Is Greece Beginning To Consider A "Strategic" Default?

Tyler Durden's picture

And why not - after all it's all the rage among those waiting in line for iPads so they can be first to buy "The Steve Jobs Guide for Deadbeat Dummies Trying To Learn To Read Good." Now that Obama has given his blessing to an entire generation of Americans to tear up contracts (very appropriate coming from a contract law professor), the follow up to moral hazard is resulting in not just individuals and companies, but entire nations simply opting out of paying their dues. Evans-Pritchard reports that after today's ludicrous rates on 3 and 6 month Bills the tide may be turning in Greece, with both parties in the country finally realizing its creditors will do everything in their power to bleed it dry, at "usurious" rates. With economic growth negative for a decade and debt interests quite certainly positive, the marginal difference will destroy not only economic output, but sink Greece ever more in debt, as existing creditors fund capital shortfalls at maturity (or default) by ever increasing interest rates. Greece has the option to stop funneling domestic capital to Germany later (inevitable) or sooner (if it finally makes the right decision).

From the Telegraph:

There are still questions that need to be answered on the EU deal," said Julian Callow from Barclays Capital. "Greece has a Herculean task ahead. The economy is contracting yet fiscal tightening has hardly begun. We expect growth of minus 4.3pc this year, and minus 1.9pc in 2011 which will be difficult for debt dynamics."

Opposition politicians in Athens have begun to question whether it is in the country's interests to accept harsh wage deflation in order to pay foreign creditors. "This is usury: we need restructuring of debts," said the Righti-wing LAOS party.

Such views are gaining support in parts of the ruling PASOK party, raising the risk that it will splinter as further austerity is imposed. Diplomats see a direct parallel with Oskar Lafontaine's Linke movement drawn from the Left-wing of Germany's Social Democrats.

Not only will a delay in defaulting do nothing for the economy except bleed it to death slowly, but ever more frequent risk flare episodes culminating in bank runs will intensify the deposit outflows and impair the banking system beyond repair (for depositors to keep their money in Greek banks, they need to be compensated for the risks: double digit rates sound about right), thus dooming any hope for an economic recovery. Evans-Pritchard's conclusion: a dead-end Greece may be on the road to the same societal splintering that post-Weimar Germany experienced, and culminated in some very tragic consequences.

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Crab Cake's picture

Not only will a delay in defaulting do nothing for the economy except bleed it to death slowly, but ever more frequent risk flare episodes culminating in bank runs will intensify the deposit outflows and impair the banking system beyond repair, thus dooming any hope for an economic recovery.

Now wait a second.  Are you talking about the US or Greece?

Sam Clemons's picture

I was reading something that said this "we are likely moving towards a coordinated outright default, which will involve the devaluation of currencies followed by central banks capping money growth, which in turn will trigger a second deflationary depression." 

 

Why would central bankers cap money supply growth in the case of a sovereign default?  Because the currency has already been devalued?

FischerBlack's picture

A deflationary depression is much more acceptable to authorities than hyperinflation. Depressions spread government dependency. Hyperinflation spreads revolution.

Mako's picture

The system has been hyperinflating for 66 years.  Credit creation from $440B to $53T.  

The equation always wins. 

The last time the system peaked, you were probably not even born yet. The only reason the collapse stopped was a guy named Hilter went and liquidated a ton of non-funded liabilities.  

This time expect a lost generation and billions of unfunded liabilities being wiped from the books.

 

UnBearorBull's picture

Very interesting comment.

If "Depressions spread government dependency," that would seem to fit the Obama plan.

But won't it require hyperinflation to fix the debt? Or is that later?

What would the Global Wall Streeters prefer? Or do they win either way?

 

 

docj's picture

The Debt doesn't get "fixed", at least not in the way you're thinking, it gets defaulted.

Which, of course, adds more fuel to the deflationary fire.

And I think Fischer has this spot-on - think FDR/New-Deal on steroids.  Obambi will be able to get the Gubermint involved into things old Frankie could only dream about because all barriers between citizen and state have essentially been eroded away since th e30's.

ObamaCare is only the start.

curbyourrisk's picture

I have been saying this for over a year, and getting beat to hell by most everyone here.  I gave up saying, but still agree with it.  This is exactly hte direction Bernanke has taken us, he really is a lot smarter than we give him credit.  He kows exactly what he is doing, despite saying "OTHER" things.  He is the Obama of the finance industry.  Ignore what he says ....WATCH what he does.  Either way, they are both dangerous games and unless he plays everyhand PERFECTLY (quite hard to do), someone will call his bluff and the whole game ends right there.

MsCreant's picture

Well I'm here to put you down, and you know why? Cause I wouldn't want you to be disappointed.

You, you, you clown you. ;-D

Catullus's picture

They'd make a massive devaluation and then "cap" money supply to make you believe the devaluation was over. That was the 1933 event in which the government declared a bank holiday, confiscated gold holdings, and devalued the dollar from $20/oz to $35/oz. It's unnecessary for the govt to do that now and probably impossible given that they would need to do it globally.

Eventually when inflationary expectations take hold, these guys will attempt to put their foot down and become very indignant about all the money printing they've done. They'll even get a few of their paid bullshitters to talk up a deflation scare. But the answer is only a fool would believe them at that point.

Mr Lennon Hendrix's picture

Good question....can we take it further....all nation states?

dark pools of soros's picture

they'll legalize weed and then 30 years from now the history books get to blame that for the fall of the empire...  then TPTB have already nested up in the new boiler room economy, wherever that may be

Mr Lennon Hendrix's picture

That would be the last act of desperate men.  I bet the mid-west and south would buy it though.  Drug money runs the system, that is the truth!

DoctoRx's picture

Cap'n Kirk did not believe in the no-win scenario.  But then he hadn't dealt with Greece.

No way out . . . no way out . . . 

Shameful's picture

We're way past James T Kirk.  At this point we need the powerful dynamic leadership of Zapp Brannigan!  http://www.youtube.com/watch?v=v_fJSsuBIks

Though looking at Greece, they may already be suffering under his leadership...

 

Real Wealth's picture

by Shameful

We're way past James T Kirk.  At this point we need the powerful dynamic leadership of Zapp Brannigan!

Actually, we need Cobra Commander, notice that the "Cobra currency" he holds in his hand is a minted gold coin:

 

http://www.youtube.com/watch?v=oP1H_69yYBE&feature=related

Cobra Commander:

"Attention citizens! Due the financial irresponsibility and incompetence of your leaders, Cobra has found it necessary to restructure your nation's economy. We have begun by eliminating the worthless green paper which your government has deceived you into believing is valuable."

No wonder they are considered a terrorist organization.  Cobra is like the military branch of GATA.  Could it be Ron Paul behind Cobra Commander's mask?

FischerBlack's picture

This report is true. One of my clients was scratching his head a month or so ago over his mother-in-law's trip from Athens to London to drop a million some-odd euros on a pad in the city. As he said, this is the absolute reverse of the trend that has existed over there forever. Old European money usually comes south to Greece to buy beachfront pads on the blue water. Not anymore; nice reversal. So, add item #569 to 'List of Greek Woes' -- potential real estate crash.

AnAnonymous's picture

Does this give ammo to people evoking a large shadow economy in Greece?

I suppose it does.

Bonesetter Brown's picture

Without default Greece faces an Augean task

brushfire's picture

do you see what happens larry? this is what happens when a debtor nation and its citizens dont give a sh*t about their creditors. wonder who's holding all that greek paper. if they sport the TBTF title will the FED come to their rescue, or are they hedged for this? inquiring minds want to know.

Mr Lennon Hendrix's picture

The Greek story was becoming boring over the last month, whereas the first month was rather exciting, but it seems to be getting interesting again!  Default?  This is some talk!  However, is it even possible for them to do so?  Being tied up with the EZ by using the Euro and such....

What_Me_Worry's picture

They will default exactly when it is in their best interest to do so, regardless of how it will affect anyone else.

The CB's should just start having every fiat trade at ∞:∞

FYI, to type "∞" you have to hold alt, type 2-3-6 and then let go of alt (num lock key has to be on).  I would probably learn how to type this if you plan on buying any stock in the future.

AccreditedEYE's picture

We cannot get out... a shadow moves in the dark...we cannot get out.... they are coming.

MonkeyMan's picture

Ha! Your avatar looks like vagina.

AccreditedEYE's picture

Sometimes.. better examples are found in robotrader's material. :)

Barmaher's picture

That's the advice of Max Keiser.  Don't pay!
Matt Taibbi goes along with him on that.

 

 

 

 

 

chindit13's picture

You just have to love economists.  This appropriately named, rather Callow fellow sees, "-4.3% growth this year and -1.9% in 2011".

Pulled that one right out of your ass, didn't you Julian?  What's that?  You have a "model"?  Oh, well then, if you've got a model it must be right.  And your model for a bankrupt fringe economy in a world that saw a $40 trillion asset fantasy value collapse, followed by the largest amount of money printing in history and the most gravity defying equity market rally in history, is based on what historical precedent?

Of course your conclusion---that a bankrupt country already heavily in debt, who borrows even more money at a time when its economy is shrinking and there is massive capital flight---might face "difficult debt dynamics" (The Dreaded Driple D) is spot-on, krackerjack, you-deserve-whatever-they-are-paying-you-and-more, piercing analysis.  Oh, you're British?  That's the proverbial "understatement" then, I guess.

Julian...you were born with a gift.  Don't fritter it away.  Move up the chain to romance novel writing.

Tethys's picture

Obviously he doesn't have a Ph.D. in economics from MIT.  Then he could see the true path to infinite prosperity:

The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.

If only I had thought of that first!  *sigh*

http://www.federalreserve.gov/newsevents/testimony/bernanke20100210a.htm...

 

dumpster's picture

More rearrangement of the chairs on the Titanic?! Borrowing from members to lend to other members all backed by the same empty promises that the global financial system operates on now. It can’t last forever.

sinclairs mine set

carbonmutant's picture

Pimco’s Gomez Says ‘Too Early’ to Buy Greek Bonds

April 13 (Bloomberg) -- Greece’s fiscal position remains tenuous and it’s “too early” to buy the country’s bonds even after it won a pledge of aid from the European Union, according to Pacific Investment Management Co., manager of the world’s largest bond fund.

http://www.businessweek.com/news/2010-04-13/pimco-says-too-early-to-buy-...

 

scaleindependent's picture

If Greece defaults...

They will not allow it. They will do to Greece what they are doing to Iceland and what they did to Argentina. Argentina went through a severe depression went they defaulted. The powers that be will make Greece a spectacular, terrifying example to all the world that default is not an option. Look at Iceland, even after 97% of the population said no to pay backs, their leaders said that the vote was obsolete and that they would pay.

A master does not easily let a slave escape. They will call up the posse, let the dogs lose and when they catch you they will severely whip and punish you.

What is wrong with all of you! There is no underground railroad in modern debtor prison!

virgilcaine's picture

If they default does GS or MS get a fee? Next they'll be talking of 'sound currencies'

and a gold backed system.. imagine that.  Can they at least advise on the ch11 proceedings?  Has to be some way for WS to profit.

glenlloyd's picture

pledges don't mean squat, nothing's happened but more talk and a few figures jotted on a napkin. They all still have to vote on it and those who have to have referendums will never get it passed...never. This is just another dead end, but we'll be hearing about it for a month because they need to talk it up.

yabs's picture

scale

Greece is different than argentina or Iceland

its in the eurozone thus they cannot devaule the euro to suit one country and legally they cannot bail them out

default is the only way

dabug's picture

Take note; http://www.guardian.co.uk/business/2010/apr/11/peak-oil-production-supply

US military forcasting an oil supply shortfall to demand by 2015. Go solar and Wind stocks?

No wonder CN just inked a deal on Canadian Tar oils, anyone think the announcements are related? Army seemed to think it was their strategic reserve...

To Cookie; thanks for the Guardian link, gonna look at the old GBP and UK property again, been wondering why its been doing ok lately. Also with reference to my "heads up" above been noting that the UK has huge wind resources and much much more planned + a suitable grid.

John Bull's picture

Greece will win, after a final against Germany, the World Cup football in South Africa. Self esteem and confidence will kick start the Greece economy.   

AnAnonymous's picture

I cant imagine Greece willingfully default now.

A consumption game is going on and defaulting now would push them on the side lines watching all the other big players eating out everything they can. When Greece recovers, they might discover the glutoons have already done the job of cleaning the dishes.

Not the proper times to turn a pariah. Big consumer countries which happen to be in deep debts (oh the coincidence) will fight not to default, countries which are consumed will be led to default as it will make them easier to consume.
Later, when there is much less to consume left on the table, well, at this point, you can stand up, 'forget' to pay the bills and leave the table with much less regrets. You are forced to leave the feast but you are not missing much. The feast is dying and will be soon over. You lived through the best parts of it, you had your fun and were not forced to pay for it so ...

merick's picture

Finally people are getting it. The EU wants Greece to stay alive so that the banks in Europe won't have a very large problem (who knows maybe the giant squid might lose a tenticle or two). As for Greece its in their best interest to completely default and nationalize.  Funny thing is they end up with a better national balance sheet in the end.

G.Kesarios's picture

I have been talking about this issue for a while now.

If you can translate Greek, take a look here

 

Μ?πως μας συμφ?ρει να χρεωκοπ?σουμε;

http://www.market-talk.net/index.php/id/8141

 

Υπ?ρ της στ?σης πληρωμ?ν

http://www.market-talk.net/index.php/id/8117

 

 

Η επιλογ? της στ?σης πληρωμ?ν

http://www.market-talk.net/index.php/id/8181

 

 

 

halcyon's picture

Pussies. Start cutting already.

Finland did it, Sweden did it (90s). Ireland is doing it, Iceland is doing it.

Did you know the retirement age can be as low as 50 in Greece, when it's 63-67 in most other parts of Europe.

So creditors of Greece are basically subsidizing early retirement by the greeks.

I say let them sink or bleed them dry if they don't cut.

There's no free lunch and I'm tired of paying for others'.

 

AnAnonymous's picture

Creditors? But creditors provide money, not goods.

People who should be tired of providing for the others are people who provide goods against money to the Greeks. They are the ones at the wrong end of the deal. Not creditors, not Greeks.

And there is free lunch. When people can drop waterfalls of credit without bothering whether or not people yielding goods against the newly emitted credited will be able to buy something in the future, that is free lunch.

Dont play the victim because you are part of the world who is emitting tons of credit. Does not fit.

G.Kesarios's picture

I would like to add by saying the following.

 

Creditors have a responsibility in the investments they make. Bond investors holding Greek paper have ignored the fact that the country's DEBT/GDP has been hovering around 100% for the last 10 years.

 

Second, the EU has inflated the moral hazard issue by repeating again and again that no country in the EU will or an default.

 

Third, Germany is actually instigating Greece to default by the stand they have on the issue. They don't want to fork up any money, but at the same time they want Greece to continue paying its creditors (aka German and French Banks).

 

Lastly, Germany's stand can probably be attributed to the fact that perhaps they want Greece to default! I mean, what the use in helping Greece with 10 billion euros and having them default anyway?

 

Its probably much better to write a check to German banks after such a default (probably 10-20 billion) and have the mess cleaned up, than to prolong the saga and have the whole of the EU under siege for a a decade or so.

 

Eally Ucked's picture

So if debt to GDP is around 100% what is the point getting loans at 5%? To have any chance to get out of that mess they would have to grow at atleast 6% for years to come, is it possible? Those who give them loans must be dreaming not to mention that population of Greece wont accept fact that they would have to live like slaves for years to pay down debt, better to default now and forget about EU. 

Ned Zeppelin's picture

When you owe a little, the creditor is in charge - when you owe a lot, you are in charge.  Especially if the debt is insecured.  Now, repossession efforts in the nature of military incursions may be suggested as a means of seizing Grecian assets for the benefit of the banks, but I don't see that happening - can you see an auction for some old urns and the Parthenon on eBay?  Seems to me, on balance, Greece does very well deliberately defaulting its debt, reviving the drachma, allowing the underground economy to continue to thrive and keep folks fed, clothed and in ouzo, and tell the rest of the EEU to f*** off.  The bankers must be shitting themselves at this possibility. Sovereign default is the most interesting default of all.

GFORCE's picture

Greeks pulling money out of a crisis economy, whose banks are in trouble and the country facing downgrades and default... and then parking it in the UK. LOL. Too funny.