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As Greek Default Risk Soars To 66%, Morgan Stanley Warns ECB May Be Unable To Launch QE
While the Santa-rallying markets have been suspiciously sanguine in the aftermath of the failed Greek presidential election on Monday and the ad hoc vote scheduled for late January which could - if left unchecked - lead to an unraveling of the Greek bailout and the expulsion of Greece from the Eurozone, events are now in motion that would end with the unwind of the world's biggest and most artificial currency and political union. In fact, the bond market is already starting to sniff out what the next, and well-known, source of contagion may be, when earlier today the probability of a Greek default jumped and, now suggest a 66% probability of default.
That said, the melodrama involving the mutual assured destruction of Greece and/or the Eurozone is nothing new, even as the debate has been raging for years who actually has the upper hand: Greece, which knows it has unlimited leverage because a Grexit would likely lead to a violent selloff in peripheral bonds, a loss of credibility of the ECB and ultimately, disollution of the Eurozone, or Europe, which is the source of all the Greek funding.
This came to a head earlier today when one of Merkel's closest advisors explicitly told Greece it can no longer blackmail Europe. In an interview with Rheinische Post newspaper published on Wednesday, Michael Fuchs who is a senior member of German Chancellor Angela Merkel's party, said Greek politicians could not now "blackmail" their partners in the currency bloc. Yes, he used that word. From Reuters:
"If Alexis Tsipras of the Greek left party Syriza thinks he can cut back the reform efforts and austerity measures, then the troika will have to cut back the credits for Greece," he said.
"The times where we had to rescue Greece are over. There is no potential for political blackmail anymore. Greece is no longer of systemic importance for the euro."
The remarks are the clearest warning yet to Greek voters from a senior German politician that Athens might lose support if it flouts the terms of its 240 billion euro EU/IMF bailout after early elections next year.
We shall see who has all the leverage in just under a month when Greece votes, and when the leading contender and most likely next Greek prime minister, the anti-bailout Tsipras, calls Europe's bluff.
However, even if Greece does remain in the Eurozone, a secondary threat has emerged to the perfectly complacent and priced-to-perfection-markets, something which we first discussed in "Draghi's QE Plan In Jeopardy After IMF Suspends Aid For Greece Until New Government Is In Place." Last night it was Morgan Stanley's turn to dare suggest that the markets, which have now priced in ECB QE in the first quarter with absolute certainly, may well be wrong:
The Greek political turmoil is likely to complicate matters for the ECB’s preparation of a sovereign QE programme. The prospect of the ECB potentially incurring severe losses is likely to intensify the debate within the Governing Council, where sovereign QE remains controversial. It could also make the start of a buying programme already on January 22 even more ambitious. In addition, the spectre of default could create new limitations on any sovereign QE design.
And should the ECB indeed be forced to postpone, or even cancel QE, and the fate of the world's capital markets rely entirely on the shaky and unstable QE originating from Japan, where the BOJ is monetizing all gross JGB issuance and pushing the Nikkei higher and the Yen lower, in the process crushing the bulk of the Japanese economy, then watch as perfectly-priced markets realize perfection never exists, not even under central-planning. Or rather, especially under central planning.
So what else did Morgan Stanley say, because what it did say will soon be aped by all ther strategists?
Here is the full note.
* * *
Implications for the ECB and Its Preparation for Sovereign QE, by Elga Bartsch
Even though my colleagues, Daniele Antonucci and Paolo Batori, do not expect the ECB and the National Central Banks (NCBs) to be subject to haircuts in the event of a Syriza-led debt restructuring, this is unlikely to be clear-cut for some time to come. As a result, the Greek political turmoil complicates matters for the ECB and its preparation of a sovereign QE programme.
In my view, a sovereign default in the eurozone and the prospect of the ECB potentially incurring severe financial losses is likely to intensify the debate on the Governing Council, where purchases of government bonds remain highly controversial. This could make a detailed announcement and the start of a buying programme already at the January 22 meeting look even more ambitious than it seemed. The spectre of default does not only make the issue of sovereign QE less certain again than the market believes, it also could create new limitations in its implementation.
One of the decisions that the Governing Council will need to take is whether to include the two programme countries (Greece and Cyprus), the only ones that are not investment grade at the moment, in its sovereign QE. In our view, it is unlikely that the ECB will deviate from the conditions imposed in the context of the ABSPP and CBPP3, i.e. the countries need to have under a troika programme (and the programme needs to be broadly on track). This would mean though that for some eurozone countries, sovereign QE would become conditional – just as OMT was.
If governments across the eurozone and the financial constructs they are backing with off-balance sheet guarantees are being haircut and the resulting losses start to show up in national budgets, the political opposition to sovereign QE might increase materially. In fact, elected politicians in creditor countries might have a preference for the ECB taking a hit as well given that the Bank has considerable risk provisioning that could absorb these losses which national budgets don’t have. This debate could also materially influence how a sovereign QE programme by the ECB is structured, notably on whether the risks associated with such a programme should be shared by all NCBs.
Even ahead of the latest developments in Greece, the Bundesbank was already pushing for there not being risk-sharing in a sovereign QE programme. This position is unlikely to only relate to Greece though, I think. It is much more likely to relate to the concerns voiced by the German Constitutional Court regarding the implicit fiscal transfers between countries in the event of purchases of government bonds. In the view of Court, this could amount to establishing a fiscal transfer mechanism that is outside the ECB’s mandate. Once the European Court of Justice (ECJ) has given its view on OMT in early 2015, the German Court can start to work on its own verdict regarding the legality of OMT and SMP purchases under the German Constitution.
Another issue the German Court has taken issue with in the context of OMT is the fact that the ECB has indicated that it regards itself as being pari passu with private investors. Faced the prospect of a sovereign default in the eurozone where it suddenly becomes very relevant where an individual creditors sits in the waterfall of liability management, the pari passu question might need to be revisited again by the Governing Council. Whether current market enthusiasm for sovereign QE would simply ride out a renewed debate on the pari passu question remains to be seen.
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HAHAHA
What a difference now that the EU thinks that it can jettison Greece.
The way things are turning out, I'm going to be unable to launch QE, myself.
The ECB needs to make an example out of Greece to keep the other Euro nations firmly on the road to banker serfdom
Sanctions embargos and asset seizures followed by military conquest if necessary
Bullhockey, if Greece goes, so do a few others in quick time. including Italy.
We can only hope, eh Winston? Seriously though, some mainstream financial media has been at work on the hype that the EU is now no longer contagious to Greece. In other words, they can put Greece in the dog house, and maintain the powerful EU economy without them. This due to the successful ECB actions.
This of course is a lie. But the EU has bought into the lie, and only time will tell if Greece ripples through the corrupt banking system of Europe. Germany has the worst bank in the world in Deutsche Bank Group". Holding more bad loans and junk bonds, not to mention more derivatives on their books than the GDP of Europe and America combined. Basically bankrupt.
The EU has just lost the largest EU export market when the USA banned trade with 150 million eager Russian consumers and businesses. The EU did not ban trade, they followed direct orders from Washington to sanction Russia for the non-invasion of Ukraine.
To sum up. The EU lost it's largest consumer export market Russia, and has gained 40 million totally bankrupt Ukrainians who are all waiting for their EU handouts and EU passports so they can leave. The EU just announced 2 billion in free money for Ukraine, but refuses more. While the Nazi's parade around Kiev looking for traitors to beat up. SOmehow, CNN missed the videos of Nazi Battlion Soldiers stopping freeway traffic outside Kiev and beating passangers and stealing their money. A number of people disappeared as well, gone inside Nazi cars. Including a number of young women. CNN missed that story. And CNN Money has missed the whole Ukraine Bankruptcy Story.
Very good view on hidden news ! Happy new year after all
I gues France and Italy will stay side by side with Germany and $eurusd will reach 0,95 or even lower. That's when the real crisis will put its ugly head up.
EU is at the point that USSR used to be...and its gone
that's the best damn analogy of the EU yet. The old Soviet Union.
seriously? when the debate here is about countries leaving or not the one or the other sovereign nation's club?
I can't remember a Soviet Union where Georgia had an open political debate about changing it's currency or leaving the Soviet Union, prior to an internationally monitored secret paper ballot election which allows parties to be represented proportionally in a parliament
the very best analogies to the current EU are all in parts of history which are not very well understood or studied by the general public. ancient Greek history, for example, is full of such examples, including some of their degenerations to hegemonic empires
my best friend's half-sister makes $77 every hour on the computer . She has been laid off for 5 months but last month her pay check was $14292 just working on the computer for a few hours. read... www.works3.com
They WILL throw Greece under the bus (and that roadkill will never be revived under comrade Tsipras' leadership). We will see what happens next.
Only a 66% chance of default ? Now that's some damn funny shit there !
"With a one hundred percent chance that there will be no repayment. Now go away or we will devalue more!"
The big banks have dumped all of the Greek bonds. Losses will be dumped onto retirees and widows. Such class.
I'm rootin' for an Inversion: 99%.
Go short Greek bonds, long Greek bondage.
The Greek distraction election sequel...
The 1rst one was ok.. that fat dude, with the giant scary head that was looking left & right, he stole the show, I hope he signed on for this one as well....
it sounds like the german banks dumped all their piigs bonds on the ecb and so merkel doesn't give a flying fuck anymore.
fuck the eu
exactly!
Unable to QE? That like them being unable to steal! What's the world coming to?
There's no way the Reinstag is going to allow a referendum on the ECB to go apeshit on printing. The Germans love the € at these levels.
The German banks dumped them into the Peoples Pension system.
WATCH !!!!!!!!!!!!!!!!!!!!!!
Collapsing equities are getting the picture, or is there other new news?
I was listening to a local News station this morning and they were comparing Greece's economy to Dallas Texas.
I couldn't help but lmfao.
• First of all these clowns have zero understanding of the European Union covenants.
• Secondly, they couldn't have picked a more perfect model of technocratic overreach to compare Greece to.
Energy ~ { The Saudies}
See Yen, now there's some more perceptions management at work.
Greece is failing and well, of course we gotta throw in Texas because of all them pesky Tea Partiers and Libertarians trying to Subvert the Statist Cause.
It's all purple Knuks.(one party) In a way, that's a good thing. It means career politicians and imbezzlers are running for the door.
As professionals in the financial industry, we know the chain is locked on studio Wall Street. BITCHEZ!
... the ECB will blackmail the government by threatening that will not purchase government bonds, therefore cut liquidity, in case that Greece choose a different path towards the reconstruction of the social state and labor rights, bringing minimum wage at pre-crisis levels, etc. However, the system shows signs of panic, which means that the European officials don't know exactly how SYRIZA will react. In case that SYRIZA has a secret agenda, and be pressed by the lenders beyond red lines, it could nationalize the central bank and return to the national currency, blowing up eurozone. This could bring a disaster to the plutocrats' plans, as may trigger the domino of other Leftist European parties to follow SYRIZA's example and drive Europe towards the direction of the real democracy and unification under different terms for the benefit of the majority.
@ no more banksters,
As a next step Syriza could/should then nationalise everything that has been stolen for cents on the Euro by the Banksters and their friends.
True.
Meanwhile, Prime Minister Samaras will attempt to win the elections by scaring the older people that their pensions will be lost under an alternative government and by scaring public servants that their positions will be at risk if they also vote Tsipras.
It worked in Scotland so don't be surprised.
Easy to put the wind up someone wearing a kilt.i
The Scots would charge the English and knock them down and sit on them with their kilts, and that's how they kilt them. :-)
If one looks at the debt to population ratio in Greece you get a number that comes to $45,000 per person. In the US the number is $56,000. Both these numbers are fictitious, and all the debt will never be paid back. In our option the only logical thing to do would be to "loan" create more money out of thin air and give it to these governments and financial institutions that run them.
Happy new year from all of us to all of you, Love Janet, Abe, and Mario.
Debt is not fictitious. Only the ability of Greece and the USA to repay is.
The pain for Greece is far from over.
For decades it relied on the income of shipping workers flowing back into the country, migrants sending their monthly payments from Germany and other places and finally the returning migrants bringing back their wealth. Then came the EU subsidies, the massive private and government borrowings and the stripping of social security trust funds by selling them bogus government bonds.
All this created a sense of euphoria and sustainability while at the same time the population has become older and many industries have been closed down or left for cheaper countries to the north.
Even the level of economic activity in Greece currently is supplemented by a run down of savings which one day will hit a brick wall.
All in all, the tragedy is yet to unfold.
"In the US the number is $56,000."
Isn't it more like $1,056,000 now that the Cromnibus has included taxpayer backstop for the $300 trillion of derivatives?
FUDGE* is what the Greek election promises. And FUDGE-packers.
* Fear, Uncertainty, Doubt, Greed, Envy.
Greece keeps being like movie "Groudhog Day."
Every time Draghi wakes up it's in a crisis again and needs more bailouts.
Unitl Draghi and the ECB oust Greece this will continue for decades.
blahh blahh the current greek PM came into power sprouting the same nationalist bs, but he became establishment the very next day...this is greek drama for the uninformed
This just means that the ECB has to go all the way if and when it decides to do QE. There is no room for half measures. They have to go pedal to the metal, balls to the wall, QE to the max. The full Abe.
The disparity between the Northern and Southern european union members was the reason why the European Union was formed in the late 90's.
It's been a consumate failure. Not because of the idea/Hypothetically the Europen Union works, from it's ORIGINAL '99 frame work.
Idiots that were paid to originate ideas have ZERO on the job skills. Draghi has to go!
the BIS, through the ecb is still trying to trap, (the crown jewel), germany.
if germany backs the sovereign qe, game set match.
the fed. owns america, boe owns uk, boj owns japan, and ecb will own eu.,theoreticly, on paper.
hell their going to 1/2 bail-out greece, and cyprus forever, nato wants to keep the locations, and eventually all the greeks will die off or move, remember their sovereign one day, and subsidiary the next day.
did any of these eu. countries read the contract before they signed, or was their representatives paid off, and the citizenry lied to, BIS'S m.o..
"or was their representatives paid off"
The Greek finance minister at the time they joined the EU went to work for Goldman Sachs afterwards.
" THE MARKET BELIEVES " Just who is the MARKET ? Traditionally markets reflect a price at which a goods or service is determined according to laws of supply and demand as well as currency differentials . In the case of EU and Greece we are talking about economic debt policy determined by Central Bankers in an effort to prevent a collapse or default of soveriegn governments. Very little to do with MARKETS. At this late stage it is more about soverign voter rebellion against local polititians and Central Bankers manipulating economic policy. Morgan Stanley interpretation of Market is ability to sell Bonds, Derivatives and credit default swaps which is becoming near impossible with continued political termoil. So much for Markets
Greece still has its gold reserves which the world bank,the IMF and every other con game would like to get their hands on.Greece can stiff the crooks and easily go with the Yuan and another system.The Greek currency can be backed by gold notes and right now the con game only seems to be promises of fresh moula coming in from England or cutting the money off.They'd be shut out of SWIFT like Argentina but so what,Goldman Sachs and their EU partners have managed to wreck the economy anyways,you might as well "F" them back and start over elsewhere.
@ Herdee
I wouldn't be a bit surprised to find out that Samaras has already made arrangements with his puppet masters in the US (read GSAX) to "help" the Greek economy by taking the Greek gold into "safe storage".
Surely these clowns will figure something out. Like the last 10,000 times. I hope it happens but i'll believe it when I see it. I hate sounding like nuland but fuck the eu. Shoulda never happend. Will give the US clowns less an excuse to join us with canada and those fucks to our south. Pretty easy to see what's going on. Big blocks and then take out the assholes that wont cooperate. Never gona work and gona have everyone of us dead or in tent city before it's over. Happy fuckin New Year!
Pre euro there were 175 Greek Drachma to one Deutsche Mark. Lots of tourist income. The euro has destroyed Greece. Greeks should elect Syriza, exit the euro, default their debt and return to the Drachma. If threats from EU find new partners from the east. There will be plenty of interest.
This is a long winded analysis of a Greek default. I will simplify it for you.
When Greek debt was restructured in the last rescue, only private holders took all the haircuts under parri passu. The Greek sovereigns held by the ECB and IMF were still payable in full.
This time the default will be disorderly, forcing the ECB and IMF to take major losses on Greek holdings. This will be a black-eye for those institutions and open the Pandora's box for more losses. Once the sovereign debt bubble is burst the ECB balance sheet will be destroyed. That is also why Germany has no more appetite for QE interventions and the like. Unfortunately it is too late.
Where, the fuck, is Super Mario. Isn't his jaw bonin suppose to eliminate this triff!
Mario, get to work, time to talk and bullshit like a motherfucker.
By the time Alexis Tsipras comes to power - if he comes to power, that is - his party program will likely undergo a number of changes.
The EU is bleeding the smaller countries in the periphery like Greece, Portugal, Ireland to protect the banks in the center. The Greeks need to leave the Euro - at least temporarily - and default but they currently don't have the nerve to do so.
So true . Markets will simply ask for the next willing exit candidate and also the Ukraine approach was very wrong from the beginning ...a) Ukraine to get into NATO , b) Russian language to be abolished c) media to delete all old nazi actions and d) Ukraine to allow not using IMF earlier ! A matter of sovereign status