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When Europe Gets Greece's Jingle Mail: Dealing With Default
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
The costs and consequences of Greece exiting the Eurozone may well dwarf the financial losses triggered by Greece's default.
The term Jingle mail originated in the great popping of the housing bubble 2008-2011. It refers to defaulting homeowners mailing the keys to their house back to the lender, and it denotes the finality of default: it's over.
The dream of ownership and easy wealth leveraged by vast debt: over. The dream that loans to marginal borrowers were as good as loans issued to qualified buyers: over.
And most importantly, the lender's dream that marginal borrowers could somehow make the payments if the terms were tweaked is also over.
Which brings us to the jingle mail Greece is about to send Europe.Greece is analogous to the marginal home buyer who took on way more debt than the household could afford. Europe is analogous to the lender, who faces a spectrum of unsavory options:
1. Accept the reality of default, write off the loans and accept the horrendous losses.2. Play for time by renegotiating the loan, reducing the payments, stretching the payments over a longer period, etc.3. Bury the non-performing loan as zombie debt: the loan disappears from the performing loans but isn't listed as a non-performing loan, either. It has become a zombie loan, neither performing nor non-performing.
Both of the latter strategies are versions of kicking the can down the road: what the lender does not want to do is report the loss and deal with the consequences (such as insolvency, lawsuits, etc.)
So the lender strings the debtor along, squeezing enough interest out to justify the claim that the loan is performing and the asset (i.e. the loan) is still worth its listed value.
The European leadership has done a grand job of stringing Greece along to maintain the illusion that default is not inevitable and final. This stringing the debtor along has yielded impressive returns for Greece's lenders, at considerable cost to non-Oligarch/non-vested-interests Greeks. Note how little of the Greek "bailout" actually went to the citizenry of Greece and how much was interest paid to Europe's financial powers.
The loans to Greece benefited both Europe's financial Aristocracy and Greece's oligarchies/ kleptocracies. This is ably demonstrated in the recent essay Misrule of the Few: How the Oligarchs Ruined Greece.
Although much has been written about the Troika (the International Monetary Fund--IMF, the European Central Bank--ECB, and the Eurozone), this chart reveals that the IMF and the ECB have relatively little skin in the game. If Greece defaults on all its debts, neither the IMF nor the ECB will be dealt a crippling blow.
The Eurozone's constituent nations will not be so fortunate: they are on the hook for most of Greece's loans. Should the loans be written off, the losses will go directly to the nations that ponied up the bailouts and other funds.
Let's turn to why mortgage lenders have let tens of thousands of defaulted homeowners continue to live rent-free in their jingle-mail homes. If the lender starts liquidation proceedings, the loan immediately becomes non-performing, and the fantasy that the lender will receive the full principle and interest will shatter.
So it's actually cheaper, in terms of consequences, to let the defaulted borrower continue to live in the home for free. This monthly loss is far more bearable than the enormous loss that must be accepted should the lender start foreclosure proceedings and write the mortgage off.
The Eurozone may well decide that Greece does not have to exit the EU, for analogous reasons. If Greece defaults and exits the Eurozone, the entire Eurozone project is at risk. What's to stop the other member nations groaning under unpayable debt from defaulting?
The costs and consequences of Greece exiting the Eurozone may well dwarf the financial losses triggered by Greece's default. Once Greece puts an end to the fantasy that all the principal and interest will be paid in full at some distant point, Greece's lenders will be forced to jettison the public-relations illusion that tweaking the terms made everyone whole.
That will leave them with only two options: either accept the losses incurred by Greece's default, or shove Greece's debt into the zombie column--neither performing nor non-performing.
What's the PR cover for this zombie status? "Negotiations are continuing."
Meanwhile, the government of Greece will no longer be able to borrow more money. It will only be able to spend whatever cash it collects. The dream of living beyond one's means will end. The people of Greece, meanwhile, will continue using euros and remain in the Eurozone.
What's not to like? Greece doesn't have to exit the Eurozone, nobody has to pony up more money for a lost cause, and the write-off of debt that will never be paid is set aside in the highly convenient zombie debt status.
Yes, Greece still owes all that principal and interest, and no, it's no longer making payments, but negotiations are continuing and officials will indefinitely remain close to reaching a deal to squeeze blood from a stone.
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8% to the Greek people is a lie.
Why do these articles always ignore the original loans made to Greece?
If a homeowner with a $460,000 mortgage - refinances with another bank - and borrows $500,000 - uses $460,000 to pay off the original loan and takes $40,000 cash -
Did he really only get 8% of the loan proceeds?
Who got the original loan proceeds?
This is exactly what Greece did - they rolled old loans over into new loans and got additional cash.
There's a phrase well-known to college students and other drinking populations that applies to supposed "contagion" of a Grexit (proving such contagion to be bull$#!+). The phrase is: "breaking the seal."
I knew a lot of girls that broke the seal in college.
Spot On. The majority of the original borrowed money was spent to hire more useless people (voters) in civil service posts, pay for pensions to the 40-50 year olds (voters) who retired thanks to the several loopholes available, or subsidize unprofitable state-owned businesses (more voters) or other unprofitable activities (even more voters) with the intention to keep the incumbent government in their post at any cost (of borrowing). If the governments of the last 40 years did not engage in such practice, we would actually have a China-like surplus.
Madoff?
Of that so called 8%...95% of that went to some Swiss bank accounts for the leaders cut of the deal..corruption at its finest I am sure
"The Eurozone may well decide that Greece does not have to exit the EU, for analogous reasons. If Greece defaults and exits the Eurozone, the entire Eurozone project is at risk. What's to stop the other member nations groaning under unpayable debt from defaulting?"
You know, I've brought that point up at least half a dozen times in the last year. It keeps getting met with a collective yawn for some reason. Greece can't be FORCED out- there is no such mechanism. So it would have to be Greece choosing to start printing their own currency that would truly signal "out". And I don't think that's gonna happen.
"there is no such mechanism."
When has anything needed a mechanism? I take it you're referring to a law? Laws don't matter.
Here's an idea, Greece defaults (says F.U. we're not paying our debts) then starts printing Drachma. All the opec nations and Brics start selling oil in Drachmas...voila. Greece is the new superpower.
I know, i know, I've had too much to drink....but it could work.
This article misses the entire problem.
In 2009, a solution for the bond problem of the piggs was to FORCE european pension funds to "invest" 75% of their assets in government bonds.
75%!!!!
And as rates where so low and they where already undercapitalized, they bought southern bonds.
This pushed rates down and the assets rose in value which also saved those pension funds.
Now that greece will default, those pension funds will be in a shitload of problems.
So what will the next problem be for Europe when greece defaukts?
Pension funds that WILL GO BUST in the next 12 months!!
And old people who spend are a HUGHE chunck of spending in Europe!
I just returned from the city after having lunch with my sister and we where surounded by old people!!
And oh brother do they spend money. The economy depends for almost half on them.
And those private pension funds are what is making the difference for their spending habbots.
All southern and central EU coutries have left is old people since they had a rapid decline in sperm rates as well as birth rate.
Cap their loans at 8% of the original principal since 8% went to the people. Done deal...
But someone would need to still loan them the money to pay the interest on this 8% - plus loan them another $XX billion euro so they can make government payroll and pay for existing pensions.
How much of the $18 trillion uncle Sam has borrowed has "gone to the people"?
Why even framed it this way?
I can't recall the exact breakdown - but most of the current treasury debt issues are to pay (roll over) maturing debt + interest.
Isn't it something like $5 trillion of US treasury debt issued per year - and the current deficit is $750 billion (whatever) so $4.25 trillion is just to pay back existing creditors.
SAME AS GREECE.
This hits the nail on the head.
The simple solution is that the EZ stops giving Greece money, which pleases Germany, and also refuses to show the money owed as a default, which pleases and stabilizes markets after Grexit.
I think that there then becomes a bit more to it, that it doesn't then go the way of "and they lived happily ever after." What no one wants to talk about is Italy and Spain. Sure, we pretty much know that any Grexit will generate some survivable pain, but that's the tip of the spear, coming in behind Greece will then be either Italy or Spain, and when, not IF, this happens then there won't be any hiding any of this, no drawn-out negotiatoins as the clock will have run so long on this Greece exit and contracts become so stale that the entire lot is going to go belly up.
It's actually a bit worse than this, and more complicated: yes, the EU institutions got most of the money, but Greek paper in the hands of the general European public got a tremendous haircut. that introduces an interesting kind of prisoner's dilemma: the EU would like probably to have the Greek government bonds to undergo a second haircut, but since they did not get one the last time, it's hard to do. Add the gross incompetence of the prospectus writers at the time (if you had 1.000 EUR of old greek debt, you'd have now 21 instruments with about 25 EUR of face value each), which forced the general public to keep the paper in their accounts. So, the same EU citizens (including Germans) who got the short stick last time would get "an offer they cannot refuse" this time again? hardly. especially if you want to tax them to prepare an emergency humanitarian package...... for Italy.
"Meanwhile, the government of Greece will no longer be able to borrow more money."
"Greece will only be able to spend whatever cash it collects."
"The dream of living beyond one's means will end. The people of Greece, meanwhile, will continue using euros and remain in the Eurozone."
I agree, and I think the Greek Government will have to sell off most of it's assets over time and the existing loans will be extented, but there will be no more new "emergency funds" at all. Greek politicians themselves will have to cut their own entitlements (no more income for Varoufakis and the other "anti-austerity activists"...)
that will bring a "Reality-Check" very quickly to all those pseudo-academic Idiots who have been running the Greek economy back into Recession since the last 2 quaters:
The Anti-Austerity stance of the present greek Government has been a total disaster . Meanwhile they spent big on themselves and the Military and raid the Greek People off their pension-money, schools and Hospitals of money for Education and Health.
What the fuck is this populist "leftist anti-austerity Government" all about ?
obviously just themselves.
Time to shut this shit down!
WR;)
This charade will continue until every other democratic welfare state is as broke as Greece. Just as the fall of East Germany doomed every communist prison state to illegitimacy and irrelevance, the fall of Greece would expose the fundamental insolvency of all democratic welfare states.
The masses might still vote for a welfare state, but the government they elect would be unable to collect taxes, borrow money, or buy anything without advance payment in gold coin.