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The Great Greek Fudge

Tyler Durden's picture




 

Submitted by Pieter Cleppe of Open Europe

The Great Greek Fudge

A third Greek bailout involving loans from the European Stability Mechanism (ESM), the eurozone’s bailout scheme, is now being negotiated. The start was quite rocky, with haggling over the precise location in Athens where negotiations need to take place and Greek officials once again withholding information to creditors. Therefore, few still believe that it will be possible to conclude a deal in time for Greece to repay 3.2 billion euro to the ECB on 20 August. Several national Parliaments in the Eurozone would need to approve a final deal, which would necessitate calling their members back from recess around two  weeks before the 20th, so it’s weird that French EU Commissioner Pierre Moscovici still seems so confident that the deadline can be met.

If indeed there is no deal, Greece is likely to request a second so-called “bridge loan” to allow it to pay the ECB, firmly within the Eurozone tradition of the creditor providing the debtor cash in order to pay back the creditor. France, which is most eager to keep Greece inside the Eurozone, is afraid that bilateral bridge loans from Eurozone countries wouldn’t be approved by the more critical member states, as this would risk France having to foot this bill on its own, perhaps with Italy. Not exactly a rosy prospect for socialist French President Hollande, who’s already struggling to contain the far right anti-euro formation Front National.

The only European fund practically available to provide a bridge loan is the European Financial Stabilisation Mechanism (EFSM), a fund created in May 2010, which has been raising 60 billion euro on the markets, with the EU’s €1 trillion Budget as collateral. The EFSM belongs not just to Eurozone member states, but to all EU member states. How on earth did the UK, which isn’t part of the Eurozone, agree to bail it out in 2010, one may wonder? The reason is that the decision to create the EFSM was taking precisely at the time of the power vacuum in the UK. Labour had just lost the election and the Conservatives were still busy negotiating a coalition with the Lib Dems. Outgoing Labour Chancellor Alistair Darling claimed to have “consulted” likely new Chancellor George Osborne, but it remains muddy who precisely gave the expensive OK. In order to correct this, PM Cameron secured a declaration from other EU leaders in December 2010 that the fund wasn’t going to be used any longer, until it was used after all, in July 2015, to provide Greece with a first bridge loan. Then not only the UK, but also the Czech Republic and Poland protested heavily, only backing down when they secured special guarantees against possible losses and a commitment that it would be illegal in the future to provide loans to Eurozone countries with the EFSM without also providing such guarantees to non-euro states.

EU Finance Ministers are currently busy implementing the legal change, through a “written procedure”, which should be finalized before the middle of August. The Council declared in July that an “agreement” on this legal change was needed “in any case before” Greece can request a second bridge loan. Another “written procedure” is needed for that, but it’s unlikely that Finance Ministers will manage to decide this in smoke-filled rooms. With Polish elections coming up on 25 October, local opposition parties may once again rail against Polish PM Ewa Kopacz, who promised voters they wouldn’t be exposed to this. Also the UK may use this as an opportunity to extract concessions related to its own agenda for EU reform. Perhaps the French government’s sudden openness to this agenda and its welcome stance that “we need a fair treatment of the ‘out’ countries” may have been linked to the British approval for a first bridge loan.

As always in the Eurozone, the safest bet is on another fudge, at least when it comes to the bridge loan.

More questionable is how the IMF’s statement that it “cannot reach staff-level agreement [to participate to a third Greek bailout] at this stage” will play out, given that Greece no longer meets two of the four IMF criteria for a bailout: ability/willingness to implement reform and debt sustainability. It will only decide whether to take part in the bailout after Greece has “agreed on a comprehensive set of reforms” and after the Eurozone has “agreed on debt relief”, meaning it may even only join next year or not at all, of course. This is a problem, given that a number of Eurozone states, especially Germany and the Netherlands, have explicitly linked their willingness for a third Greek bailout to participation by the IMF. Former EU Commissioner for Monetary Affairs Olli Rehn has suggested that many countries demand IMF involvement in bailouts because they don’t trust the Commission.

It’s not entirely clear what will be sufficient for the IMF: its President, Christine Lagarde, has discussed a write-down on the value of the country’s debt but ruled out a straight “haircut”, while mentioning an extension of debt maturities, an extension of grace periods and a maximum reduction of interest rates. The IMF carries the legacy of its former Director Dominique Strauss-Kahn, who managed to overcome opposition within the fund against taking part in the first Greek bailout in 2010. The IMF only issues loans to countries when there is prospect for debt sustainability, which clearly wasn’t the case for Greece in 2010, but the interests of supposedly “systemic” banks were considered to be more important. Now the IMF, which has never taken straight losses on loans it has issued, may be experiencing this in case of Grexit.

As opposed to the IMF, which has completely ruled out the idea of taking losses on its lending to Greece, and contrary to the picture painted by some, Germany has made some noices suggesting it may be open to cutting its losses in Greece. German Chancellor Merkel has not only been open to extending debt maturities and lowering interest rates, but her Finance Minister Wolfgang Schäuble has said that “if you think the best way for Greece” is debt relief, then “the best way forward” is to leave the euro, adding that “a real debt haircut isn’t compatible with the membership of the currency union”. So Germany is willing to accept debt relief, if there is Grexit.

Some have questioned Schäuble’s claim that debt relief wouldn’t be legally banned within the eurozone, as for example Financial Times columnist Wolfgang Munchau, who recently wrote: “In its landmark Pringle ruling — relating to an Irish case in 2012 — the European Court of Justice (ECJ) said bailouts are fine, even under Article 125, as long as the purpose of the bailout is to render the fiscal position of the recipient country sustainable in the long run.”

This sounds a bit like a stretch. The ESM is very much conceived as a “European IMF”, hence the ECJ’s use of the term “sustainable”, reminiscent of the IMF’s condition to provide cash. Just like the IMF, the ESM has been set up to issue “loans”, not to provide “transfers”. Obviously, a loan with an artificially low interest rate partly counts as a “transfer”, but even for the rather politicized judges of the European Court of Justice there is an end to stretching the meaning of words.

Therefore, apart from the case where the ECJ would completely remove the meaning of the words of its previous rulings and the ESM Treaty, EU law doesn’t allow the “loans” made to Greece to just be forgiven, as much as proponents of a Eurozone transfer union like Mr. Munchau may regret this.

After PM Tsipras threatened with an internal referendum in his own left-wing populist Syriza party, it looks like he has secured the necessary domestic support for a third Greek bailout.

Obstacles remain, but much of the protest in “creditor countries” seem to have been overcome. In Finland, where the coalition was at risk at some point, Foreign Minister Timo Soini has said that it “would make no sense” for his Eurosceptic Finns party to leave the Finnish coalition over this. In the Netherlands, the governing VVD party, which is skeptical to the Greek deal, has provided tacit consent for negotiations to start. In Germany, despite all the noice, Merkel enjoys a comfortable majority to get on with the third range of transfers.

The third bailout is likely not to be sufficient to cover all Greek funding needs in the next few years, also given that expecting 50 billion euro from privatizing Greek state assets looks a little rosy. This is a problem which can be solved near the end of the bailout period, once Greece has made it through the difficult year 2015. In 2016 and 2017, the country needs to make debt repayments “only” amounting to around 6 billion euro each year.

The IMF may in the end just back down and join in, given how it already bent its rules twice to agree to Greek bailouts. It would have been expected to provide between 10% and a third of the funding of the new bailout which may amount to 86 billion euro (and possibly more), so if the IMF wouldn’t back down, Germany and France would see their bill for the third bailout rise with another 1.7 billion and 1.3 billion euro respectively. A lot will depend on how the IMF will calculate “debt sustainaibility”. Speaking in the Dutch Parliament, Eurogroup chief Jeroen Dijsselbloem said on 16 July that the Eurozone already “agreed with the IMF to look at “debt service”, not merely at the debt to GDP levels”. In other words: because Greece’s interest burden as a percentage of GDP is even lower than the one carried by Portugal, Italy, Ireland and Spain, one can ignore the fact that its debt to GDP is at the horrendous level of 180% now. This of course overlooks the difficulty to boost that GDP, given the tax hikes and the capital controls which will be hard to remove as a result of the talk about “Grexit”. Still, a fudge looks on the cards.

It isn’t a good idea to let the bill of Eurozone taxpayers grow even bigger, to burden an economy already crippled by debt with even more debt and to intervene deeply into domestic Greek policy choices. Opting for Grexit may have been the wisest choice for everyone. The opportunity was there, given that many Greeks had already taken their savings out of banks anyway. Also, many of the reasons to think Greece still may leave the Eurozone, like the difficulty to unwind capital controls, remain in place. We have come close, but Grexit seems to have been avoided for now. But it’s unlikely to have been referred “ad kalendas Graecas”- “until pigs can fly”.

 

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Sat, 08/01/2015 - 15:10 | 6379117 Chuck Knoblauch
Chuck Knoblauch's picture

Buy food and water.

Sat, 08/01/2015 - 15:48 | 6379225 FlipFlop
FlipFlop's picture

Indeed. This is starting to look like Greece is made an example of terror no-one wants to endure. Once market discipline failed due to bad institutional setting, it became clear that Greek exit would disqualify a much more important principle of integration getting constantly deeper. Hence there is a need for a terrible precedent.

Right?

Sat, 08/01/2015 - 16:09 | 6379266 stocktivity
stocktivity's picture

"Dammit!!!   Give us the bailout money so we can repay the payment due on the previous bailout money you lent us. What's the problem?"

Sat, 08/01/2015 - 16:14 | 6379280 FlipFlop
FlipFlop's picture

Your are right, Sir!

We can keep this going for ever with zero interest. Why then all the fuss, is there something more sinister brewing? Nothing surprises anymore, but at least we have an eternally running mix of Greek tragedy/comedy and Wagnerian torture.

Sat, 08/01/2015 - 17:07 | 6379416 BurningFuld
BurningFuld's picture

Just read the first four paragraphs and it occurred to me that they are just making shit up as they go long.

Sat, 08/01/2015 - 16:19 | 6379295 Bush Baby
Bush Baby's picture

I t's very simple, if a politician is certain a deadline can be met, then it can't.
Remember , they are not allowed to tell the truth under any circumstances.

Sat, 08/01/2015 - 15:14 | 6379127 kaiserhoff
kaiserhoff's picture

Qui bono?  Who benefits?

Who could possibly want to extend the pain from one more kick of the can in this Greek tragedy?

Oh yes,  Lloyd and Jamie need their Christmas bonuses.

 

Sat, 08/01/2015 - 15:18 | 6379140 bamawatson
bamawatson's picture

chaz bono ... what's that?!

Sat, 08/01/2015 - 15:21 | 6379145 kaiserhoff
kaiserhoff's picture

A reverse, double somersault version of Caitlyn Jenner...,

   or Moochelle/Michael

Sat, 08/01/2015 - 15:18 | 6379139 ArmyofOne
ArmyofOne's picture

Buy seeds, livestock, farm tools and finds some land to squat on. It going to be a long time before you can just go to the store and buy stuff.

Sat, 08/01/2015 - 15:24 | 6379149 back to basics
back to basics's picture

Excellent summary on the Greek tragicomedy but the author could have saved us all a lot of time by simply just saying that Greece would never be allowed to default and exit. Everything else is noise. 

Sat, 08/01/2015 - 15:24 | 6379155 i_call_you_my_base
i_call_you_my_base's picture

I can't be convinced that any of the rules matter.

Sat, 08/01/2015 - 15:28 | 6379163 slicker
slicker's picture

OF COURSE all deadlines will be met, all agreements finalized, all funds transfered, all debts paid by somebody to somebody.  This is euroland, the land of many roads and many cans to kick down the roads.

Sit back relax and enjoy the show.

Sat, 08/01/2015 - 15:30 | 6379169 davidalan1
davidalan1's picture

"European stability mechanism"....  LMAO, what will they think of next?

Sat, 08/01/2015 - 18:56 | 6379757 invisible touch
invisible touch's picture

basic system they usezd on tzipras, it is a giant butt plug  guled to a seat in brussel, when you have are person causing problem like tsipras agitating the place, you tell him , pls, HAVE A SIT. PLEASE.

 

and it's done, you are stabilised.

Sat, 08/01/2015 - 15:31 | 6379174 orez65
orez65's picture

"so it’s weird that French EU Commissioner Pierre Moscovici still seems so confident that the deadline can be met"

Not only weird but a French sacrilege to skip any August vacation days.

Sat, 08/01/2015 - 15:37 | 6379194 kaiserhoff
kaiserhoff's picture

Some measure of their desperation.

Sat, 08/01/2015 - 15:34 | 6379182 Soul Glow
Soul Glow's picture

Leave the EU for Pete's sake!  Pete's been hurting for too long!

Sat, 08/01/2015 - 15:46 | 6379207 WhyWait
WhyWait's picture

Interesting analysis from a leader in Syriza's "Left Platform":

https://www.jacobinmag.com/2015/07/tsipras-varoufakis-kouvelakis-syriza-...

Bottom line: the game's not over; the people have learned some hard lessons about the European project and the banksters, and are still in play. Sheep have been sorted from goats.

Sat, 08/01/2015 - 15:45 | 6379210 PoasterToaster
PoasterToaster's picture

Bailout =  Profit Taking

Sat, 08/01/2015 - 15:52 | 6379238 _ConanTheLibert...
_ConanTheLibertarian_'s picture

This grand Ponzi scheme will never allow Greece to default and they (the Greek) know it.

Sat, 08/01/2015 - 15:55 | 6379241 Peter Pan
Peter Pan's picture

The EU and its institutions are a greater problem that what Greece is. Greece is simply exposing their faults, weaknesses, fracturing and indecisiveness. Above all Greece's situation is exposing their penchant for dealing with a situation through denial of how bad things are which in turn leads them to applying remedies for the most part unsuited to the situation.

Sat, 08/01/2015 - 16:17 | 6379285 falak pema
falak pema's picture

If an Empire has the right to print money (IOUs) to infinity and use raison d'etat to write off debt at its DISCRETION then there is no problem PROVIDED its current balance with those outside the Empire is not NEGATIVE as that destroys the premise that its money is worth GOLD.

There is only ONE empire who thinks it has the right today and ENJOINS all others to be "for us or against us". 

If Germany feels like China and Russia it can balk that rule and make the Euro ( as would China the Yuan) an Independent reserve that challenges the USD in case the WS/FED Titanic were to sink, it would be totally unacceptable to the US empire.

There cannot be THREE monetary systems, of which TWO pretend they can DISSOCIATE themselves from the Greenback.

For the EURO the Empire's respose is FU Europe, for the China/Russia axis it risks to be : GUNFIGHT AT SPRATLEY ISLANDS!  

Just like for Saud its been : IRAN is now on board! 

Sat, 08/01/2015 - 16:25 | 6379312 Peter Pan
Peter Pan's picture

Falek if I read you correctly you are saying that the Euro is nothing more than the USA's pet dog and therefore it cannot aspire to become bigger than the big dog.

The problem as I see it these days, is that all these powers, whether they be the USA, Europe, China, Israel etc etc, are so preoccupied with controlling what goes on outside their borders that they have made a mess of what goes on inside their borders.

Sat, 08/01/2015 - 16:53 | 6379354 falak pema
falak pema's picture

You have not understood the basic premise I am making :

As UNIVERSAL empire the US HAS NO BORDERS; all the others do.

So FDR's legacy and NWO supremacy ensures, in the mindset of those who wear Rome's purple, that they can go anywhere; as the world is their oyster; and nobody else's.

As an American you don't SEE their perspective; you REALY THINK that they have to see yours as US citizen. 

They couldn't give a damn about the 1% in USA or ELSEWHERE;  its all one big world that THEY RUN. And the current Oligarchy/State alliance with US assets pumped to levels unknown ensures that (on USD paper; Papal bull).

Democracy at home is a FED EX package, delivered by a drone, that says : just sign on the dotted line and  we'll do the rest. 

 

Sat, 08/01/2015 - 21:51 | 6380171 Treason Season
Treason Season's picture

You are undoubtedly the most erudite articulate idiot in this universe.

Sat, 08/01/2015 - 17:07 | 6379422 Clowns on Acid
Clowns on Acid's picture

Bruce Transjenner says "Go Greek!" "Go Fudge!". Its made him (X chromosones) some money.

Sat, 08/01/2015 - 17:22 | 6379470 kchrisc
kchrisc's picture

The Cliff Notes of the so-called Greek Crisis:

1) The usury, plunder, must continue to flow to Zion.

2) Greece sits on a pipeline route from Israel to Zion's new plunder base, Europe.

3) Greece's leaving would motive others, not so encumbered with being on one of Zion's pipeline routes, to leave, and take their usury, plunder, flows with them.

4) Greece would rapidly become a satellite of the east, and a thorn in the side of Zion in Europe.

5) There will be blood.

Liberty is a demand. Tyranny is submission.

Sat, 08/01/2015 - 18:47 | 6379732 TweedleDeeDooDah
TweedleDeeDooDah's picture

Things will become apparent to the Greek... the impending NATO/EU/US occupation and political subservience of Turkey will lead into a new, but different "Regime of the (NATO) Colonels.

The Straits of Bosphorus can them be closed, permamnently.

Sat, 08/01/2015 - 19:21 | 6379817 WTFUD
WTFUD's picture

Pure Circus. Everyone is screwed and nobody has a clue which way the dice rolls.There is no captain on this merry go round. Amateur Dramatics. Stop trying to make sense of nonsense.

Sat, 08/01/2015 - 23:29 | 6380059 HardlyZero
HardlyZero's picture
Puerto Rico will default

Puerto Rico will miss a payment on debt due August 1, the governor's chief of staff said on Friday, an event that will be considered a default by investors as the commonwealth lurches towards what could be one of the largest US municipal debt restructurings in history.

The missed payment will mark the first default by the commonwealth and shows the depth of the island's economic and cash flow problems. Puerto Rico Gov. Alejandro Garcia Padilla shocked investors in June when he said the island's debt, totaling $72 billion, was unpayable and required restructuring.

According to a 2014 bond offering statement, Puerto Rico has never defaulted on the payment of principal or interest of debt.

"Tomorrow is Aug. 1 and we don't have the money," Victor Suarez, chief of staff for Puerto Rico's governor, told journalists in San Juan, referring to a $58 million payment due on Public Finance Corporation (PFC) bonds.

"The PFC payment will not be made this weekend," Suarez said. "It was not consigned."

http://www.businessinsider.com/puerto-rico-will-miss-august-1-payment-default-2015-8#ixzz3hcD00rpt

 

Oops...Opa !!!    Gr fudge >> Pr fudge   or   Pr fudge >> Gr fudge      it's a fudge fountain.

Sat, 08/01/2015 - 23:16 | 6380361 fowlerja
fowlerja's picture

Greece's debt problems require bold action..they cannot repay their debts...if you are in default for your house you pack up and leave..time for the Greeks to pack up and leave...where?..that's their problem..Europe takes over the island and everything is auctioned off until the debt bill is payed...anything above that amount is then distributed to all the European nations..end of debt problem..let's move on..

Sun, 08/02/2015 - 00:19 | 6380465 JoJoJo
JoJoJo's picture

Central governments will do anything to preserve their union. U.S. had a civil war and Europe will just keep paying off its secessionists.

Sun, 08/02/2015 - 07:15 | 6380811 Cloud9.5
Cloud9.5's picture

We are at the end of growth.  Everyone will default.

Sun, 08/02/2015 - 12:22 | 6381524 Bemused Observer
Bemused Observer's picture

Does anyone honestly believe there's a plan for any of this?

Everyone is winging it. Because the "wingers" know something about how the world they created works, they have been able to keep it going for now. But there are a lot of things that don't work, and they are running up against some of them now.

They will do SOMETHING, be sure of it. But there IS no plan, no "master strategy" for world domination. Greedy people working in finance have discovered they can enrich themselves by erecting a complicated Jenga-tower of financialization, globally. But that's where the "planning" ended.

They NEVER got past the part where they cash their checks. Now all those unforeseen consequences are looming...the exponential debt, the completely disrupted job market, the impossible costs of keeping your populace from hacking you to death with machetes by handing out goody-bags, a technology boom that TPTB are discovering can also be used BY their victims against THEM...all the chickens are coming home to roost now.

All the anguish will be worth it if we come out the other side with a totally new attitude towards things like money, distribution, etc. It's time to draw up a new 'social contract'...a set of ground rules we agree to follow in our dealings with each other.

And we need to get smaller, and restore boundaries between people and nations. Boundaries aren't a bad thing, we use a saying, "Good fences make good neighbors". They remind you of where you need to stop, of where your 'rights' end and someone else's begin. Right now we just have the equivalent of everyone pissing on everyone else's azaleas and helping themselves to tools out of other folk's garages.

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