZFOAlR4B suggesting that the IMF is now actively drifting into fall-out management mode for Greek crisis.

According to the FT: "Greece is so far off course on its $172bn bailout programme that it faces losing vital International Monetary Fund support unless European lenders write off significant amounts of its sovereign debt, the fund has warned Athens’ eurozone creditors." And this means that Greece is at a risk of failing to secure release of EUR3.6 billion worth of bailout funds - the IMF share of the EUR7.2 billion of Troika funds - that still remain to be disbursed to Athens.

Absent these funds, Greece is insolvent, full stop.

Basically, per IMF projections, debt sustainability in Greece requires 3% primary net lending / borrowing balance in 2015 (up on estimated surplus of 1.5% in 2014) and this is required to rise to 4.5% in 2016-2017 and 4.24% in 2018-2020. In Euro terms, 2015 primary surplus required is EUR5.49 billion. Instead, the IMF now estimates that the country will be running a primary budget deficit (not surplus) of 1.5%.

Primary balance is Government balance excluding interest on debt.

If true, the deterioration in Greek finances so far this year is massive. And there is no way of correcting for it, unless either Greece imposes much more severe austerity or there is a formal and significant debt restructuring for debts held by the 'official sector' - aka Troika.

Per FT report, sources close to the Eurogroup claimed that “The IMF thinks the gap between the two realities is very large right now,” said one senior official involved in the talks. A stand-off between the IMF and eurozone creditors over Greece is not unprecedented. Three years ago, the IMF refused to disburse its portion of the aid tranche because of similar fears Greek debt was not falling fast enough. The IMF only signed off after eurozone ministers agreed to consider, but never implemented, writing down their bailout loans to reduce Greece’s debt to “substantially lower” than 110 per cent of GDP by 2022. It currently stands at 176 per cent." So in other words, the IMF appears to be pushing for a debt restructuring for Greece.

In a separate report: http://www.ifre.com/imf-not-insisting-on-further-debt-relief-for-greece-schaeuble/21197177.fullarticle Germany Finance Minister Wolfgang Schaeuble denied the IMF is pressuring the Eurogroup to restructure Greek debts.

As I noted in January (http://trueeconomics.blogspot.ie/2015/01/512015-imf-on-debt-relief-for-greece.html), this is by far the most often repeated disagreement between Greece, Europe and the IMF. And it comes as the Eurogroup attempts to structure another bailout package for Greece. So far, rumours have it, the Eurogroup outlook for Bailout 3.0 needs are pitched at EUR30-50 billion. But, as FT notes, "rising deficits could change that calculation."

Meanwhile, Greece continues to stumble from one payout to next - on a weekly basis - http://trueeconomics.blogspot.ie/2015/05/1515-good-news-may-hide-bad-news-when.html

And now we have a smell of napalm in the morning - some signs of bond markets repricing peripheral risks for the euro area:

1/5/15: Good News May Hide Bad News When it Comes to Greece

Greek 5 year CDS (Credit Default Swaps) continued to tighten dramatically today:

Source: CMA
Note: CPD refers to Cumulative Probability of Default (5 years)

Per Bloomberg, this is down to Greek Prime Minister Alexis Tsipras stepping up "efforts to clinch a deal that would unlock financial aid… The ASE Index of stocks jumped the most since September 2012 from a two-year low on April 21. It ended up 6.1 percent in April, the biggest rally in western Europe. Bonds returned 13 percent, while securities in the rest of the region fell. Investors put money into Greek assets in April, betting the rally may have more to go if a default is averted. The nation and its creditors hope to reach a preliminary agreement by Sunday, ahead of a scheduled meeting of euro-area finance ministers on May 11, according to three people familiar with the matter." More on this here: http://www.eubusiness.com/news-eu/greece-debt-imf.10za.

One factor unmentioned is sidelining of Greek Finance Minister in leading the negotiations with the Troika. Another factor is growing discontent within the Greek ruling coalition - a move that increases pressure on Tsipras to get a new deal. My sources in Greece claim there are big disagreements within the Government and main parties. Much of this is focused on hard left's view that Syriza is abandoning its Programme promises. But, as common, much of it also about individual personalities.


Greece is a recurring nightmare - for Europe and for Greece itself.

The country had to be bailed out twice already, borrowing EUR240 billion from the European partners and the IMF. Its Government debt stands at 177% of GDP. The economy is down 25% since 2010 and unemployment rate is at 26%.

It is crunch time for the country:

• European position is that there is no question that Greece is responsible for the mess the economy is in. The problems - with external and fiscal imbalances - started with misguided policies, dishonest accounting and reporting of the fiscal environment, and this continued over many years. The problems were exacerbated by structural weaknesses in the Greek economy. So from the European perspective, a member state, like Greece, simply cannot continue endlessly violating rules. Which means that Greek debt write down via official channels is impossible. And since the banks and private investors have already taken a 50%+ write down on their claims, further debt relief is not on the cards.
• The Greek view is the exact opposite. And it has some reasonable ground under it too. Greeks see their situation as being forced onto them by Europe and, rightly, recognise that the country simply cannot repay the debts accumulated. Worse, the economy, in its current state, can't even fund these debts. We are now witnessing weekly liquidity squeezes, the latest being over the tiny EUR200 million interest payment this week.

Greece is being squeezed on liquidity front much more seriously than the immediate pressure points suggest.

Banks are losing deposits - probably over EUR5bn in April, on top of some EUR27 billion in 1Q 2015 which marked a 16% decline. These are being replaced by weekly increases in ELA by the ECB. In April alone, ECB hiked ELA by EUR5.6 billion.

Government is also running out of money. In first two weeks of May, Greece will need to refinance EUR2.8 billion of Treasury T-bills, repay EUR800 million on IMF loans. In June - EUR1.5 billion of IMF debt, EUR3.2 billion in T-bills. So there are big bills coming due.

Meanwhile, the Government is having difficulty paying pensions and public sector wages. The Government have already drained the local authorities funds, requiring their transfers to the Central Bank. Which provided somewhere between EUR1.6 and EUR1.9 billion in deposits. Not enough to cover May liabilities.

Beyond that: big redemptions are due in 2016: total of just over EUR5 billion, 2017 - over EUR6 billion, and 2019 - just under EUR11 billion. These are completely unfunded at this stage, as Greece needs to negotiate a new support package with the EU, IMF, and ECB - the so-called Institutions.

And things are still very trigger happy.

• "Panic descended in Athens on Thursday as Greece’s 2 million pensioners were hit with delays to their monthly state stipend. Pensioners raided their accounts and broke into a board meeting, according to reports."
• And quoting from the EUBusiness news linked above: "...the Greek government, ...insists it will not back down from 'red lines' on labour protection and wage cuts. A Greek government source on Thursday said Athens wanted a deal without austerity "crimes" against the Greek people. ...would not back down on labour issues, income cuts, the sale of state assets at whatever cost and a hike in VAT.""
• And the external environment remains also volatile. As Reuters described this scenario: "“We’re going bust.” “No, you’re not.” “You’re strangling us.” “No we’re not.” “You owe us for World War Two.” “We gave already.” The game of chicken between Greece and its international creditors is turning into a vicious blame game…" The problem, as anyone familiar with the game theory knows, that in the game of chicken, switching into unstable strategies may lead to a worse outcome if expected payoffs from non-cooperation (head-on-collusion) are raised. When you start publicly accusing the other side of being intentionally damaging and/or dishonest, you are getting the cost of stepping down from brinkmanship only much higher.

Three options are open:

• Structured write down of official sector debts : EFSF, ESM, and ECB. But not the IMF, leading to no Grexit and a path toward repaired economy;
• Hard default with resulting Grexit and massive mess across both the EU and Greece; and
• Kicking the can down the road once again by securing another bailout agreement to take Greece through 2015-2016. The problem here is that unless Greek economy starts a dramatic recovery, 2017-2020 will see renewed pressures of default and Grexit.

All in, the third option is currently the most likely one. Welcome to Europe's Groundhog Day, Season 8.

23/4/15: Two links to read on Greece today

Two articles worth reading today on Greece:

• Via @zerohedge : Grimbo or Greek Limbo http://www.zerohedge.com/news/2015-04-23/forget-grexit-grimbo-has-arrived relating to indeterminacy of the Greek short term path through the Summer and the option of 'printing' IOUs; and
• Related, (h/t to @WhelanKarl) via @dsquareddigest post: https://medium.com/bull-market/greece-the-next-steps-and-scenarios-576aedb408d4

Meanwhile, here is a reminder, via OpenEurope, of the mountains of debt and liabilities coming due:

22/4/15: Some morning links on Greek crisis

Greek crisis is accelerating once again, predictably, given the deadlines and debt redemptions looming. So what's worth reading on the subject this am?

Start with @FT's Martin Wolf and his "Mythology that blocks progress in Greece". It is good… as a summary of key myths surrounding Grexit. But...

Myth 1: "A Greek exit would help the eurozone" and Wolf view is that it is not so because with Grexit "euro membership would cease to be irrevocable. Each crisis could trigger destabilising speculation." Now, sort of yes, Martin. But by the same token, is irrevocable - no matter what - euro a good thing? Is it stabilising to know that euro is purely political currency with membership irrespective of economic and financial realities? Is it better for a city to keep town walls shut for doctors in a plague?

Myth 2: "A Greek exit would help Greece". Here Wolf is on the money… again, sort of. "Stable money counts for something, particularly in a mismanaged country." Really? Stable money in a mismanaged economy? Is that possible? Ever heard of real effective exchange rates and internal devaluations? So much for 'stable', then. Would it not be more helpful to devalue both across real and nominal margins, rather than force all pain into internal devaluation channel?

Myth 3: "It is Greece’s fault. Nobody was forced to lend to Greece." Yeah, true… sort-ish… No one was forced, but many were incentivised to lend to Greece, including by idiotic EU (and international) risk-weighting rules on sovereign debt. Wolf is right that in 2010, "Rather than agree to the write-off that was needed, governments (and the International Monetary Fund) decided to bail out the private creditors by refinancing Greece. Thus, began the game of “extend and pretend”. Stupid lenders lose money. That has always been the case. It is still the case today." Which is an argument in favour of a default. Perhaps managed default or as I call it - assisted. But default alone won't do much to correct for internal mispricing of risk and real mispricing in the economy. That requires devaluation, so back to Myth 2 above.

Myth 4: "Greece has done nothing." Agree with Wolf here. Greece has done quite a bit. But I am a bit puzzled: "Indeed, one of the tragedies of the impasse over the conditions for support is that the adjustment has happened. Greece does not need additional resources." Really? Oh, ok, then - if Greece does not need additional resources, soldier on, what's the fuss?

Myth 5: "The Greeks will repay" - Agree with Wolf - this is a sunk cost fallacy. "What is open is whether the Greeks will devote the next few decades to repaying a mountain of loans that should never have been made." This is on the money.

Myth 6: "Default entails a Greek exit." Ok, agree again. But I must add here that if we do have default and no exit, then by Myth 1 analysis by Wolf, the euro will be a currency where "Each crisis could trigger destabilising speculation". You can't have a cake and eat it, Martin.


Now, EUObserver on the European salad dressing - sorry, the meetings schedule for resolving Greek crisis. First there was Friday 24th of April as the deadline, now its May 11th summit that is going to be decisive…  Read and laugh - THIS is Europe. ""What are the 70 percent [of the programme] Greece said were acceptable and the 30 percent acceptable? When we have a firm picture of that, we’ll discuss that. But preconditions for having discussions are not there”." All sounding like a dysfunctional family attempting to deal with an unpayable credit card bill amassed by the live-at-home 'prodigal' son… One note, though - this is about meetings to shore up Greece until June. This is NOT about meetings to shore up Greece for 2016-on. In other words, the entire circus is for bridging things through 2015. Thereafter... ah, well, pass the Kool-aid jug, Roger...


Talking of dysfunctional families, one can't avoid the topic of dead-beat parents… And here rolls in the ECB. "ECB to fund Greek banks as long as they stay solvent - Coeure". Coeure is priceless. Apprently, "The European Central Bank will continue to provide liquidity to Greece's banks as long as they remain solvent and have sufficient collateral, ECB Executive Board Member Benoit Coeure" said. Wait, you mean as long as Greek banks continue to have that which they don't have enough of?

"imposing capital controls was "not a working assumption" for the ECB, while speculation about Greece leaving the euro was "out of the question."" But capital controls already ARE a "working" solution, not just an assumption and the ECB is already looking at cutting back Greek banks access to liquidity supports and Constancio did already say that capital controls can be introduced, which is sort of saying that look, Cyprus does exist.

The best bit of Coeure's statement is this: ""In recent days, there has been tangible progress in the quality of the discussions with the three institutions - the ECB, the European Commission and the IMF - which can be built upon," Coeure said." Tangible metrics of quality… only at ECB.

Meanwhile, more news about ECB considering doing what Coeure says they won't do.

May Greek Gods be with Greece today, for the whole Euro area beehive is buzzing with funny stuff… qualitatively and quantitatively "tangibly"...


Meanwhile, some factuals: 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.

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.

20/4/15: Greece moves in with public sector capital [cash] controls

And... we have first round of [long-expected] capital controls in Greece: http://www.ft.com/intl/fastft/310542/athens-forces-local-governments-send-cash-central-banks. Per Bloomberg report, this covers term deposits: http://www.bloomberg.com/news/articles/2015-04-20/greece-moves-to-seize-local-government-cash-as-imf-payment-looms.

Which means... capital controls and an impact [of unknown magnitude so far] on capital spending and multi-annual spending lines, let alone on current spending.

Update: in response to some questions on the above, here is my view of risks arising from the above move by the Greek Government:

1. This points to a rather desperate situation in terms of cashflow in Greece. With three payments of maturing debt looming, Greek Government is now clearly and openly signaling lack of cash. As such, this move is a potential precondition to a default, although it is not necessarily a signla of such.
2. Transfer of cash into CB accounts means that the central authorities can have a more direct control over expenditure by the local authorities, which can have a negative impact on payments of current liabilities (e.g. wages, salaries, bonuses, pensions etc) and on some contracts, including capital expenditure and procurement contracts. Non-payments and payments delays to contractors are likely to rise as well.
3. Over longer term, such procedures can have adverse impact on local authorities investment plans.
4. Finally, transfer of cash implies reduction in deposits in the commercial banks which are currently experiencing significant private deposits withdrawals. The net impact is to further destabilise banking sector balance sheets. 

19/4/15: Greece In or Out: Ifo ain't caring much

Ifo Institute calculated euro system-wide losses from Greek default under two scenarios: Greece remains in the Euro and Greece exits the Euro.

In basic terms, there is no difference between the two.

And alongside that, called for the annual settlement of euro system liabilities and higher cost of funding within the central banks system. Which would trigger Greek default literally overnight and probably make Grexit total inevitability. In effect, thus, Ifo - a very influential German think tank - is calling for shutting the lid on Greece, comprehensively, and crystalising losses across the Eurozone and Eurosystem.

15/4/15: Official Sector Exposures to Greece

As Greek crisis enters a new turn of the spiral, here are full official sector exposures to Greece by country:

Source: @FGoria 

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.

15/6/2012: Some probabilities for post-Greek elections outcomes

Some probabilistic evaluations of post-Greek elections scenarios and longer range scenarios for the euro area:

In considering the possible scenarios for Ireland’s position for post-Greek elections period, one must have an explicit understanding of the current conditions and the likelihood of the euro area survival into the future.

Short-term scenarios:

In my opinion, there is currently a 60% chance that Greece will remain within the euro area post elections, but will exit the common currency within 3 years.  Under this scenario, the ECB – either via ESM or directly – will have to provide support for an EU-wide system of banking deposits guarantees, and new writedowns of Greek debt, as well as full support package for Spain’s exchequer and banks. Ireland, in such a case, can, in the short term, benefit from some debt restructuring. Part of the package that will allow euro area to survive intact for longer than 6-12 months will involve increased transfer of structural funds to stimulate capital investment in the periphery, including Ireland.

On the other side of the spectrum, there is a 40% probability that Greece exits the euro area within 12 months either in a unilateral, unsupported and highly disorderly fashion (20%) or via facilitated exit programme supported by the euro area (20%). In the latter case, Ireland’s chances to achieve significant writedown of our debts will be severely restricted and our longer term membership within the euro area will be put in question. In the former case, post-Greek exit, the euro area will require very similar restructuring of debts and real economy transfers as in the first option above. Here, there is an equal chance that the EU will fail to put forward reasonable measures for preventing contagion from the disorderly Greek default to other countries, including Ireland, which would constitute the worst outcome for all member states involved.

Longer-term scenarios: 

In terms of longer horizon – beyond 3 years, the scenarios hinge on no disorderly default by Greece in short term, thus focusing on 80% probability segment of the above short term scenarios.

With probability of ca 30%, the coordinated response via ECB/ESM to the immediate crisis will require creation of a functional fiscal union. The union will have to address a number of structural bottlenecks. Fiscal discipline will have to be addressed via enforcement of the Fiscal Compact – a highly imperfect set of metrics, with doubtful enforceability. Secondly, the union will have to address the problem of competitiveness in euro area economies, most notably all peripheral GIIPS, plus Belgium, the Netherlands (household debt), France. As mentioned in the short-term scenario 1 above, growth must be decoupled from debt overhang and this will require simultaneous restructuring of real economic debt (corporate, household and government), operational system of banks insolvencies, and investment transfers to the peripheral states. The reason for the probability of this option being set conservatively at 30% is that I see no immediate capacity within euro area to enact such sweeping legislative and economic transformations. Much discussed Eurobonds will not deliver on this, as euro area’s capacity to issue such will not, in my view, exceed new financing capability in excess of 10% of euro area GDP.

The second longer-term scenario involves a 60% probability of the euro area breakup over 2-5 years. This can take the form of a break up into broadly-speaking two types of post-Euro arrangements.

The first break up arrangement will see emergence of the strong euro, with Germany at its core. Currently, such a union can include Finland, Benelux, Austria, and possibly France, Slovakia, and Slovenia. The remaining member states are most likely going to see re-introduction of national currencies. Alternatively, we might see reintroduction of 17 old currencies. Italy is a big unknown in the case of its membership in the strong euro.

In my view, once the process of currency unwinding begins, it will be difficult to contain centrifugal forces and the so-called ‘weak’ euro is unlikely to stick. Most likely combination of the ‘strong’ euro membership will have Germany, Benelux, Finland and Austria bound together.

Lastly, there is a small (10 percent) chance that the EU will be able to continue muddling through the current path of partial solutions and time-buying. External conditions must be extremely favourable to allow the euro area to continue in its current composition and this is now unlikely.