Goldman's "Conspiracy Theory" Stunner: A Greek Default Is Precisely What The ECB Wants

Tyler Durden's picture

Last week, we showed a curious thesis by Goldman, which asked if there is a new and "ominous" development in European currency swings, namely the emergence of what may be a "under the table" fight between the ECB and the Bundesbank on which bonds to monetize.

This is what Goldman said then:

the average maturity of ECB bond buying is around 8.0 years, in line with what Executive Board member Coeure said in his May 18 speech. However, while Italy and Spain see purchases that have an average maturity above that of the outstanding debt stock, Bundesbank buying has fallen short from the very beginning.... This kind of signal – from the key hawk in the Eurosystem – has the potential to undercut the credibility of ECB QE, since it weakens the portfolio balance channel.


After all, it was supposed to be low yields in core Europe into risk assets. If those yields now rise and become more volatile, such portfolio effects will be lessened.

Today, in a follow up report by Goldman's Robin Brooks and company, and one which seeks to validate Goldman's "top trade" thesis of a weak Euro currency, (recall Goldman top trade #1 for 2015: "Stay long EUR/$ downside via 1-year 1.00/0.95 put spread (originally at 1.20/1.15 with a premium of 70bp EUR at initiation, expiring on 20 Nov 2015, opened at a spot EUR/$ of 1.253 on 20 Nov 2014, currently at 1.135.") Goldman explains why despite relentless Greek drama, the EUR hasn't moved and its conclusion is that this is due to "growing question marks over ECB QE" as a result of the surprising bond-buying on the short end (at the expense of reducing longer-term maturity holdings) out of the Bundesbank which has "reduced the maturity of its QE buying."

From Goldman:

As tensions around Greece have mounted, it is something of a puzzle that EUR/$ has shown little reaction. Our explanation, laid out in our last FX Views, is that much of this price action stems from the Bundesbank, which has reduced the maturity of its QE buying, enabling the Bund sell-off and moving longer-dated rate differentials in favor of the Euro. EUR/$ thus hasn’t traded Greece, but instead growing question marks over ECB QE.

Here is Goldman's full take:

From an economic perspective, Greece shows that “internal devaluation” – whereby structural reforms are meant to restore competitiveness and growth –is difficult politically and a poor substitute for outright devaluation. Emerging markets that devalue during crises quickly return to growth, powered by exports, while Greek GDP continues to languish. We emphasize this because – even if a compromise involving a debt haircut is found – this will not do much to return Greece to growth. Only a managed devaluation, with the help of the creditors, can do that. With respect to EUR/$, we think the Bund sell-off increases EUR/$ downside if tensions over Greece escalate further. This is because the ECB, including via the Bundesbank, would almost surely step up QE to prevent contagion. We estimate that the immediate aftermath of a default could see EUR/$ fall three big figures. The ensuing acceleration in QE would then take EUR/$ down another seven big figures in subsequent weeks. We thus see Greece as a catalyst for EUR/$ to go near parity, via stepped up QE that moves rate differentials against the single currency.


Incidentally, "internal devaluation" is a very polite way of saying plunging wages, labor costs, and generally benefits, including pensions.

But if this is correct, Goldman essentially says that it is in the ECB's, and Europe's, best interest to have a Greek default - and with limited contagion at that - one which finally does impact the EUR lower, and resumes the "benign" glideslope of the EURUSD exchange rate toward parity, a rate which recall reached as low as 1.05 several months ago before rebounding to its current level of 1.14.  Needless to say, that is a "conspiracy theory" that could make even the biggest "tin foil" blogs blush.

A different way of saying what Goldman just hinted at: "Greece must be destroyed, so it (and the Eurozone) can be saved (with even more QE)."

Or, in the parlance of Rahm Emanuel's times, "Let no Greek default crisis go to QE wastel."

Goldman continues:

Greece, like many emerging markets before it, is suffering a balance of payments crisis, whereby a “sudden stop” in foreign capital inflows caused GDP to fall sharply. In emerging markets, this comes with a large upfront currency devaluation – on average around 30 percent across nine key episodes (Exhibit 1) – that lasts for over four years. This devaluation boosts exports, so that – as unpleasant as this phase of the crisis is – activity rebounds quickly and GDP is significantly above pre-crisis levels five years on (Exhibit 2). In Greece, although unit labor costs have fallen significantly, price competitiveness has improved much less, with the real effective exchange rate down only ten percent (with much of that drop only coming recently). This shows that the process of “internal devaluation” is difficult and, unfortunately, a poor substitute for outright devaluation. The reason we emphasize this is because, even if a compromise is found that includes a debt write-down (as the Greek government is pushing for), this will do little to return Greece to growth. Only a managed devaluation can do that, one where the creditors continue to lend and help manage the transition.

Here, Goldman does something shocking - it tells the truth! "As such, the current stand-off is about something much deeper than the next disbursement. It signals that the concept of “internal devaluation” is deeply troubled."

Bingo - because what Goldman just said in a very polite way, is that a monetary union in which one of the nations is as far behind as Greece is, and recall just how far behind Greece is relative to IMF GDP estimates imposed during the prior two bailouts...

... simply does not work, and for the union to be viable, a stressor needs to emerge so that broad currency devaluation benefits not only the peak performers, i.e., the northern European states, but the weakest links such as Greece.

Incidentally, all of this was previewed long ago in, in December 2012 when we wrote "Next Up For A "Recovering" Europe: A 30-50% Collapse In Wages In Spain, Italy And... France." To Greece's great chagrin, all of this internal devaluation has mostly impacted the impoverished country, which continues to be a shock absorber to broader internal devaluation across the entire Eurozone.

Which brings us back to Goldman's assessment of the current Greek state, and the suggestion that all the smoke and mirrors flooding the headline-scanning algos is nothing but noise, and that in reality the forces are alligned to "push the EUR near parity in fairly short order."


Paradoxically, Goldman keeps pushing for a worst-case outcome, and one where the market finally reprices all the risk it has ignored for months:

Even if Greece ultimately stays in the Euro (our base case), the immediate aftermath of such a non-payment will be to push bond yields up across the periphery. This rise in the fiscal risk premium (Exhibit 3) will of course be limited, because the ECB will likely accelerate QE, including via the Bundesbank. That will push rate differentials, especially longer-dated ones (Exhibit 4), against EUR/$. We estimate that the initial fiscal risk premium effect could be three big figures, while the subsequent QE effect could be worth around seven big figures.

The conclusion:

In short, we see mounting tensions over Greece as a catalyst for EUR/$ to move near parity in fairly short order, with much of that move driven by rate differentials. If, instead, a compromise solution is found (including possible debt haircuts), we see the upside to EUR/$ as very limited, i.e. on the order of one big figure at most. The reason for this is that the market is broadly expecting an agreement to be found, even with the possibility of a default in the near term on debt repayments coming due.

And of course, going back to the start of the note, a "favorable" outcome pushing EUR higher will be one that "will do little to return Greece to growth" and as a result will force the insolvent nation back to the negotiating table until such time as the Eurozone finally realizes that it desperately needs EUR much lower, not higher, and will do everything it can to achieve that, even if it means "siloing" Greece in a state of suspended default indefinitely if only to eliminate the "risk on" euphoria in the currency pair.

Indeed, as we said last year, the entire escalation over the Ukraine conflict was merely to push Europe to the verge of a triple-dip recession, which in turn was the catalyst that finally greenlighted the ECB's first episode of QE with Buba's blessing (after all Germany's economy was finally on the brink as well and it had little to lose). Well, the next such "catalyst" will come from none other than Greece as per Goldman's punchline:

We encounter many who argue that mounting tensions over Greece could be Euro positive. The short term angle is that risk reduction will lead to a squeeze of Euro shorts, so that EUR/$ could squeeze higher. The reason we don’t believe this is because we think stepped up ECB QE will dominate any risk-off response. Or, to put this in another way, the ECB will not allow the fiscal risk premium to go all that much higher. The medium-term angle is that the Euro zone might be more cohesive without Greece. That rationale assumes that Greece is a case apart, when of course it isn’t. After all, the Spanish unemployment rate is not far behind that of Greece and populist political pressure is also building. The underlying commonality, in our minds, is that “internal devaluation” is very difficult. As a result, we think mounting tensions around Greece could just as well focus market attention on the sustainability of the adjustment program on the Euro periphery.

Whoever would have thought that none other than Goldman would serve as the source of what may be the biggest "conspiracy theory" gambit of 2015...

One final thought: what Goldman wants, its former employee at the ECB tends to deliver.

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Joebloinvestor's picture

Goldman Sachs should be in the "dock" along with former Greek government officials and on trial for perpetrating a fraud.


Fun Facts's picture

Everyone at Goldman should be hanging at the hague for crimes against humanity.

Publicus's picture

Greece should switch to the Ruble or the Yuan, let us destroy the Western Elites.

NoDebt's picture

Geez, pushing entire countries into insolvency just to knock a few pennies off the exchange rate?  I don't know about that.  If it's a reason its certainly not the only one.

Are we absolutely certain this can't be fixed by printing more money?  I mean, shit, everything else has been fixed that way, why not this?


Wolferl's picture

Throw those pathetic Greek deadbeats out of Europe already.

SWRichmond's picture

Speaking of broken stuff, Note to the Tyler(s):  The site has become almost unusable.  So many scripts running, so many pop up ads, so many autorunning video ads, so much audio clutter, that page loads take forever, and sometimes fail completely.  When I have to click through an ad which covers the content front and center, I go elsewhere.

bigkahuna's picture



I've installed Ad Blocker on Chrome and it has reduced the annoyances:

ATM's picture

The shock of Greece getting the boot fromt he EuroZone willl be just the thing to get the rest of Europe on the fast track to Federalizing. 

That has always been the goal.,one government Europe and you need a crisis of epic proportions and pain in the wallet to get peple to choose to enslave themsselves.

Captain Debtcrash's picture
Captain Debtcrash (not verified) ATM Jun 22, 2015 1:01 PM

If we do it its conspiracy theory, if Goldman does it its sound analysis.

eclectic syncretist's picture

Any public announcement by goldman can be safely taken to mean they are taking the opposite position.

The ecb and imf need a greek bailout far more desperately than greece.  Especially now that the BRICS bank has duped the populace into thinking it can also conjure value from nothing.

TheFourthStooge-ing's picture

OT: Ukrainian Deputy Minister of Defense defects to Donetsk Republic.

Major-General Alexander Kolomiets confirmed that many of his colleagues and countrymen want to switch to the side of DPR.

MonetaryApostate's picture

Read this bro, I'm a former computer tech & programmer with many years of experience, it will help you a lot...

(To all the down voter, hey, nobody paid me to do the research to help people, and it took me a lot of time to make that blog post, which you can verify the information with any real tech.  I assure you it's accurate & need to know information for most computer users, though I don't write for Mac & Andriod, sorry.)

Winston Churchill's picture

It was so much simpler(in a way) with punchcards.

My first computer was far bigger than my office now.The desktop calculatot took a desktop

to house it.2400 bps ,full duplex,was state of the art for modems.

i'm getting old, and feeling it.

Ralph Spoilsport's picture

Yup. But dropping a stack of IBM cards and/or getting your data cards mixed in with your program deck was a nightmare. That was personal data storage back then, a stack of punchcards - a card stock equivalent of a USB jump drive.

Fudomyo's picture

The recommendations you are making are out of date.

Run the free version of Spyhunter and you'll see how much is getting around Malwarebytes and MVPS. Both are crap. (so is Windows Defender and Avast)

You don't have to purchase the software, you can turn on invisible folder items and go into your iNet folder and remove the spyware manually, same for going into the task manager to remove registry items, but at least Spyhunter lets you know what's on your machine.

RogueKiller, ComboFix, Rkill, AdwKiller, Junkware Killer, TDSS killer, Sophos Anti Rootkit are also great free tools. (you need to be careful with things like Combokiller and Rogue Killer, only use them for scanning, don't remove items that they list. You need to search what these items are and how to safely deal with them. A good resource is the Bleeping Computer help section. They have line item walkthroughs on the removal process where they helped other people deal with infections)

One software doesn't do all, especially if you need to get something out of your rootkit, because a lot of malware/spyware is hidden deeply and reinstalls on boot. Even with an Ad Blocker and Self Destructing Cookies, you need to scan daily and take stuff out because a lot of things get through (once you do a primary deep clean up, daily maintenance takes a few minutes).

Hope this helps.



invisible touch's picture
invisible touch (not verified) SWRichmond Jun 22, 2015 12:28 PM

you have something called NO SCRIPT, where nothing apear but the basic html, you should try it....

MonetaryApostate's picture

Yes, script blocking is essential to stopping those pesky corps from sniffing the hell out of your computer every time you go to their site...  It also stops them from getting your IP Address, which could be used for all sorts of evil things (like direct hacking)...

Ralph Spoilsport's picture

"It also stops them from getting your IP Address...."

Wrong. How can a server send you a web page without your IP address?

I Drink Your Milkshake's picture

You don't have NoScript running?!

Once you add this to your browser you'll be amazed how many servers one website talks to.

Socratic Dog's picture

And just how many  of them have "google" somewhere in their name.  Then consider that "google" and "NSA" likely amount to the same thing.

Peribanu's picture

In Internet Explorer you don't need an ad blocker. Just go to Manage add-ons, and under Tracking Protection, add EasyPrivacy, PrivacyChoice, and Trust-e tracking protection lists. This blocks almost all the ads. Unfortunately it doesn't block the Wolferei script that keeps repeating something about throwing those lazy German banksters out of Europe already on every thread.

Proofreder's picture

Pathetic Greek ...

FFS, give it a rest, asshole - is this the only comment you can come up with in the last week?

crazytechnician's picture

This bot is faulty , they never get stuck on one sentence.

asteroids's picture

Fuck You Wolferl, you malaka. Greece is trying to negotiate. Everyone else is giving them ultimatums. I hope Greece tells the oligarchs to go pound sand. I hope it gives the Italians, Spandiards. etc...  courage to do the same.

walküre's picture

Yup, Wolferl. I'm with ya. Cut 'em lose! Otherwise, we'll motivate Germans to drop the EZ bullshit and walk away from all ECB bullshit liabilities that we are supposed to carry.

Fuck 'em all!

ANestIOS's picture

lol, it seems the greeks are doing it themselves!

(it appears that the euroleaders are scrambling for and will be putting forward  a new improved long term package - that includes debt forgiveness, as per Lew's edict - in the hope that the greek government will support a YES vote in the referendum)

JRobby's picture

The Greek People did not hire Goldman. Their "elected leaders" did.

fockewulf190's picture

V A M P I R E   S Q U I I I I I I I D ! ! ! !

TheReplacement's picture

Some folks like watching Nascar, some soccer, some porn.  Others enjoy watching pensioners struggle while making a quick euro.

Arnold's picture

The attitude comes from sunshine, magnifying glass and ants.

And feeding rat poison to puppies.

MonetaryApostate's picture

I've got this feeling that Greece won't be the only pensioners up in arms soon....

hoos bin pharteen's picture

Kill the chicken to teach the monkey.  The big picture is about Italy and Spain.  If Greece goes unpunished too long, then the reckoning for those countries will be much, much worse.  Who's to blame is irrelevant for this stage of the game.  

Low Tech Future's picture

Anybody that trusts Goldman Sachs as anything more than a contrarian indicator needs a refresher in critical thinking skills.

Goldman has value.  For example, if you want to market time ETFs, one strategy would be to do the opposite of whatever GS says publicly.  I can tell you sincerely that this has worked for me several times.


But otherwise, they are self-serving, manipulative liars.  GS officially, publicly assured us all that they would shut down their Sigma X Dark Pool.  What did they do?  Swallow up their competition, then instead, expand their Dark Pool and HFT.

GS is a pack of liars and should never be trusted at face value.

Low Tech Future's picture

Anybody that trusts Goldman Sachs as anything more than a contrarian indicator needs a refresher in critical thinking skills.

Goldman has value.  For example, if you want to market time ETFs, one strategy would be to do the opposite of whatever GS says publicly.  I can tell you sincerely that this has worked for me several times.


But otherwise, they are self-serving, manipulative liars.  GS officially, publicly assured us all that they would shut down their Sigma X Dark Pool.  What did they do?  Swallow up their competition, then instead, expand their Dark Pool and HFT.

GS is a pack of liars and should never be trusted at face value.

WTFRLY's picture

Of course, GS is the mafia so they recognize mafia tactics, impressed that they called it so honestly. That's the scary part is that they have no choice but to acknowledge the real events now in their notes.

fromthinair's picture
fromthinair (not verified) Joebloinvestor Jun 22, 2015 11:55 AM

very true, the same people who started the arson are now running around with a fire truck. Why did they not figure this out 6 years ago .. even zerohedge and other blogs figured that out years ago.

Joebloinvestor's picture

If Greece would have arrested and prosecuted the ones responsible, I would bet the EU/ECB/IMF would sit down and hammer out an agreement.

The first thing on the table would be ,"No Prosecutions" as saving banksters seems to be the common theme.

However, things being as they are, Greece would rather prosecute the reporter who published the complete list of tax cheats with the Greek names that weren't removed.


Socratic Dog's picture

Good analogy.  Quite a few fire chiefs have served time for arson.

A bit like 9/11, come to think of it.  No one in jail yet, but.

newsoutlet's picture
newsoutlet (not verified) Jun 22, 2015 10:41 AM

In Russia under putin regime rule seniors pension is 125 $ a month!


The cost of living is like this... 7.00 $ for 500g (about 1,1 lbs) of local cheese


Could you live with such money?


putin regime is pathetic one - no doubt about that.

HenryHall's picture

False. (But entirely what you would expect from that source).

Retirement pensions in Russia are paid in Rubles, not dollars.

newsoutlet's picture
newsoutlet (not verified) HenryHall Jun 22, 2015 11:07 AM

Of cource in Russia pensions are paid in RUB and not in USD, but for readers they don't give a **** about RUB and how much value it holds.

But everyone can undesrtand that there is no living with 125 $ a month.

ThirdWorldDude's picture

Meanwhile in Bulgaria, a EU member-state, average pension is $75/month.

That in itself doesn't mean shit until you've compared earnings to local living standards. Now go pound some zio-sand!

newsoutlet's picture
newsoutlet (not verified) ThirdWorldDude Jun 22, 2015 11:46 AM

I just compared prices - cheese costs 7 $ for 500g in Russia.

So would you like to live for 125$ in Russia.

P.S. Never heard from zerohedger that Bulgaria is some kind of "world leader that will soon win over US"

the phantom's picture

So comparing prices in Moscow to the rest of Russia is not that bright now, is it?  Moscow, one of the most expensive cities in the world.  It's like saying someone living on social security for $800/month in the US has to pay an average of $3,500 rent in Manhattan.  Wow, the US gov't is really screwing the seniors with those SS wages!  Your argument is false.  

newsoutlet's picture
newsoutlet (not verified) the phantom Jun 22, 2015 12:15 PM

Are you saying there are no people in Moscow living on pension?

Are you for real?

Also did you know that prices in regions are high because of logistics to get goods there? Actually there are few things that Russia can supply on it's own. Huge amount are imported  including food supply. And than spread across country.