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Another Surprising Conversation With "Athens"
I wrote about a conversation I had with a Greeks shipper living in Athens on May 15. In that article I conveyed the thoughts of my friend who was convinced that the June 17 Greek elections would produce a different result than the May 26 effort to form a government. At the time he said:
When the next election comes, Greeks will not vote in anger and they will not vote for the idiots on the fringes. The centrist parties will rebound. A National Salvation Government will be formed.
He was proven correct and I called him this morning to get his thoughts. It went like this:
BK:
Good call on the election. What happens next?
Athens:
New Democracy (ND) and PASOK (P) will form a new government. Of significance is that another socialist party, The Democratic Left (DL), will join in with ND & P. This makes the coalition more credible as Fotis Kourelis runs DL. Fotis is well liked and respected in Greece. Syriza and the Communist parties will form the opposition. I have no idea what the far right parties will do.
BK:
Can this work?
Athens:
For a time, maybe. The DL party is in favor of rewriting the deal reached with Germany. I think that talk of this will happen in the coming days.
BK:
Are you pleased with the voting results?
Athens:
It's not possible to be pleased with anything that happens in Greece these days. I have taken my family to London for a few months. We will go the Olympics and try not to think about life in Athens. I fear that social unrest is going to spring up again. This is the real reason I took my family out of the country.
BK:
That is a shocking statement. What will bring back the demonstrations?
Athens:
The country is flat broke. In a few weeks the government will not be able to pay workers. When this happens, the strikes will resume.
BK:
What are the chances of another bailout package from Brussels?
Athens:
Screw Brussels. The decision on more aid for Greece comes from Berlin. I think the Germans will say, “No.”
BK:
So you think that Greece will be forced out of the Euro?
Athens: Yes, this is a possibility. Greece is not competitive at all. It is 40% less competitive than even Spain. So ultimately some form of devaluation must happen.
BK:
What’s your sense of timing for Grexit?
Athens:
Where will the money come from that Greece needs to stay alive? I tell you again that it must come from Germany. We may hear that Germany is willing to renegotiate parts of the bailout, but significant new money from Germany is not in the cards. There will be another crisis in less than three-months.
BK:
If Greece goes, does Spain follow? What about Italy?
Athens:
If Greece leaves the Euro there will be tremendous hardships for all of the countries involved. Spain would be very hard hit, Italy as well. The economies and commercial banks of the southern European countries would implode. The costs would be staggering. These facts are understood, so I think they will not let the Euro collapse.
BK:
But what is Plan B?
Athens:
Simple. Germany will leave the Euro. It will reestablish the old Deutche Mark (DM). The Euro, without Germany in it, would fall against all currencies. The necessary adjustments to restore competitiveness will have been achieved. The DM will be very strong against the Euro. This will hurt Germany, but not for long. In the end this is the only solution that I can see.
BK:
What about France?
Athens:
The most important election this weekend for Europe was not in Greece. It was in France. The election results were very clear. France is going in a very different direction than Germany. The cooperation between France and Germany over the past few years is finished.
BK: Wow! So what do you do? Do you sell the Euro and buy dollars?
Athens:
I already own dollars. I don’t like them either. Recently I have been converting Euro holdings into German corporate paper that pays in DM if the Euro is no longer the official currency of Germany.
++
Notes:
The idea that it is Germany that leaves the Euro is not new, but I have always considered it to be far fetched. Not any longer. This fellow has been spot on regarding developments in Greece. He is well connected in Germany. That he is putting money on the table to back up his views is important to me.
The EUR rate against the major crosses this morning does not reflect the views of my friend. The current EURUSD 1.2570 rate reflects the market thinking that there is no immediate crisis. It certainly is not a price that contemplates a Euro without Germany. Should “Athens” thinking on the outcome gain some traction, then the Euro is headed much lower.
The Bonds that have DM protection clauses are new to me. The following link is to a prospective of the securities issued by VW on June 12, 2012. (Link - PDF) The language regarding “Successor Currency” is here:
References herein to a "Specified Currency" shall include any successor currency provided for by the laws in force in the jurisdiction where the Specified Currency is issued or pursuant to intergovernmental agreement or treaty (a "Successor Currency") to the extent that payment in the predecessor currency is no longer a legal means of payment by the Issuer on the Notes.
A number of “DM protected” bonds have been issued in the last month. If someone has a full list, I would appreciate it. The timing of this issuance is interesting. I understand the bonds were lapped up by the market.
I’m tempted to short the EURUSD on this information. But FX markets are not at all predictable, and there is no assurance that things go in the way this article suggests. One thing that I am pretty sure of is that volatility in FX markets is going to take a very big leap.
Seat belts on. Impact imminent.
H/T: K
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Ok, fair enough. And a great, moving story that third one about that kid Danny.
BK with some passion. Thats what I like to see. Nice response. In passion there is truth.
If I was a Greek shipper I'd convert a couple boats into cruise liners specializing in natives leaving Greece 4 permanent vacations.
Excellent Bruce - as always - you get to the points the MSM never - EVER do.
I am contemplating taking a "be caught short the Euro" spread trade, using teeny margin, and carrying it - much like I was the past two years with the Yen (getting "caught short" it at key levels), with their sisyphusian attempts to intervene.
Banked good coin on those - but had to wait them out. Loved the Halloween treat last year.
One never knows what those kooks over in Europe will do - and when they'll do it.
Anything below 1.20 and 'Merika begins to suffocate. Suffocation is generally addressed in a number of ways but I can sleep fairly well betting the $ will get slammed lower.
Your contact, dear Bruce, is an elitist among the Greeks and should be acknowledged as such.
Bruce, could you be so kind to ask your friend about this hard to ignore fact -- Germany would face ~$2 trillion financial loses if it were to leave the euro? Can Germany afford a ~ $2 trillion hit? (And it is not even including disintegration of German industry)
Germany’s six economic advisers, one of the Kiel Institute of World Economics (Institut fuer Weltwirtschaft), estimated that if the euro zone disintegrates, Germany will face a ~ € 1.5 trillion (about $ 1.9 trillion) financial loses (and this number growing every single day).
Also, according to the reports, the powerful lobbying organization of German industry BDI appeals to the German government to maintain the integrity of the euro and warned that the euro zone disintegration would be devastating to German industry. It would be a political suicide for Merkel to ignore BDI.
Germany has loaned a bunch of money to peripheral European governments who are never going to be able to pay it back. That money is gone no matter what Germany does. The only question is whether German political leaders are able to acknowledge that fact and move on, or whether they try to kick the can for a few more years. Most likely they will decide to kick the can.
The US has done the same thing. US citizens have loaned trillions to the US government that it will never be able to repay. But they were smarter than the Germans. Instead of financing the consumption of foreign countries, they wisely used the money to build bridges to nowhere and failed solar cell factories in the USA.
No question but that you are right. I said in the article that I have previously dismissed the GERMexit scenario for the reasons you cite.
But will you please tell me what the alternative is? Do you believe that it is best to let this fester for a few more years? And then blow up? Whatever the costs to Germany are today, they will be triple that in a few years.
I use your words, "this number growing every single day."
Yes, it is growing every day.
It is only a question of when Germany chooses to cut its losses. Not that it has losses. This will become the political issue for Germany.
b
Yes, the problem is one of culture. Germany has its problems, but 30 hour work weeks and retirement at 50 are not on that list. Germany is not the solution to these problems. If anything, if they play the savior they too will drown.
The alternative is to kick Greece out (Germans can’t go on funding the Greeks indefinitely, Greece is beyond help), EU ZIRP, QE € printing to buy proportionate share of each EU country sovereign bonds (including German debt monetization), and € devaluation.
In my view the Germans would only convert to the new DM the accounts of German residents/nationals, neutralizaing the loss due to target 2.
Of course it will fester. The people making the decisions are not basing decisions on logic, which is part of the reason it is the mess it is. They can still kick the can down the road, and so they will.
The Greeks did not vote for anything at all. 38% of Greeks DID NOT VOTE IN THE ELECTIONS. In other words the largest grouping of Greek voters see the situation as being hopeless.
The shipper himself sees the situation as hopeless otherwise he would not be shifting family and money out of Greece.
The so called lunatic fringe is right about one thing and that is that the austerity program in its present form is doomed as is any nation that sticks with it.
How much will the Grecian Urn in Germany when he and his family have to live there? In France and Germany they have socialist governments, but they are so (so so) different.
Great call on the election though. Being right on one of 2 options is really hitting the big numbers. I will use the coin flip method next time too.
Excellent prophesy. Which coin should I use to flip? My lucky one? Gee, what if luck and ignorance have run out?
Poodle.
If Germany leaves the Euro there will be a rush for the exits as anyone who can, runs as far away as they can from the Basket cases. Its fun to be in the Euro.
Lets have a quote -
"What we should grasp, however, from the lessons of European history is that, first, there is nothing necessarily benevolent about programmes of European integration; second, the desire to achieve grand utopian plans often poses a grave threat to freedom; and third, European unity has been tried before, and the outcome was far from happy." -- Margaret Thatcher
If Germany leaves the EUR, what will Switzerland do? Continue to 'fix' the CHF to the EUR or to the DM2?
It would have to link up with DM2. The Swiss Euro reserves are all in German Bunds.
The Swiss Franc would be 1 to 1 with the Deutche Mark. I think the DM would be 1:1 to the dollar. The old Euro would fall 25% and also be one to one. The Canadian and Aussie dollars would be 1:1 too.
A redial of the whole system. Something like this does not come easy. Nor would it happen in an orderly fashion.
What happens to Bunds currency-wise on GERMexit?
BK, don't you mean New Deutsche mark / Northern euro would be about 1.60 to the US dollar? ... I think that is what has been typically suggested before, I forget if perhaps by you yourself as well.
Doesn't make sense to say the new DM would drop well below current exchange value of euro ... and DM and old euro would be equal in value.
The new Swiss - DM - Northern euro would be the premium currency of the world.
Yes, sorry about that. I forgot a step. If one had a bank account in Germany and the SHTF they would get 1.96DM for each Euro. (the original conversion rate). This would imply a 2.0 rate (vs my mistaken 1:1). But this seems too high. If there is a Northern Euro it would be worth more than USD 1.25 and less than USD 2.00.
So I like your estimate for the 1.60 rate. And yes, it would be the premium currency of the world. At NEWEURUSD 1.60 it would rise in value as reserves poured in.
I can't imagine that the German economy could be on par with the US economy. 1-1 with the DM2 seems crazy if the dollar is still at 1.25 to the euro with all this going on now.
The United States of America is not Germany.
The DM would quickly rise against the USD.
Pegs always beg to be broken.
If they all stay 1-to-1 we'll have our world currency.
And let's not forget that printer - Fortress I believe - with that huge new order that will make such a difference on their bottom line. Could they be printing DM protected bonds?
Sorry, paper nerd here. Fortress is milling banknote paper for someone, not printing anything. Just like old Crane Paper in Mass produces most, if not all, of the paper that the US Mint prints FRNs with. According to Fortress' website, they have produced banknote paper for more than 50 countries, most probably without the capability to do so at home. Not just any papermill can produce paper with all the modern security features and consistency required. I would be quite surprised if Germany had to outsource any of their paper. So a puzzle - the order is from someone without the technology or someone who wants such a quantity of security paper in x timeframe that they need help.
Edit - forgot to mention why I've been doing a little research on this puzzle - it was a reinstated order. So a rolling/blanket got stopped Nov '11 and reissued last week.
A technical aside: FRNs are churned out by the Bureau of Engraving and Printing, not the U.S. Mint.
Fortress is not printing DM bonds, but they might be printing "New Marks".
If one had the answer to this, it would be a layup to make a bundle........
Congratulations (and thanks!) Bruce to you and your friend in Athens for your great call on the Greek elections.
It looks like decision time is rapidly approaching for Germany. Do they want to save the euro or not? Heavy weather ahead.
these fuckers are doomed
"A number of “DM protected” bonds have been issued in the last month. If someone has a full list, I would appreciate it. The timing of this issuance is interesting. I understand the bonds were lapped up by the market."
I would like to see such a list as well - at least SOMEONE has a plan for when reality wins.
If the euro still exists after a german exit, seems to me VW will pay you with the cheap euro rather than the new strong DM.
Agreed, the Euro would not cease to exist and would still be lawful, so VW would pay in cheap Euros.
Indeed...
Great source Bruce - thanks!
I bet Angela is busy printing DMs while she bluffs.
Athena in mythology and astrology: wisdom, intuition, logic, and applied strategy. It is also creative of original thought, showing artistic ability.
These printing companies that say they have contracts, everyone is pretty much assuming they are to print drachmas, right? It has been mentioned there is printing of Deutsche Marks. But all sources that I find for this all come back to Pippa Malmgren, no independent confirmation. Hmm.
The head of the currency printing company which may (or may not) be printing up New Drachmas, or New Deutsche Marks, or New Northern Euros, has just cancelled a trip to join the G-20 in Mexico due to some sudden emergency ...
More details about this currency printer situation including a tale of involvement of the UK's Serious Fraud Office, on John Ward's 'The Slog' -
http://hat4uk.wordpress.com/2012/06/18/de-la-rue-the-drachmas-a-likely-s...
Interesting.
No seems to be talking about who will make the new pfennig coins? Seems that would a larger manufacturing footprint than the notes would.
I think "Successor Currency" clauses under Specified Currency covenants are quite common in the EZ, particularily with covered bonds.
+1 and it has lots of precedents
Does anyone have a list of debt instruments with DM convertibility?
In my opinion a simple savings account would do it, see above
A Gerexit is not sooo new as an option. I personally would prefer this as it is the economically sound alternative.
Seems to me that the idea goes in the direction of "Northern Euro" (Neuro, Nordo ?) and Southern Euro (Seuro, Südo ?).
I sort of like the idea of having a bunch of neuros in my pocket ...
Always interesting Bruce.
Thanks.
+ 100 Nice post. Spells it all out.. Better than Dooline Grist and Willem Booter with 20 charts each and saturated with econo-financial jargon.
So this guy, who Bruce credits with being very accurate, given the current choices goes with german corporate paper. Prob not a bad choice. I find it interesting he does not mention precious metals at all.
Sounds like your friend Bruce, is exactly right. I would be interested to know how soon he thinks Germany pulls out....
The "pull out" method is very risky ... it requires superb timing ... lest you end up with support payments or worse ...
Regards,
Cooter
Maybe because German coporate paper with DM protection is a far better place to park a large amount of money than precious metals, at this point in time.