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Goldman's Erik Nielsen On Why US Taxpayers Will Soon Burn Tens Of Billions To Delay The Greek Bankruptcy

Tyler Durden's picture




 

A very much downcast Erik Nielsen shares why the soon to be revised IMF/EU 3 year €150 billion (up from €40 billion) Greek bailout will be a waste of taxpayer money. And here is why American taxpayers will soon have to pony up to make sure Greeks can retire at 61. "I suspect that some haggling is now going on between the IMF and the Euro-zone on the burden sharing of a bigger program, but I rather doubt that the Europeans can do more than the already announced EUR30bn for the first year.  If so, I suspect that the IMF will have to settle for something like a 12-months fully funded program worth a total of EUR50-55bn (or could it be an 18-months program worth some EUR80bn?)." Yet, as even Erik points out, this is just more US money thrown out. "even a fully funded program for 12-18 months imply important risks and could lead to debt restructuring.  First, while the government will be fully funded, the private sector, including the banks, maybe still find financing at affordable rates difficult to come by.  Second, there is a risk that the government will not meet the performance criteria and hence lose the promised official financing, and third, what comes after the fully funded program?  If the situation is unsustainable now, it’ll take one heck of a policy program to make it sustainable in three years following more debt at interest rates well above the likely nominal GDP growth rate." All is good though - remember the Bernanke Directive #1: If an action results in the imminent weakness, suffering, pain or death of the dollar, with (preferably) or without the elimination of the US middle class, pursue such action with enthusiasm and vigor, in perpetuity.

***

Update from Washington: Greece and more.

After a couple of days of meetings here in Washington, these are my updated thoughts post IMF spring meetings:

  • My impression is that the official thinking on Greece has shifted in recent days, possibly caused by market reactions.  While they have long rejected the idea of a debt restructuring out of fear of contagion, to avoid that outcome two things have now become clearer to the officials:  (1) the program will need to be “fully funded”, i.e. the market has to be taken out of the equation for some time; and (2) the Greek program, partly because of the need for a sizable (15%-20%) decline in nominal wages, will need to be much longer than the originally envisaged three years.  On my numbers, a one-year fully funded program needs to provide a minimum EUR50-55bn; an 18-months program will require some EUR75bn, and a 3-year program a minimum EUR150bn.  I think the latter numbers is out of reach even for the present political environment of generosity, so the debate is between EUR55bn and EUR75bn.  I suspect that some haggling is now going on between the IMF and the Euro-zone on the burden sharing of a bigger program, but I rather doubt that the Europeans can do more than the already announced EUR30bn for the first year.  If so, I suspect that the IMF will have to settle for something like a 12-months fully funded program worth a total of EUR50-55bn (or could it be an 18-months program worth some EUR80bn?)  Regardless, it’ll be presented as a 3-5 year program potentially worth even more in terms of headline number, but look out for the degree of conditionality attached to future disbursements, as well as to possible double-counting as the early money will be rolled into a second program.

 

  • The underlying assumption will be that during the first 12-18 months, which will be fully funded by official sources, Greece (and Portugal, Spain and others) will implement sufficient reforms to make it possible to gradually return to the market during years 2-5 as the official financing begins to gradually fade away.

 

  • For the IMF to increase their share, they’ll probably insist on the Europeans committing their money up front.  The Spanish government will approve its €3.7bn share of the package this coming Friday (but it’ll still take about a week more to disburse the money as they first have to go borrow it.)  The Spanish government will do it through a fast-track piece of legislation according to which the government approves the loan and parliament validates it within a month.  Other governments will take longer, so I suspect that work is being done on a bridging facility, maybe by the BIS.

 

  • The authorities are calling on the IMF staff in Athens to conclude negotiations by Friday.  Whether this is feasible, I don’t know, but it makes an announcement by Friday possible.  Maybe its more likely during next weekend.  However, as I have argued before, rather that focusing on the actual loan number, investors should focus on the conditionality attached because that’s what will determine the sustainability of the program.

 

  • If I am right on the above, then the IMF-EU dealing with the present liquidity issue will be more pronounced and longer than I had originally envisaged.  However, my longer term concerns on Greece remain, namely my doubt whether the domestic political and social fabric can withstand the reforms that are needed to simultaneously cut the deficit while restoring growth.
  • In other words, even a fully funded program for 12-18 months imply important risks and could lead to debt restructuring.  First, while the government will be fully funded, the private sector, including the banks, maybe still find financing at affordable rates difficult to come by.  Second, there is a risk that the government will not meet the performance criteria and hence lose the promised official financing, and third, what comes after the fully funded program?  If the situation is unsustainable now, it’ll take one heck of a policy program to make it sustainable in three years following more debt at interest rates well above the likely nominal GDP growth rate.

 

  • I hope I am wrong, but I kind of doubt it – so this needs to be watched very carefully.

 

  • Beyond Greece, there is a certainty deflated feeling here in DC with respect to the IMF proposals of a globally coordinated bank taxation.  The differences between the US and Canada were not resolved, while Europe – oh good old Europe – never made it to centre-stage because of the lack of intra-European agreement.

Stay tuned.
Erik F. Nielsen
Chief European Economist
Goldman Sachs

 

 

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Tue, 04/27/2010 - 00:19 | 319168 Cursive
Cursive's picture

My impression is that the official thinking on Greece has shifted in recent days, possibly caused by market reactions.  

Translation:  My initial "analysis", which was only me re-printing the establishment's desired outcome, was utterly wrong.  I really have no idea where this is headed, but it all looks really, really bad.  Do you think we can put Humpty back together again?

Tue, 04/27/2010 - 02:42 | 319224 Cookie
Cookie's picture

+1

Tue, 04/27/2010 - 00:27 | 319173 Rusty_Shackleford
Rusty_Shackleford's picture

Why are countries always talking about "debt restructuring" instead of "debt repayment"?

 

Tue, 04/27/2010 - 00:43 | 319179 Assetman
Assetman's picture

Because Greece can't possibly repay.

The crazy thing about all this is that an IMF "solution" is probably the best of bad scenarios for the EU and Greece.

It's the worst of all possible solutions for the U.S. because it sets a precedent for the rest of the PIIGS.  We will be bailing out 20% of just about everything that sinks in Europe when all is said and done.  Little wonder that the IMF wants to fill the coffers right now.

And if Greece is really closer to 100 billion euros in "need", is the IMF really provisioning enough?  Bennie Mae must love all of this potential money printing...

Tue, 04/27/2010 - 05:28 | 319280 Hansel
Hansel's picture

If Greece can't possibly repay, how the hell will they be able to repay an additional 50, 80, or 150 billion starting in 2-3 years?  Especially when the program seeks wage cuts of 15-20% for the Greeks?  This is beyond stupid.  The "masters of the universe" (IMF, gov't, banks) can go fuck themselves.

Tue, 04/27/2010 - 07:14 | 319307 mephisto
mephisto's picture

Strange, that's exactly what Erik wrote but Goldman PR deleted the last sentence.

Tue, 04/27/2010 - 08:41 | 319370 cossack55
cossack55's picture

The MUs are too busy doing us.

Tue, 04/27/2010 - 09:40 | 319443 A_MacLaren
A_MacLaren's picture

Plain and simple, because they are Paperbugs. The solution to too much paper, is more paper.

Paper problems presage papering-over. Preserve paper's primacy, perseverance promotes paper prosperity.

To which I say, Piss-off Paper Pushers.

Tue, 04/27/2010 - 20:46 | 320992 akak
akak's picture

Pugnacious paper pushers persistently peddle predictably Ponzi paradigms, painfully producing pervasive pauperism plus precarious pecunary programs propagating pernicious public pillage.

Tue, 04/27/2010 - 00:29 | 319174 Mitchman
Mitchman's picture

If thatSome smart politician on Capitol Hill ought to compute the U.S."s share of that 150 billion number and run with it all the way to high political office.

Tue, 04/27/2010 - 00:39 | 319177 plocequ1
plocequ1's picture

Come on Ben. I hate when you tease me like this. You are such a naughty boy. I  hope you get us a bad deal on this bailout. I want at least 80% taxes taken out of my paycheck. I bust my ass everyday for you Ben. You are my God, My Master, My Guru. You are my Judah Ben Hur nanke

Tue, 04/27/2010 - 03:17 | 319245 jeff montanye
jeff montanye's picture

ben hur nanke.  watch out for the spear hubcap in your spokes.

Tue, 04/27/2010 - 00:37 | 319178 What_Me_Worry
What_Me_Worry's picture

There is little doubt that the IMF/EU/Greeks want this deal done for as much as they feel is needed to prevent defaults spilling over to the rest.  I don't think anyone doubts their intentions here.

One wild card remains the Greek public.  Most people (at least most people I know) don't have a 20 percent buffer in their incomes to accept that kind of cutback.  I would think a majority could handle 10 percent.  My rough guess is gradually after 10 percent it will really start to turn those who can handle it into the minority.

It would seem the general population of an industrialized country (is it even proper to call them that?) won't take action unless their backs are against the wall.  The threat of truly losing their way of life could trigger something drastic here.

Maybe life in Greece is different and they will moan about it, but accept it?

Lastly, I am guessing Germany is still the last direct wild card standing in this debate.  In the end, I say they easily cave due to how much their own banks are on the hook in this debacle.  If their banking lobby is even 1 percent as strong as our US counterpart, then they should have no problem convincing German leadership to see these their way.

Katla could be a grey-swan?  Seems like a long-shot, though?

Would CDS rates fall because they know each Euro country will be bailed out or will they go up since it becomes painfully obvious that many more countries will need bailouts to keep this thing glued?  Obviously, markets will shoot the moon when another announcement is made and the Euro will probably jump a little.

Tue, 04/27/2010 - 00:50 | 319182 sushi
sushi's picture

Must remember that Erik is in Washington talking to officaldom. I think of Ireland, which has implemented an austerity program with 20% public sector pay cuts, coughing up a few billion to support a nation of unhappily retired 22 year old hairdressers; I don't see how this achieves public acceptance. I expect the hairdressers to riot.

Tue, 04/27/2010 - 00:51 | 319184 Assetman
Assetman's picture

Interesting view on Germany, Alfred.

I gather one factor is how well capitalized (poorly levereraged) these German banks that could be on the hook actually are.  Can they absorb the damage, per hpas with German "help"?

The best solution long term is for the Greeks to default and go their own way.  Of course, there is bound to be a political solution that just farks up everything.

Tue, 04/27/2010 - 07:43 | 319319 FischerBlack
FischerBlack's picture

In the end, I say they easily cave due to how much their own banks are on the hook in this debacle.

If the German banks are screwed if Greece goes under, why not just do the German thing and give the billions of Euros to those banks, and take control of them. Why trust the Greeks to do the right thing with your money when they might not and blow up your banks anyway? The whole thing makes no sense to me. I'm pretty sure I don't fully understand the situation over there.

Tue, 04/27/2010 - 08:01 | 319332 ZackAttack
ZackAttack's picture

why not just do the German thing and give the billions of Euros to those banks?

 

No, no, no... Even though it would be far cheaper, the bailout has to be *laundered* first so the corruption is less obvious. We "bailed out" AIG rather than write a check to the squid. We "bailed out" Fannie and Freddie so we wouldn't have to have a vote on funding RTC 2.0.

Tue, 04/27/2010 - 08:43 | 319374 cossack55
cossack55's picture

The Germans are just still pissed about the whole "Navarone" thing. 

Tue, 04/27/2010 - 13:38 | 319949 lucky 81
lucky 81's picture

don't be so sure. sounds to me like you have a very accurate description of whats happening over there. soon to be happening here.

Tue, 04/27/2010 - 02:39 | 319220 Barmaher
Barmaher's picture

Sounds like a lot of dollars will need to be printed.

One more reason to own gold and silver. 

 

Tue, 04/27/2010 - 02:55 | 319228 Popo
Popo's picture

Let's see what a 20 percent reduction in income does to housing prices. (Think 50 percent drop).

....And lets see what that does to local Greek banks.

Tue, 04/27/2010 - 03:10 | 319241 The Alarmist
The Alarmist's picture

Just for the record, if you are in a hazardous profession (which includes hairstylists due to exposure to chemicals and broadcast professionals due to expsoure to bacteria and germs on the microphone), then you are entitled to retire at 50 in Greece.  And now the EU Minister for Industry has decided that vacation travel is a right and that those who can least afford travel (which he has decided includes retirees) should be entitled to subsidies to help them achieve that right. 

This is the real embodiment of that "giant sucking sound" that Ross Perot talked about during the NAFTA debate.  Coming to a country near you soon, no doubt.

Tue, 04/27/2010 - 06:30 | 319296 Crime of the Century
Crime of the Century's picture

And now the EU Minister for Industry has decided that vacation travel is a right

Somebody has been listening to Alan Grayson...

Tue, 04/27/2010 - 03:33 | 319254 heyligen
heyligen's picture

As Goldman sent its shit to Europe and helped Greece with fraudulent accounting, why are goldmanites complaining when some shit comes back? Must be God's work.

Tue, 04/27/2010 - 08:07 | 319334 King_of_simpletons
King_of_simpletons's picture

Goldman's mess is cleaned up by the US Tax payers, while they make a tidy profit from both sides of the trade doing "God's Work" !

Tue, 04/27/2010 - 04:49 | 319272 Sudden Debt
Sudden Debt's picture

WE NEED SOME MARSHMELLOWS OVER HERE!!! PRONTO!!!

Tue, 04/27/2010 - 04:57 | 319273 sangell
sangell's picture

The notion that the other Piigs will have to contribute rather large sums to 'save' Greece is preposterous. Portugal, e.g., could end up paying more to borrow the $1 billion plus it is expected to 'loan' Greece than the Greeks will pay for the EU loan! That this EU loan is not expected to be senior to Greece's other debt makes the entire EU loan risky to say the least as I doubt Greece will be able to adhere to the yet to be announce IMF/EU austerity plan and will not be able to pay the loan back.

Tue, 04/27/2010 - 05:59 | 319286 BeSosaNotTony
BeSosaNotTony's picture

Here's what I can't fathom: why do all these policy prescriptions seek to kick the can down the road when the entire problem arose from the fact that fiscal policies in Greece (when they weren't committing outright fraud) were entirely based upon the assumption that they could inflate the welfare state and kick payments down the line? The way I see it, any solution that serves as a stopgap is just putting off and exacerbating a day of reckoning that's already here for both Greece and the EU as an economic and political project. There's no way that the US, if they have any sense (I trust that my buddy Benny et alia do not possess such intelligence, but I digress), puts a cent of Fed money into this b/c politically this is a godsend--the Euro was the chief rival to the US's monopoly on reserve currency, and now its imploding, so why help it? Let Goldman (inb4 vampire squid), JP, and the rest of the sharks take their pound of flesh, collect the taxes and fines (not like they pay taxes anyway, but OK), and whistle dixie as you continue to rebuild the house of cards that caused this mess in the first place? Seems logical to me. 

Tue, 04/27/2010 - 06:03 | 319287 exportbank
exportbank's picture

Spain to borrow 3.7 billion to give to Greece - seems like a great derivative bet - they'll be looking to get 100 billion out of those chips next year.

Just give the Greeks a somewhat generous exchange rate and turn all Euro's in the country into Drachmas (new Drachmas 100 = 1 Euro) the problem will then self correct. A quick "debt resolution" - if you don't want to take the cash hit you can use the New Drachma to vacation and enjoy the culture. 

Tue, 04/27/2010 - 07:32 | 319314 The Alarmist
The Alarmist's picture

If they were smart, they would borrow €4b, lend 3.7 to Greece and use the rest to buy CDS coverage.

Tue, 04/27/2010 - 06:25 | 319293 Crime of the Century
Crime of the Century's picture

If the situation is unsustainable now

That should read "system", and it isn't a matter of if anymore...

Tue, 04/27/2010 - 07:03 | 319304 rawsienna
rawsienna's picture

Maybe the IMF can bailout California?

Tue, 04/27/2010 - 12:59 | 319814 Cleanclog
Cleanclog's picture

Or the BIS can provide California a bridging facility.

Can this become any crazier?  Every funding entity (IMF, BIS, EU, W BK, FED, ECB, China's air polution authority, EPA, and  Polynesian shell exchange), soon to be "helping" every government on earth meet it's financing obligations with more debt, from the UK to San Jose, Venezuela to NYC.  

Do we just have everyone "stand down" and forgive all debts?  Isn't that easier and more transparent than this sham being created now?  

Reward the greedy and punish the responsible feels more and more true every day.

Tue, 04/27/2010 - 07:12 | 319305 Bow Tie
Bow Tie's picture

quite the situation the greek people find themselves in. options would be to default or accept progressively larger, more extensive loans and austerity measures, becoming eternal serfs/debt slaves.

unfortunately, the greek government and the imf are committed strictly to the latter. all of the country's productive assets will be gobbled up by the 'charitable' international financiers. the people will work to pay off ever-increasing interest on the debt, with perhaps a few crumbs left over to feed themselves. status quo will not be challenged unless the people rise up.

Tue, 04/27/2010 - 07:24 | 319309 JiangxiDad
JiangxiDad's picture

Not just the Greek people, by my calculation. You might even say the Greeks have been clever. They're first in line for a hand-out, and their fall will be cushioned. Clever people. Those begging later won't be so lucky, including us.

Tue, 04/27/2010 - 08:23 | 319318 Bow Tie
Bow Tie's picture

hmm, but its not so much a 'hand-out' than it is a debt-laden chokehold. any 'money' (which in reality is further indebtedness) comes with many strings attached. and they are first because their current finances and underlying structural problems are such a mess. without a real default, the greek people will end up with even less crumbs on the table than the rest of us. the black hole of debt could go very deep indeed.

so surely their fall will only be cushioned or worthwhile if the eventual default is a genuine, fully fledged default. is that even allowed to happen? i guess what i'm trying to say is that as a sovereign nation, isn't it best in the long term to not get bailed out by such dubious organizations as the IMF? break free of the banker shackles now, stop paying ever-increasing amounts of interest, start a clean slate. or something.

Tue, 04/27/2010 - 08:27 | 319350 JiangxiDad
JiangxiDad's picture

Well of course you're right. But the Greeks will likely do both--take the money and default. Think GM.

 

It's all sad. We had a nice thing going.

Tue, 04/27/2010 - 13:04 | 319834 Cleanclog
Cleanclog's picture

Agree the Greeks are smart to get in first.  There is no way every  needy government will be able to be fed at the trough.

Tue, 04/27/2010 - 07:22 | 319308 JiangxiDad
JiangxiDad's picture

I'm new to your planet. On ours, this type of financial mgm't doesn't work. Seems I have much to learn.

Tue, 04/27/2010 - 09:02 | 319394 Hulk
Hulk's picture

Is there anyway you can take a few of us back to your planet? I want off this one!

Have gold, will travel

Tue, 04/27/2010 - 07:27 | 319312 Miyagi_san
Miyagi_san's picture

Let it burn...it's just smoke on the horizon

Tue, 04/27/2010 - 07:30 | 319313 kaiserhoff
kaiserhoff's picture

The paradox is that policy wonks worldwide want inflation to ease many pressures and they are not getting it.  Deflation is winning.  There are strong deflationary forces at work.

1 the real estate collapse

2 the real wage collapse mostly due to globalization

3 oddly enough, the internet, which has wiped out whole categories of middle men.  good for consumers, but hell on employment.

Throwing trillions into the fire doesn't matter if it goes to banks to cover busted loans or to governments for essentially the same reason.  There is no multiplier effect with this crap.  Keynes had it exactly ass backwards which should surprise no one. 

So we extend and pretend, the private sector is starved for cash in a sea of liquidity, and the band plays on.  Comrade Ben does not learn.

Tue, 04/27/2010 - 07:46 | 319325 heyligen
heyligen's picture

4 credit vaporization, credit out of thin air that used to drive spending and inflation

Ah, those were the times...

 

Tue, 04/27/2010 - 07:36 | 319316 FischerBlack
FischerBlack's picture

LMAO @

The Spanish government will approve its €3.7bn share of the package this coming Friday (but it’ll still take about a week more to disburse the money as they first have to go borrow it.)

 

Tue, 04/27/2010 - 07:58 | 319327 kaiten
kaiten's picture

There´s no way Greeks will accept 15%-20% decline in nominal wages. The Greek government just stopped the pay increase and look at the reaction. Mark my words, Greece will leave eurozone within few months, a year at most. And then default.

Tue, 04/27/2010 - 08:26 | 319346 Absinthe Minded
Absinthe Minded's picture

   "The Spanish government will approve its €3.7bn share of the package this coming Friday (but it’ll still take about a week more to disburse the money as they first have to go borrow it.)"

Who in their right mind would even think of loaning that money to Spain?

Tue, 04/27/2010 - 16:56 | 320460 The Alarmist
The Alarmist's picture

Someone who borrowed it from someone else, leveraged it up another 30x or so, and then bought CDSs on Spains sovereign debt .... In other words, the Vampire Squid.

 

Tue, 04/27/2010 - 08:33 | 319359 kaiserhoff
kaiserhoff's picture

This has nothing much to do with Greece.  As soon as anyone defaults (Portugal, Illinois, the Neoga sewer district) long rates will spike.  When long rates adjust to reality, all ponzies die. 

That's why Ben and Timmy work so hard juggling buzz saws.  LOL

Tue, 04/27/2010 - 15:02 | 320186 HomemadeLasagna
HomemadeLasagna's picture

+1

This isn't buying time to delay a Greek default, it's buying time to delay a world default.

If it gains me a few extra months to make personal preparations as well, then the Greeks are welcome to as many of these soon-to-be-worthless dollars as they'd like.

The alternative is that the whole cascade starts sooner, which means it hits my backyard sooner...

Tue, 04/27/2010 - 08:37 | 319364 MsCreant
MsCreant's picture

Everyone is insolvent. The real problem is no one can think of a story to cook up, that everyone will buy (even politely turning their head the other way), that will allow them to print to the moon. None of the stories (loans, austerity, interest, blah) add up to anything credible that someone would even believe works. There is no kicking this can, the can is at the end of the road. 

Tue, 04/27/2010 - 10:16 | 319525 glenlloyd
glenlloyd's picture

it really is unfortunate that failure doesn't have the same consequences it used to. When someone failed....well...they failed. Now it just means that the failed entity has to look elsewhere for what they can't do themselves.

debt liquidation is the only thing that will solve their problems, prolonging the liquidation doesn't ever resolve the problem of too much debt. There's just no chance that this will result in a satisfactory solution, it only eats up resouces that could be used more productively elsewhere...it's a bottomless pit.

Tue, 04/27/2010 - 10:43 | 319556 wyosteven
wyosteven's picture

First of all Greece is the smoke, the REAL fires surrounding national soverignty have little to do with Greece.

Most fools don't remember the "dominoes" tactic, exercised by letting Lehman fail so that "containment" could occur for the rest, and then all in charge of stealing your money can say that they didn't bail out everyone, blah blah blah (the difference between bailing everyone or not takes only one exception).  Pure authoring of history.

Expect the same play.   The first country is all diversion, which of course sets up the play for the real game.  Greece is no main attraction, it is lies and set up for the real problem (who's next).

Think about it.   These crooks won't blow their load on Greece.   Who the hell cares about Greece anyway, no one (except Greeks) - thats who.

The only thing that matters is how much money can be printed as fast as possible and how much theft can occur from US citizens before they actually notice or (shock) even care.  Straight out of the W. Bush paybook... er playbook. 

Get a few fag-traders to try to inflate the debaucle (again authoring history), light a few more fires, and more money is printed.  

End the Fed and quit rewarding the fags of finance for theft of US treasury money.

Tue, 04/27/2010 - 23:24 | 321168 MsCreant
MsCreant's picture

Homophobic asshole. Do not insult homosexuals by comparing them to bankers. They do not deserve that kind of contempt and bankers deserve a whole lot more than just a lil' banker bashing. 

I'm joking but not. Any other division, dem/rep, straight/gay, black/white, young/old, jew/goy (fill in your favorite), serves to fragment us and keep us at each other's throats and off them. 

Eyes on the prize. 

 

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