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Greece - Now What
Submitted by George Kintis of Alcimos
Greece - Now What
For those of you who like fast-forwarding to the end of the film, here it is:
- Grexit was never on the cards. Even less so after the recent European Summit decisions and the Greek bank recap recently put in motion. This is mainly on account of the dual surpluses Greece currently runs: the current-account and primary budget ones. Even if one could push a magic button and kick Greece out the euro, there is nothing that would prevent Greece from immediately reintroducing it, Kosovo- or Montenegro-style. The only impediment would be the funding of the banking system, but this is being taken care of.
- There has been a decoupling of a large part of the Greek economy from the sovereign issue; for example, exports of goods and services, accounting for around 30% of the Greek economy have been growing at 9% a year. Investors readily recognize this in publicly-traded assets (most Greek corporate bonds are trading well above the sovereign ceiling), but are so far oblivious to it when it comes to non-traded ones (e.g., loans, receivables, etc.). This is a “ginormous” arbitrage opportunity—one just needs to put in a bit of legwork to identify, diligence and acquire such assets. Sorry, you can’t do it off your Bloomberg terminal, or over lunch at Cecconi’s.
- Greece does not have a functioning banking system—credit has been contracting for years, while new origination is practically non-existent. This depresses asset prices to ridiculous levels—even prices of assets which are uncorrelated to the sovereign situation, per the previous point. This reversal of this situation is likely to start in Q2 2016, post the Greek bank recap, which we expect will be coupled with a bank bail-in—and the mother of all NPL trades.
Those of you who think that it’s the journey that teaches you a lot about your destination, read on.
In our recent analyses in the Greek situation, we got many things right—and not just that Grexit will not take place. For example, we had predicted that Tsipras will do an about-face even before the elections, but we also warned that GGBs are not the way to play this on 24 February (unless one has inside information on political decisions). We then advised people on 24 February to stay away from anything that has to do with the public sector and the banks. On 5 April we discussed why investing in Greek banks makes little sense–and then explained why we think Greek banks will be bailed-in on 17 July.
We also got some things wrong: the outcome of the referendum (for better or for worse, there’s a clear bias in our circle of friends towards people with a positive balance in their bank accounts) and the imposition of capital controls (which we believe to be completely illegal).
Here’s why we were wrong in predicting that capital controls wouldn’t be imposed: our working assumption in predicting various outcomes at every step of the way of the Greek saga, is that all players are totally selfish, as well as ruthless and shameless in pursuing their own interests. We realize that the ruthlessness and shamelessness of Greek politicians knows no bounds—we’ve known quite a few of them personally for way too long to have any illusions. We assumed, however, that European politicians had a modicum of dignity; that’s where we got it all wrong.
We did not, for example, expect that Ms. Danièle Nouy, head of the Single Supervisory Mechanism, would go on record as recently as 7 June proclaiming Greek banks “to be solvent and liquid”, but then the Euro Summit of 12 July would identify in its statement the need for the “the establishment of a buffer of EUR 10 to 25bn for the banking sector in order to address potential bank recapitalisation needs and resolution costs”. Where did these guys get that €25bn number—if not from the head of the bank supervisory mechanism? We’d never think that the ECB would cut off financing to banks it considers solvent, saying that they do not have adequate collateral. If they were solvent, how could they not have adequate collateral? Substituting ELA for deposits can have no effect on the solvency of the institution; if the institution was solvent—and therefore its deposits were safe, then the ELA which substitutes these deposits should be safe, too. Anything else is financial alchemy, of which we did not think an institution like the ECB would partake.
Nor could we have imagined that the ECB would refuse to disclose the rationale behind its decisions to freeze Greek ELA, citing as reason that “[i]f the ELA ceiling determined by the Governing Council and the related deliberations including the names of the credit institutions receiving ELA were to become known to the public, market participants could infer from this information the liquidity situation of the credit institutions, with immediate detrimental effects on financial stability. Even if such ELA ceiling determined in a particular situation were to be disclosed ex post, such publication could have detrimental effects on the Governing Council’s opinion-building and decision-making in future similar situations.
The ELA ceiling would be an indication of the extent of stress that the credit institutions were facing, and in particular if market participants were able to monitor the development of the ELA ceiling over time, an upward trend would be interpreted as a signal of increasing stress. Hence, publication of such information would negatively impact the banks’ ability to borrow funds from the market and thereby reinforce their liquidity problems”. This, at a time when the ceiling on Greek ELA is leaked to Reuters and Bloomberg immediately after the relevant ECB decisions, is reported on the Bank of Greece balance-sheet published on a monthly basis, while all four Greek systemic banks recently reported their ELA funding to the Athens Stock Exchange (see for example here).
Who needs another “signal of increasing stress“, when the Euro Summit itself has adjudged “potential [Greek] bank recapitalisation needs and resolution costs [to be between]€10 to 25bn”? Of course, the irony of claiming that “publication of such information would negatively impact the banks’ ability to borrow funds from the market and thereby reinforce their liquidity problems”, when said banks have been locked out of credit markets for months, while their liquidity problems have been a direct effect of the contested ECB decisions, was lost on them. But we are digressing…
We now know better: we are convinced that all players in the Greek drama are thoroughly unscrupulous. Once one analyses the Greek situation through this lens, it’s hard to get predictions wrong. You can only go wrong when certain players turn out to be even more ruthless than you would have imagined.
Once one agrees that both sides (i.e., Greece and Germany) are only self-interested, the dynamics of the current Greek negotiation can be analysed within the framework of a prisoner’s dilemma. Greece does not want the structural changes (austerity and the like), while Germany wants to avoid a haircut at all costs. “Cooperation” would then entail Greece swallowing its medicine, while Germany continues to happily fork over money for as long as needed. “Defection” would mean that the Greek government only pretends to be discharging its obligations under the various memoranda, while Germany is forced to accept a haircut. Now, someone who’s even remotely familiar with game theory can easily predict how this will end: both sides will lose. But let’s follow the various steps.
Germany, as we all know, won the Euro Summit battle: Tsipras surrendered and capitulated (in theory) to all German demands. Germany, has, therefore, “punished” Greece in the prisoner’s dilemma framework. Now we think Greece will retaliate—with the help of the IMF.
Here is how:
We have previously analysed the ongoing tug-of-war between Germany and the IMF (read: the US) on a possible haircut on Greek debt as part of the (supposedly) ideological conflict between “austerity” and “Keynesianism”. Germany has said, no deal without the IMF. The IMF has said, no deal without a haircut. Germany has said, no haircut under any circumstances. You can see where that leads: Greece will pass through the measures, but the creditors will find it difficult to agree between themselves on a new package. We may have a few more bridge loans (in the grand can-kicking tradition of Greek negotiations) but the music will eventually stop. Then Germany will be faced with the stark choice between:
(a) a Greek default, which will result in Greece going to the IMF for help, which “stand[s] ready to assist Greece if requested to do so”, which then leads to an effective subordination (read: haircut) of Germany’s bilateral loans to Greece due to the IMF preferred-creditor status; and
(b) a haircut on Germany’s loans to Greece, which will allow the IMF to participate in the Greek bailout.
Germany is, therefore, free to choose between a haircut and a haircut—even Die Zeit seems to agree with this. A haircut is of course political suicide for Merkel, but the latter version can be sugared with some grand-European-vision talk, so we think she will go for this. We also claim, however, that whatever she does only affects her chances of political survival and not Greece. Here’s why:
Despite all the talk, Greece (still) runs a healthy primary surplus (Jan-Jun 2015) and a current account surplus. The former means that if there was no deal with the lenders, the Greek government would keep on functioning; any new money lent to Greece goes back to repay existing debt. The latter means that Greece will still have the euros it needs to pay for its imports, irrespective of any agreement with the lenders. The only leverage Germany has over Greece, is through ECB financing of Greek banks. That last card has been played—we claim to the benefit of large European banks. Greeks banks will be recapitalized (read: bailed in) no matter what, and bought out by large European banks. Their funding no longer will come from the Bank of Greece, but from the parent—which also has access to the ECB. That bullet has been spent.
Here’s where that leaves us: Greece stays in the Euro, but Greek banks are sold off, properly recapitalized at last. Here’s the back-of-an-envelope calculations behind this:
As at June 2015, the Greek banking system had loans to the private sector of €220bn and total provisions of €41bn. There’s a 35% NPL figure being bandied around, but we have long believed the real number to be higher. How higher—God knows, but let’s assume it’s 50% (it’s probably even higher, but a good part of those NPLs may be strategic, so let’s settle at 50%). To the €41bn of existing provisions one should another €30bn (equal to 8% of total liabilities which, per article 44(5) BRRD, need to be bailed-in before the public purse can be accessed) and the €25bn which have been set aside for the Greek bank recap per the 12 July Euro Summit statement and you get to a figure of €97bn in capital available to absorb losses on an NPL book of €110bn—translating to an NPL coverage ratio of 88%.
The big NPL trades, the ones everyone (and their mothers) has in vain been coming to Greece for since 2010, will finally arrive, probably in Q2 2016.
As to the Greek economy: it’s doing very well, thank you, having grown at 1.6% y-o-y in Q2 2015. It will do even better, when Greece has a functioning banking system. Stay tuned.
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So, Tsippie-boy, how is the Community Organizing thing workin’ out for you ? ;-)
Looney
Fuck Greece, and all their Citizens.
They had their day in the sun,
and they blew it.
Who cares now that they have bent over and let Germany have their way with them.
We're not going to feel sorry for you now.
You had a referendum.
Now, enforce it.
You conflate the abstraction, Greece, with the government of that abstraction, with the people who live in that abstraction. The people who live in Greece spoke their opinion clearly in the referendum. The government ignored the people's voice. Now the people suffer.
What would you have the people of Greece do? Have an insurrection? Surely that would bring the wrath of god (Germany, the EU, the international banks, the US--take your pick of gods) down upon them.
Sort it out, man! What you have said is utter tripe. Let's hope the SWAT team busts down your door some night. Then we can chide you for not putting up resistance, for not getting a bullet in your head, tough guy.
I like your use of language. its not very threatening.
"Grexit was never on the cards"
At least not on the cards held by Tsipras and the Banksters
wait . . . wasn't there a referendum?
Greece is Germany's colony now as Germany is America's colony. Bigger fish eating the smaller fish as usual.
Greeks will be in debt servitude for decades. NSA will own German politicians for decades as they do Merkel now
Germany spied on EU partners for USGermany has been spying and eavesdropping on its closest partners in the EU and passing the information to the US for more than a decade, a parliamentary inquiry in Berlin has found, triggering allegations of lying and coverups reaching to the very top of Angela Merkel’s administration.
http://www.theguardian.com/world/2015/apr/30/germany-spied-on-european-p...
. "credit has been contracting for years, while new origination is practically non-existent. This depresses asset prices to ridiculous levels—even prices of assets which are uncorrelated to the sovereign situation, per the previous point."
This is what happens when you turn off the bubble machine. It's also called a clue.
50% Npl Lol.
Greek Banks refi bad debt posting profits instead of write downs, 30% recovery may be way too optimistic when all the dust settles. Voodoo math and bogus fictional assumptions the mother of all modern financial screw ups.
What a waste of time.
No kidding!
"The only impediment would be the funding of the banking system, but this is being taken care of."
Talk about pissing on my foot and telling me it is raining.
I've been putting a list together on Greece Lessons Learned. It is a great testbed to fine tune asset stripping processes then replicate.
Should be a short list. Howzzabout making a list of lessons NEVER learned?
The prmary surplus is largely a myth and has been achieved largely by draining Greeks of their savings and by not paying their creditors. This glorious surplus also forgets the small issue of interest on the debt.
Worst of all the declining demographic, the still too large bureaucracy etc are major hurdles along with massive unemployment as well as the large numbers of employed who are working either for a pittance or being paid 3, r or even 6 months in arrears.
With the exception of that 10 year run up to the GFC Greeks never lived rich lives. There was always a frugality for the masses and it is this frugality that is to return gradually as the renewed reality.
And I am advised that the new tax rules for individuals are nothing short of Orwellian squared with the requirement very soon to make statements of wealth to a new Wealth Register and the right of the tax authorities to enter your home and conduct searches etc. There is even talk of granting tax free thresholds if credit cards are used for all expenditures.
Greece is an experiment , a can kicking exercise and an attempt by outsiders to aset strip the place all in one go.
In the short term there are profits to be made from trading her bonds while Germany props up the show but in the long run reality will assert herself either through exhaustion or a black swan the size of ex Prime Minister Venizelos.
The current political show simply reflects the predisposition and the fixation of the politicians.......power.
My guess is that end of the year events either inside or outside Greece will see a repetition of more high drama.
Does anyone even care about Greece anymore? In this enviroment, Greece is so last year! Out of fashion and out of date.
Believe me my friend, Germany cares with a passion because if Greece leaves and starts to breathe once again, then Spain, Portugal and others won't sit around twiddling their thumbs.
That is why Germany plays it tough on the outside while continuing to hand out the cash.
That may be true but after Tsipras betrayed Greece Greece lost that tiny glow of hope, literally. Greece had the chance to show the world that it is possible to stand against the banksters and their system but when it mattered the most they caved in. Or should I say, Tsipras caved in. The EU literally sliced his balls off. In my view, Tsipras turned out to be an imposter and a coward. Nothing else.
AS a Greek American I agree with you BurningBetty 100% except the part DOES ANYBODY CARE.. Be careful what you wish for because its coming to the good old USA ( Look at DETROIT ) Varoufakis was really Greece's last hope and everyone felt good to be a Greek again.. Varoufakis in my opinion was threaten externally ( BANKSTERS) and internally by his own government.. TSIPRAS is a COWARD and it's up the Greek people to burn down the parliament and lock up all politicians.. Just like America the FEDERAL RESERVE is the master. we have not had a GOOD president since JFK!!!!
JFK wasn't a particularly good president; he just benefits from the glow of martyrology. Anything he did right, was pretty much Bobby's doing. Bobby was the smart brother. That's why the CIA had him murdered when he clinched the Democratic nomination by winning California.
JFK did so much in 2 years to list.. #1 was he was taking back the U.S treasury from the Federal Reserve and started printing money OURS...( without the PRIVATE FEDS APPROVAL or printing out of thin air) executive order 00001 that's what got him killed by the C.I.A..You are right Bobby Kennedy might have been the smarter brother but SINCE JFK all presidents have been selected NOT elected!! I hope you not one of those people who actually believe JFK was killed by Lee Harvey Oswald.. Imagine if JFK did 2 terms as President?
I'm sick of hearing about Greece and will not read any more articles about it. Fuck Greece.
Bingo!
Aww, come on q99, they speak so highly of you!
I like the idea that what happened to Greece had nothing to do with Greeks and their governments. Some outside shadowy entity fooled them into spending more than the make, piled up public debt and overpaid government workers.
I suggest it has to do with the failures of socialist-statism and the weakness of the population. Weak pessimistic people favor socialism and vote for it over and over. Venezuela is about to go into the actual starvation mode and yet I do not see any government buildings burn. Idiots.
One should never burn government buildings; only the people that occupy them.
Die neue milchkuh!
and what if Germany decides to pull out of the IMF???
That would be very interesting.
There's less chance of that than there is of me pulling out of Taylor Swift in the final strokes.
Not gonna happen.
Tsipras and other Syriza leaders
planned to lie and betray the public from the start.
The problem is a secretive system wherein an established few
can coerce and corrupt public officials.
http://www.globalresearch.ca/former-greek-finance-minister-yanis-varoufa...
Greece will implode within months. I give it 8 months tops before we start talking Grexit again, only this time there will be no "narrow misses".
They have already cried wolf too many times. Eat a bag of dick you ugly fucking greeks
Burn thru the latest pile of free money > Threaten Grexit > 11th hour stick-save > RINSE. REPEAT.
Greece is finished. Just like the Banksters wanted. Put a fork in the craddle of Demcocracy! Oh the Irony...
Greece - please, just please ! Go away already !
... I'm on my knees Greece !
Nobody cares about greeks anymore, their death might save others though. I hope they suffer long and hard for being such pussies
Firstly, HaHa.."Long and Hard"
Secondly, can we replace the word 'Greeks' in that sentence with 'Americans' and/or 'Brits'?
YES WE CAN.
Don't care about Greece.
I worry about Korea, my shoes are made in Korea. I don't buy shit from Greece, but I gotta have shoes and stuff.
I said the following on 11th July 2015, well before the bailout deal:
--
--
I was wrong, I guessed the EU were not dumb enough to fall for it ... but apparently the banks, who are the real "policy makers" in this warped version of democracy, were more than desperate enough.
And the Greek politicans were more than venal enough to take advantage of the desperation they helped create to bring it about! ... hahaha! ... no really! .... ahahahahaah!!
LOSE + LOSE! ... FAIL + FAIL ... dressed up as ... WIN + WIN!
This unaffordable public debt will in fact be 100% defaulted upon.
Theorists can claim a default was not on the cards if they like, OK, but if they want to base it on accounting and budgets, sorry, ... hahaha! ... that's funny stuff.
it's just a game of musical chairs, or who has to pay the bill in the end. With all their theater and drama up to now they just gained the time they needed to move it from the banks on the back of the euro-peons, so any time is good from now, but since it worked so good now they want to play another round at it and make the shitpile higher before it happens.
Greece has survived a lot worse in its history. They are just engaged in a fear trade, unable to cut a loss at the moment. Next step ----->> FORCED AWARENESS.
Then they'll drop their position.
Man, these ZH comment threads are truly going to shit.
Greece was front page news for a long time - too long. It's so yesterday now.
So now we see that the target all along was not "Greece" the nation -- what do nations matter any more anyway? It was possession of the Greek banks. The big Eurobanks -- BNP, Credit Suiss, DeutscheBank -- are on the rocks due to the losses of the Banking Crisis and Great Recession. Things aren't getting any better and won't. THERE IS NOWHERE LEFT TO EXPAND ON A FINITE GLOBE. The only way that the banksters can continue to survive is by cannibalizing other members of the System.
Greece is rich compared to the little African countries, Asia is in Chinese territory, and Latin America belongs to the U.S. when it isn't busy nationalizing private assets under its long leftwing tradition. So, run the Greek banks into the ground by instigating a long bank run, make it all look "political" by blowing smoke about the supposedly bankrupt government, then move in and take over the Greek banks, haircut to the former owners and big depositors. Shove the losses off on some competitors, grab the existing assets, and use them to prop up the shaky edifice of European banking.
Yeah. And now we understand both why we all said that Syriza's only way to hold on to independence was to nationalize the banks, and why Tsipras wouldn't do it. Because they're a poison pill. He probably knows a lot more about the skeletons on their balance sheets than their would-be Euro owners. Cleaning them up was a job he wasn't prepared to manage, and once it's all blown over and the Eurobanks have taken charge . . . . a future, REAL leftist government can still nationalize them. But it's a lot easier on domestic politics, to nationalize foreign property.
I gave up on this shitshow months ago.
It was fun at one time, now it's just painful to watch/read.