Enter the Greek Bailout that doesn't bailout!

Of course, what would a weekend be without another installment in the
Grecian soap opera: Greece Bailed Out.....Again: Bloomberg

• European governments have offered up a $61 billion Greek rescue
  package, meanwhile (and of course), Greece has not asked for any sort of
  package, insisting it can pay its debts
• Greece plans to offer €1.2 billion in 6 month and 1 year notes
  tomorrow (April 12^th)
• So, the EMU pledges aid that Greece does not want to accept right
  before a bond auction that would have otherwise failed, and Germany
  after months of demanding Greece be punished for its profligacy, has
  backed off and agreed to an emergency plan that offers aid at a
  significant DISCOUNT to the market rate. How does this pass the
  mainstream smell test?

Here are some choice quotes from the story: "The package “sends a clear message that nobody can play with our common currency and our common fate,” Greek Prime Minister George Papandreou told reporters in Larnaca, Cyprus." Actually, the package sends a clear message that moral hazard abounds over there in Euroland and their will be no market discipline for financial profligacy. Germany “has lost the competition,” said Carsten Brzeski, an economist at ING Group in Brussels who used to work at the European Commission. “All that fuss and talk about not putting taxpayer money at risk has been made obsolete.” ... the European loans would be tied to Euribor and priced above rates charged by the IMF, a nod to German opposition to subsidizing a country that lived beyond its means. The EU will offer a mix of fixed- rate and floating rate loans. Tis not much of a nod since it substantially undercuts the market rates. Yes, its more than the IMF rates, but the IMF rates were closer to zero, not withstanding the fact that the IMF would cause them to contort the spending. Greece last week raised its estimate of the 2009 deficit from 12.7 percent of gross domestic product to 12.9 percent, the highest in the euro’s history and more than four times the EU’s 3 percent limit. While rules dictated by Germany in the 1990s foresee fines for countries that go over the limit, no penalty has ever been imposed. Germany also led the charge to loosen the rules in 2005 after three years of excessive deficits. Basically, the rules are a joke and there is no wonder why not even a single country in the EU has respected them. While all euro-region governments vowed to contribute, some would need parliamentary approval. Ireland, itself reeling from the financial crisis, would require “national legislation,” Finance Minister Brian Lenihan said in an e-mailed statement.Ireland is quite the interesting case in and of itself. Subscribers who have not done so are strongly recommended to carefully review the Ireland public finance review thatI will be posting later on. It's a doozy! It will be very interesting to see how a country such as Ireland who actually needs a bailout, will be bailing out another country that needs a bailout. For a sneek preview, see Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe and Reggie Middleton on the Irish Macro Outlook. Notice how Ireland is the nation with the second highest NPA to GDP ratio. Overall, in terms of total financing needed for 2010 (which includes 2010 bond maturities, short-term roll over debt and fiscal deficit), France and Germany top the list with € 377.5 billion and €341.6 billion, respectively while the total finance needed as percentage of GDP is expected to be highest for Belgium and Ireland at 26.3% and 22.4%, respectively. Now, to focus on the contagion effect of Ireland, specifically, let's borrow from our yet to be released foreign claims model in order to see who may be effected from the rush to pull capital out of extant positions to fill the leveraged NPA holes left by the banks... Ireland has the largest claims against the UK as a percentage of the its respective GDP, the largest in the world. In the rush to raise cash to sell assets, expect some fire sales in the UK. For those who may be wondering how this may affect the UK, see our premium subscription report on the UK's public finances and prospects (recently updated to include the last round of government projections):  UK Public Finances March 2010 2010-03-29 06:20:38 615.90 Kb Ireland can also be expected to pull assets our of the ailing PIIGS group as well, since they are, bar none, the biggest lender to that group as a percentage of GDP. No wonder their banks are having problems.   Ireland also has the second highest claims (as percent of GDP) against the central and eastern European nations, who happen to be in a full blown depression. The withdrawal of assets, banking support and credit will exacerbate both Ireland's problems and that of these nations. See The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious! to find that Ireland can exacerbate the problems of Austrian, Swedish and Belgian banks by pulling capital out of the CEE region, and yes, they are truly in a depression: The Greek government has yet to request a European lifeline, confident that this year’s planned budget cut of 4 percentage points will stem speculation that it is heading for the euro region’s first-ever default. Fitch Ratings highlighted that risk by shaving Greece’s debt rating to BBB-, one level above junk, on April 9. A combination of higher taxes, lower spending and salary cuts for public workers have prompted strikes and protests against Papandreou, a socialist elected in October on promises of raising wages. The EU showed no sign of demanding further Greek austerity measures. Rehn hailed the Greek government for implementing “a very bold and ambitious program.”This is interesting since our analysis shows that the plan as Greece has announced it, just won't be able to cut the butter. Either the guys at the EU didn't read the plan, their spreadsheets need to be recalibrated, or they aren't being totally upfront. Then again, maybe I can be totally wrong and all of the EU/IMF/Greek government super rosy estimates illustrated below will turn out to be different this time around???? Greece needs to raise 11.6 billion euros by the end of May to cover maturing bonds, and another 20 billion euros by the end of the year to pay debt coupons and finance this year’s deficit. The debt agency plans to offer 1.2 billion euros of six- month and one-year notes tomorrow, in a test of investor confidence. So far, all of the recently issued bonds are totally undewater. Is this really a worthwhile investment? Greece is likely to need money by the end of April, said Erik Nielsen, London-based chief European economist at Goldman Sachs Group Inc. Noting that the budget cuts threaten to cripple the economy, he said in a research note that “this thing is unlikely to go to bed anytime soon." "Cripple" the economy is right. They will throw themselves into a deeper depression, and it is doubtful that the cuts go anywhere near far enough, thus they will either have to cut deeper or face the fact that they will still be running an inappropriate deficit anyway. These are the email addresses of the reporters that worked on this story (James G. Neuger in Brussels at [e-mail] This e-mail address is being protected from spam bots, you need JavaScript enabled to view it ; Jonathan Stearns in Brussels at [e-mail] This e-mail address is being protected from spam bots, you need JavaScript enabled to view it ). I challenge anyone (including them or their sources) to demonstrate how Greece will be able to pull out of this, even with the EU subsidy that was just announced. This are just too bad. Subscribers can reference  Greece Public Finances Projections 2010-03-15 11:33:27 694.35 Kb . while those that don't subscribe can simply review the anecdotal evidence I have gathered, see Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! Let's take a visual perusal of what I am talking about, focusing on those sovereign nations that I have covered thus far. Notice how dramatically off the market the IMF has been, skewered HEAVILY to the optimistic side.  Now, notice how aggressively the IMF has downwardly revsied their forecasts to still end up widlly optimistic. Ever since the beginning of this crisis, IMF estimates of government balance have been just as bad... The EU/EC has proven to be no better, and if anything is arguably worse!   Revisions-R-US! and the EU on goverment balance??? Way, way, way off.  If the IMF was wrong, what in the world does that make the EC/EU? The EC forecasts have been just as bad, if not much, much worse in nearly all of the forecasting scenarios we presented. Hey, if you think tha's bad, try taking a look at what the govenment of Greece has done with these fairy tale forecasts, as excerpted from the blog post "Greek Crisis Is Over, Region Safe", Prodi Says - I say Liar, Liar, Pants on Fire!... Think about it! With a .5% revisions, the EC was still 3 full points to the optimistic side on GDP, that puts the possibility of Greek  government forecasts, which are much more optimistic than both the EU and the slightly more stringent but still mostly erroneous IMF numbers, being anywhere near realistic somewhere between zero and no way in hell (tartarus, hades, purgatory...). Now, if the Greek government's macroeconomic assumptions are overstated when compared with EU estimates, and the EU estimates are overstated when compared to the IMF estimates, and the IMF estimates are overstated when compared to reality.... Just who the hell can you trust these days??? Never fear, Reggie's here. Download our "unbiased, non-captured, empirically driven" forecast of the REAL Greek economy - (subscribers only, click here to subscribe)  Greece Public Finances Projections 2010-03-15 11:33:27 694.35 Kb . Related banking research can be downloaded here: Banks exposed to Central and Eastern Europe Greek Banking Fundamental Tear Sheet It really is a shame when you have to pay for the truth, isn't it? If you think you've witnessed an example of social unrest in Greece, you ain't seen nuthin' yet. Wait until the reality of these faked numbers start hitting home...   The Pan-European Sovereign Debt Crisis, to date (free to all):  1.     The Coming Pan-European Sovereign Debt Crisis - introduces the crisis and identified it as a pan-European problem, not a localized one. 2.     What Country is Next in the Coming Pan-European Sovereign Debt Crisis? - illustrates the potential for the domino effect 3.     The Pan-European Sovereign Debt Crisis: If I Were to Short Any Country, What Country Would That Be.. - attempts to illustrate the highly interdependent weaknesses in Europe's sovereign nations can effect even the perceived "stronger" nations. 4.     The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries 5.     The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious! 6.     The Beginning of the Endgame is Coming??? 7.     I Think It's Confirmed, Greece Will Be the First Domino to Fall  8.     Smoking Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer Beware! 9.     Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter? 10.   "Greek Crisis Is Over, Region Safe", Prodi Says - I say Liar, Liar, Pants on Fire!  11.   Germany Finally Comes Out and Says, "We're Not Touching Greece" - Well, Sort of... 12.   The Greece and the Greek Banks Get the Word "First" Etched on the Side of Their Domino 13.   As I Warned Earlier, Latvian Government Collapses Exacerbating Financial Crisis 14.   Once You Catch a Few EU Countries "Stretching the Truth", Why Should You Trust the Rest? 15.   Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! 16.   Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe 17.   Moody's Follows Suit Behind Our Analysis and Downgrades 4 Greek Banks The EU Has Rescued Greece From the Bond Vigilantes,,, April Fools!!! How BoomBustBlog Research Intersects with That of the IMF: Greece in the Spotlight Grecian News and its Relevance to My Analysis A Summary and Related Thoughts on the IMF's "Strategies for Fiscal Consolidation in the Post-Crisis

Comments

[fredquimby]

Trust me on this one Mr. Middleton.

Make time and read the FOFOA blog.

It is the most incredible journey of writings I have come across regarding the situation we face today, the reasons behind how we got here and what is likely coming up next....

[Leo Kolivakis]

Reggie,

Given the size of the underground economy in Greece & Italy, I take any GDP figures with a shaker of salt. The reality is that this bailout has bought Greece time but it still needs to reform pensions, cut the size of the public sector and start collecting income and real estate taxes (can you believe that Greeks hardly pay any real estate taxes!).

I predicted that Greece would be bailed out, just like I predict others will be bailed out. The powers that be have one agenda: AVOID GLOBAL DEFLATION AT ALL COSTS.

There will be turbulence, but ignore dire warnings and keep buying them dips. Cheers.

[Cyan Lite]

How does this pass the mainstream smell test?

There is no mainstream, if it wasn't mentioned on Real Housewives of Hollywood then it doesn't exist.  Seriously, ask one "normal" person if they know about Greece being in trouble and you'll get clueless answers.  This wasn't even covered by CNN/FoxNews.  Heck, DrudgeReport doesn't even have it.

[stkboy]

Reggie, you do great analysis and you are a pleasure to read. Mish did a piece on Canadian Banks versus US Banks and had this to say  "Canadian banks were actually significantly more leveraged – and therefore more risky – than well-run American commercial banks"

Have you taken a look at Canadian banks and what is your opinion of the article and strength of Canadian banks. Thanks very much

http://globaleconomicanalysis.blogspot.com/2010/03/california-usa-vs-ontario-canada-which_29.html

[Reggie Middleton]

I haven't looked at the Canadian banks in detail yet, but will end up getting around to them.

[fredquimby]

And heres a tempter from that link to FOFOA:

"Many pundits and analysts have been speculating that this "Greek debt crisis" could mean the end of the euro, the end of a broad-based euro, the break-up of the Eurozone, or something along those lines. But this analysis flows from the shallow and short-sighted thinking that has become the very hallmark of Wall Street and Washington. The euro was and is a political movement (remember I said that politics is one of the three key forces to watch) that spans decades if not centuries, and encompasses much more than just a transactional currency. It is comical to watch some of these Wall Street hot shots criticizing what is really quite an impressive accomplishment in the euro."

:)

[Reggie Middleton]

I don't have the time to read your link, thus you will have to summarize here for me. As for a political movement, that is the problem. It is a centralized currency movement with ho common political or fiscal mechanism, thus the unity is truly just a mirage as has been recently demonstrated.

[fredquimby]

Dear Mr. Middleton...I rise to your challenge of: "How will Greece be able to pull out of this, even with an EU subsidy"

Easy.

FREEGOLD is how Greece and ALL the PIIGS will get out of trouble.

To get the full breakdown have a squiz through here for the full reasoning why The Euro will not fold anytime soon...

http://fofoa.blogspot.com/2010/02/greece-is-word.html

Cheers!!

[Misthos]

I've just started reading FOFOA and the old writings of ANOTHER(THOUGHTS!)...  pretty interesting stuff.  When do you see Freegold occuring?  Is the EU merely delaying the inevitable, hoping that the US Dollar paper standard collapses first?  Then, enter Freegold?  What timeframe do you see this happening?