Monday, I posted As Promised, Greece Guts Naive Investors Once Again… (a must read for those who don't know my extensive history on this topic), and received some very interesting if somewhat unbelievable feedback from the muppets among my readers (for those not versed in Muppets and muppetology, seeGoldman Sachs Executive Director Corroborates Reggie Middleton's Stance: Business Model Designed To Rip Off Clients). As hard as it is to believe, there are actually still those who are of the mindset that the events of recent past were somehow solely or at least primarily market driven. Not trying to be facetious, or anything of the sort, but you muppets need to get a grip on reality. I'm going to reintroduce BoomBustBlog research from earlier in the year in three distinct topical sections, all in an attempt to expand the consciousness of the muppets amongst us. Professional and Institutional BoomBustBlog subscribers who don't want the brief in socio-economic theory and history can download ourGreek debt restructuring & maturity extension model and just get busy. Everyone else should continue on....
New Age Imperialism = Economic Colonization
As far back as 1920, Lenin explained what is happening to Greece (and likely soon Italy, Portgual, Spain and Ireland), and did so in exquisite detail may I add - as I excerpt from from Wikipedia's Imperialism, the Highest Stage of Capitalism:
In order for capitalism to generate greater profits than the home market can yield, the merging of banks and industrial cartels produces finance capitalism — the exportation and investment of capital to countries with underdeveloped economies. In turn, such financial behaviour leads to the division of the world among monopolist business companies and the great powers. Moreover, in the course of colonizing undeveloped countries, Business and Government eventually will engage in geopolitical conflict over the economic exploitation of large portions of the geographic world and its populaces. Therefore, imperialism is the highest (advanced) stage of capitalism, requiring monopolies (of labour and natural-resource exploitation) and the exportation of finance capital (rather than goods) to sustain colonialism, which is an integral function of said economic model. Furthermore, in the capitalist homeland, the super-profits yielded by the colonial exploitation of a people and their economy, permit businessmen to bribe native politicians — labour leaders and the labour aristocracy (upper stratum of the working class) — to politically thwart worker revolt (labour strike); hence, the new proletariat, the exploited workers in the Third World colonies of the European powers, would become the revolutionary vanguard for deposing the global capitalist system.
Imperialism, the Highest Stage of Capitalism (1917), by Lenin, describes the function of financial capital in generating profits from imperial colonialism, as the final stage of capitalist development to ensure greater profits. The essay is a synthesis of Lenin’s modifications and developments of economic theories that Karl Marx formulated in Das Kapital (1867).
the highest stage of capitalism, represents the stage at which a country's consumers cannot buy all the products that have been produced, and additional markets must be sought after. The dominant feature of imperialism is the repatriation of invested capital.
Cecil Rhodes and the Cape-Cairo railway project. Rhodes founded the De Beers Mining Company, owned the British South Africa Companyand had his name given to what became the state of Rhodesia. He liked to "paint the map British red" and declared: "all of these stars ... these vast worlds that remain out of reach. If I could, I would annex other planets."
For those of you who don't see the connection yet, let's peruse some sample output from Greek debt restructuring & maturity extension model :
So When It Comes To The Indebted, When Does 2 Euro + 24 Euro = Less Than 2 Euro, or You Can't Solve Insolvency By Piling On More Debt!
The first section of the graphic below shows Greece's funding requirement from the open market after it implements 65% haircuts across the board of its debt and reduces coupon rates in half by substituting existing debt with new debt as a Zero Coupon Bond Roll-up with 20 yr amortization. As you can see, such a plan (if it were doable) puts the country on relatively stable footing. Of course, if it were to do so the markets would extract their pound of flesh in terms of markedly higher coupon rates, which Greece presumably would not be able to afford (presumably). So, what do TPTB do? They push/offer 240B euros of bailout aid in the form of debt - debt that has to be serviced at some time in the short to medium term future since it is understood that Greece will not be able to get this funding from the market (is it understood, or presumed?). This debt is a multiple of what Greece can afford to service. It is a multiple of the debt that it has now, and this is not considering its condition after the still ongoing and draconian austerity measures forced upon it - thus cutting its GDP and revenue generating capability nearly in half (or so-ish).
Looking at the graph below, without adjusting for the austerity effect, Greece is considerably worse off after the bailout package, then before.
When observed over time, all this bailout and default/haricuts/restructuring buys Greece (in terms of time) is one year. In 2014, it's time to pay the piper and default once again as it begs for more bailouts with the overly stringent austerity price tag...
Now, who is lending this money that can easily be seen with a simple spreadsheet to be IMPOSSIBLE to pay back? It's the Troika, that's who. But these ivory tower beings who reign above us mere bloggers and investors from NYC must have supreme knowledge in the fact that they are assisting the unwashed, profligate masses, right????
Who Are These New Age Imperialists? The New Economic Colonizers Of The Globe????
Faithful BoomBustBlog readers should remember the empirical rant, How the US Has Perfected the Use of Economic Imperialism Through the European Union!, wherein the following was preached:
... the Euro members’ loan will be pari passu with existing sovereign debt i.e. it will not be considered senior. Although there is no written, hard evidence to support this claim, it is our view that otherwise there will be no incentive for investors to hold the debt of troubled countries like Greece, which will ultimately defeat the whole purpose of the rescue package. Moreover, there are indications that support this idea. As per Dutch Finance Minister Jan Kees de Jager, “We are not talking about a special preference for the eurogroup loans, that’s not possible because then you would have the situation that already-existing rights of creditors at the moment would be harmed.” (reference http://www.businessweek.com/news/2010-04-16/netherlands-excludes-senior-status-for-greek-aid-update1-.html). Of course, if more investors did their homework and ran the numbers, that same disincentive can be said to exist with the IMF's super senior preference given the event of a default and recoverable collateral after the IMF has fed at the trough.
IMF’s preferred creditor status coupled with the expensive Euro members’ loans which are part of the rescue package can create a public debt snowball effect that could push the troubled countries towards insolvency when the IMF debt becomes repayable in three years time.
If you look at the output from our BoomBustBlog model, that event is clearly illustrated and articulated using simple (not complex) addition and subtraction (and some minor bond math).
This could be seen particularly in case of Greece (subscribers, please reference Greece Public Finances Projections). Even if all the spending cuts and revenue raising are achieved as planned for Greece, its debt will peak to 149.1% of the GDP in 2013. Please keep in mind that these numbers are based on what we perceived (as does simple math) to be pie in the sky optimism.
Being that this article is well over a year old, that pie in the sky optimism proved to be just that as we now Greek debt to GDP will break 200%!!!
I urge all readers to reference Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!.
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…
Many of my readers have inquired as to why the IMF has been so inaccurate in their estimates throughout the crisis. I doubt very seriously that it is a case of ineptitude. If one were to be a skeptic, and realize that the IMF charges stringent rates and can (and does) usurp the hierarchy of the claims upon assets upon its entrance, then one can clearly see a motivation in undershooting certain estimates. I am not saying that this is the case, but I would be remiss in failing to broach the topic. Remember, this is not your typical mainstream media publication, It's BoomBustBlog, and nothing is off limits.
|IMF Economic Forecasts (%)||2010||2011||2012||2013||2014|
|Debt as % of GDP||133.3||145.1||148.6||149.1||144.3|
The year 2013, with a IMF-proclaimed debt ratio of a tad under 150%, is the time when Greece will have to refinance the debt to pay the IMF (remember the charts above that show how optimistic the IMF has been historically). However, since the current debt raised by Greece is at fairly high rates, new debt will only be available at much higher rates (as markets should price-in the risk of high debt rollover) unless there is some saving grace of a drastic plunge in world wide interest rates and a concomitant plunge in the risk profile of Greece. At a 150% debt ratio, historically low artificially suppressed global interest rates that have nowhere to go but higher and prospective junk ratings from the US rating agencies, we don' t see this happening. Thus, the cost of borrowing for in 2013 is likely to be much higher in the market than the nearly five percent for the existing debt. Greece will either be unable to fund itself in the markets at all, and will have to convince the Euro Members and the IMF to extend the three-year lending facility just announced (reference What We Know About the Pan European Bailout Thus Far) or, it will get the debt refinanced at very high rates. In both cases the total debt as a percentage of GDP will continue to rise, and this is not a sustainable scenario over the longer-term. In addition, if it accepts the EU/IMF package and there is an event of default or restructuring, the IMF will force a haircut upon the private and public debtors beyond what would have normally been the case. This essentially devalues the debt upon the involvement of the IMF, a scenario that we believe many sovereign bondholders (particularly Greek, Spanish and Irish) may not have taken into consideration. This also leaves the possibility of a significant need for many banks to revalue their sovereign debt - particularly Greek sovereign debt - holdings.
As illustrated above, there is a higher probability for a Greek sovereign debt restructuring in 2013, which will definitely not hurt IMF (since it has a preferred right) but the Euro Members and other investors who will be holding the Greek debt.
So, now that we know who loses, who actually benefits?
Members' quotas and voting power, and Board of Governors
Table showing the top 20 member countries in terms of voting power (2,220,817 votes in total):
|IMF member country||Quota: millions of SDRs||Quota: percentage of total||Governor||Alternate Governor||Votes: number||Votes: percentage of total|
|United States||37149.3||17.09||Timothy F. Geithner||Ben Bernanke||371743||16.74|
|Japan||13312.8||6.12||Naoto Kan||Masaaki Shirakawa||133378||6.01|
|Germany||13008.2||5.98||Axel A. Weber||Wolfgang Schäuble||130332||5.87|
|United Kingdom||10738.5||4.94||Alistair Darling||Mervyn King||107635||4.85|
|France||10738.5||4.94||Christine Lagarde||Christian Noyer||107635||4.85|
|China||8090.1||3.72||Zhou Xiaochuan||Hu Xiaolian||81151||3.66|
And there you have it. An encapsulated lesson on global imperialism (or how the US in now colonizing Europe, unlike the first time around during those pre-Boston tea party days). Is this or is this not an interesting way to introduce the concept of Greek bond defaults???
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