• Sprott Money
    05/26/2016 - 05:58
    How many “emergency” “secret” meetings do the central planners around the world need to have before the citizens of the respective countries begin to fully understand and take notice that something...

Forget The "Bazookas": Here Come The "Tomahawks" And "Howitzers" - An R-Rated Walk Thru The Greek Endgame

Tyler Durden's picture




 

We have already provided much cold, hard, clinical facts on the hypothetical Greek EMU exit on countless occasions before. Yet Jefferies' David Zervos has done it with such peculiar aplomb which we have not encountered before, that we felt compelled to share with it readers. Zervos' Paulsonesque 'apocalyptic' flair shines particularly when analyzing what happens at T-0, i.e., June 16, i.e., the day before Greek election day, i.e., the last Greek free call option on physical euros if all hell breaks loose: "On June 16th why wouldn't every Greek go to the bank with a sack and ask for the cash. Why hold Euros into the 17th? By that logic why not get them out earlier in case they shut the ELA pre-election. From the north's perspective, one could argue that Merkel should shut the ELA right now. Allowing the Greek people to access all their Euros physically, while still holding the option to default on June 17th, is insane. She and the ECB would NOT be acting in the best interest of the Eurozone if they let this happen - there would be 300b in Target2 losses to split up between 16 member NCBs if the Greeks choose to leave after taking out all the Euros." So where does the chaos from a Greek bank run and exit lead us, as Zervos puts it. "The end is of course ECB printing, Eurobonds and every developed market central bank dumping massive liquidity into the global financial markets as systemic risks rise - QE, LTROs, Currency swaps, and every funding facility under the sun come into play. The path to this end game will be bumpy, but make no mistake, the developed market central banks will dump so much fiat on the system to cover the losses, that risk free real rates will plummet to levels so negative that anyone left holding cash or cash equivalents will see massive destruction of real wealth. We may have to push risk assets a bit lower from here, but the global central banks will be firing howitzers and tomahawks very shortly, not bazookas! And you best be owning some risk when those bad boys are launched!!"

Of course, owning fiat-based assets in a system that is about to be drowned in what effectively amounts to infinitely more fiat, makes one wonder: what will be the point owning risk if the "currency" in which risk is denominated becomes meaningless virtually overnight?

Which is why we are happy to paraphrase Zervos: "And you best be owning some hard, real assets when those bad boys are launched."

Extracted from Jefferies' David Zervos: No ELA, No Euros! The End!

So lets "run" through the mechanics of a Greek bank run. As the Greek people begin to smell a Greek exit and a conversion of their hard earned Euro deposits back to Drachmas, they will withdraw Euros from Greek banks. So the Greek banks will head to the BoG with some dubious collateral to beg for Euros to pay depositors. The BoG takes the collateral, gives it a minuscule haircut, and draws Euros via the ELA. This of course creates an increase in BoG Target2 liabilities. The BoG then sends the Euros to the Greek bank and the Greek bank then gives the Euros to the hard working Greek depositor standing in line waiting to empty the account.

Importantly, Greek banks ONLY run out of Euros if the ECB can justify a shut down in funding to the BoG ELA facility or the Greek banks directly. Now, as we heard last week, the ECB has already stopped OMOs with 4 Greek banks (which one could safely assume are the big ones). So the ONLY thing standing between a Greek depositor and his/her Euros is the ELA. No ELA, no Euros!! And, as mentioned above, the ECB has once before threatened to turn off NCB access to Euros via the ELA in the case of Ireland. So there is a precedent for this to happen again!

Now we have to look at the conditions under which the ELA could be turned off by the ECB. Looking back to the Irish case, it was the potential for a default on senior bank debt that triggered the ECB threats to the central bank of Ireland. As the rules stand, ELA lending can only be done to "sound" institutions. So the ECB in theory can shut down all lending, including ELA, if the NCB is failing to abide by the rules. And clearly, Irish banks that default on senior debt are easily proven NOT sound!

In the case of Greece, in the middle of a bank run, will it be hard to prove that banks are not sound? Hardly! But more importantly, the soundness of the Greek banks is 100 percent dependent on the 65b Euro capital injection coming as a part of the previous government's agreement to the MoU (Memorandum of Understanding, or what Tsipras calls the Memorandum of Barbarity).

That 65b is the ONLY reason why Greek banks have a chance of being deemed sound. Without the 65b, there is no way anyone could claim the BoG is lending to sound institutions and there is no way the ECB could continue to authorize the BoG to lend under ELA.

And that takes us squarely to Mr Tsipras, SYRIZA, the MoU/MoB and the Greek election. It will be very easy for Merkel and company up north to lay out a case for an ELA shut down for the BoG if the MoU is discarded by the Greek voters via a win for Tsipras! In a sense, Merkel's phone call on Friday to the Greek president was just that. It was actually the same call that was made to the Irish president a while back - and of course the Irish balked, caving to the German demands. At that time however there wasn't an Irish presidential vote. This time, with Greece, Merkel's message is really to the Greek people. And what is that message exactly? Vote for Tsipras and I turn off the Euros. Or, in other words, choosing Tsipras means choosing to leave the Eurozone. Of course, Greece could vote for Tsipras, discard the MoU, repudiate the dni8ceebt (including Target2 debts), still use the Euro and stay in the EU - but they would become Montenegro! The chances of that however are zero. The Greeks will want to print and control their destiny if they get cut off. No ELA will almost surely bring back the Drachma. And doing so would, in Merkel's view, be the choice of the Greek people. At least that's how it will be sold to the rest of Europe.

The problem for Merkel is that the Greeks will understand this and run the banks BEFORE June 17th - it is happening right now. On June 16th why wouldn't every Greek go to the bank with a sack and ask for the cash. Why hold Euros into the 17th? By that logic why not get them out earlier in case they shut the ELA pre-election. From the north's perspective, one could argue that Merkel should shut the ELA right now. Allowing the Greek people to access all their Euros physically, while still holding the option to default on June 17th, is insane. She and the ECB would NOT be acting in the best interest of the Eurozone if they let this happen - there would be 300b in Target2 losses to split up between 16 member NCBs if the Greeks choose to leave after taking out all the Euros. If she gives the directive to shut off the ELA early she will at least keep the Target2 losses to 150b. And she will be telling the Greek people that if they vote for Tsipras, their Euros in the bank will not be available. This is a dangerous game for sure! But this way she can also blame the Greek voters for an exit, and hide behind ECB rules that imply access to funding can only be done to sound institutions. With this strategy she can have the Greeks decide on the 17th to keep the MoU, get the 65b and have access to their 150b Euros OR abandon the MoU, watch their Euros turn to Drachmas and leave the Eurozone. She didn't kick them out, they chose to leave!! Of course the few weeks leading up to the election with ELA turned off and a multi week Greek bank holiday would make for some crazy headlines.

As I said in Friday's piece, deciding what to do with the ELA for the BoG as we head into the Greek election "is the most important decision in the history of EMU". By turning it off, Merkel might scare the Greek people into complying, as she did with the Irish. By leaving it on, she makes it much easier for the Greeks to vote Tsipras and leave the rest of the zone to pay. She also makes it much more likely she will have to cave to Tsipras' demands.

The stakes are high, and while the decision is crucial for Greece, and their creditors, there are even bigger second order issues in play. A Greek run will certainly cause the Spanish and Italian folks to question the access of their respective NCBs to ECB funding and the ELA. It will be VERY hard to argue that Italian banks are sound if 100s of billions in deposits flow to Germany! And why wouldn't every Eurozone resident put their hard earned money in the safest bank possible if we start to see Greek depositors threatened? As soon as retail sniffs that there is a chance of a loss, a full scale Eurozone bank run ensues. If the Germans can turn off the Greeks or the Irish, could they turn off the Italians?

The Germans have tried to play hard ball for 3 years. Every time it backfires and the Fed and ECB have to ride to the rescue with bazookas. My money is on the Germans going to battle with Tsipras. And in the end we create a Greek exit and a bank run throughout the periphery. The endgame looks like what I described in the commentary entitled "Angie ain't it time we said goodbye". In that analysis the Italians and the Spaniards, through the chaos of bank run and Greek default, force the Germans to wrap their debts via Eurobond or some sort of system wide European bank deposit scheme. In actuality, the Rajoys and Tremontis of the world may even try to incite a run in Greece - it gets them the German wrap they have always dreamed of! Using Greece as a pawn in the big Eurobond chess game is dangerous, but likely effective!

So where does the chaos from a Greek bank run and exit lead us. The end is of course ECB printing, Eurobonds and every developed market central bank dumping massive liquidity into the global financial markets as systemic risks rise - QE, LTROs, Currency swaps, and every funding facility under the sun come into play. The path to this end game will be bumpy, but make no mistake, the developed market central banks will dump so much fiat on the system to cover the losses, that risk free real rates will plummet to levels so negative that anyone left holding cash or cash equivalents will see massive destruction of real wealth. We may have to push risk assets a bit lower from here, but the global central banks will be firing howitzers and tomahawks very shortly, not bazookas! And you best be owning some risk when those bad boys are launched!!

0
Your rating: None
 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Mon, 05/21/2012 - 17:04 | 2448838 SHEEPFUKKER
SHEEPFUKKER's picture

Something that is not worth saving must be let go. 

Mon, 05/21/2012 - 17:15 | 2448872 Race Car Driver
Race Car Driver's picture

The only wealth which you will keep forever is the wealth you have given away.

- Marcus Aurelius

Mon, 05/21/2012 - 17:21 | 2448894 francis_sawyer
francis_sawyer's picture

Here come the pea shooters & potato guns!... Run for your lives!

Mon, 05/21/2012 - 17:28 | 2448908 Shocker
Shocker's picture

We have been talking about Greece and others for months now. If the problem was solvable don't you think it would of already been done?

The problems Globally and in the US are so major, there is no 'real' solutions.

Things can work towards getting better, but not until we actually come up with some real long term solutions.

Even though we talk about Greece, others all the time, talk should also be about what is happen in the US economy.

http://www.dailyjobcuts.com

-

Mon, 05/21/2012 - 20:54 | 2449354 GeorgeHayduke
GeorgeHayduke's picture

The collapse in Greece gives people a scapegoat to blame instead of coming to the realization that much of the so-called economy of the past 20-30 years or more (likely since at least that buffoon Reagan) has been an unsustainable, paper shuffling fraud.

Maybe the mantra of endless growth really is just a myth and Greece with its well known ancient mythology is a perfect place to kick off the death of this modern mythology. The myth likely will die hard with many apologist economists and ideologues fighting to keep the myth alive, but reality really doesn't care about that. The final outcome is inevitable.

Mon, 05/21/2012 - 22:19 | 2449547 tempo
tempo's picture

Never let a crisis go unused...More Government, more regulation, controls and power for the elite. They always win.

Tue, 05/22/2012 - 02:33 | 2450004 the tower
the tower's picture

"Maybe the mantra of endless growth really is just a myth"...

Maybe?

Every man and woman on this planet driving a car, owning 3 iDevices, going on 3-4 holidays a year? Really? 

The West has been great at keeping wealth to itself, "defended" it with all it's might. Many of the wars "fought over oil" were actually wars to destabilize regions with the sole purpose to set them back so wealth stays concentrated in the West.

This has ended. Wealth is spreading therefore the game is over. Growth is not endless, a new system is going to replace the old. This is the time we live in.


Mon, 05/21/2012 - 17:32 | 2448919 HarryM
HarryM's picture

Custards last stand perhaps

but they are going down swinging and have no choice but to take us down with them

I suspect the market may recoup everything lost in the last 4 weeks by the end of this week.

 

Mon, 05/21/2012 - 18:14 | 2449022 Betty Swallsack
Betty Swallsack's picture

Not sure what fight custard was involved in.  Perhaps a cafeteria style food-flinging fest.  General George A. CUSTER's famous fight had to do with a kerfuffle at Little Big Horn.

Mon, 05/21/2012 - 20:48 | 2449339 unrulian
unrulian's picture

Custard was a pussy

Mon, 05/21/2012 - 20:52 | 2449349 disabledvet
disabledvet's picture

But Mustard wasn't. That Colonel did in the Library with a candlestick from what i hear...

Mon, 05/21/2012 - 21:04 | 2449378 francis_sawyer
francis_sawyer's picture

@unrulian

anyone who can quote Sam Elliott gets a +1 from me...

Mon, 05/21/2012 - 23:40 | 2449697 HedgeCock
HedgeCock's picture

Yeah, everyone knows custard is soft.  

Mon, 05/21/2012 - 21:19 | 2449416 akak
akak's picture

"Custard's Last Stand" --- sounds like a great name for a chain of ice-cream shops to me!

Mon, 05/21/2012 - 23:54 | 2449721 StychoKiller
Tue, 05/22/2012 - 02:40 | 2450033 tenpanhandle
tenpanhandle's picture

One on every reservation.  Speciality - scalped macaroons and shaved sniz.

Mon, 05/21/2012 - 18:24 | 2449053 El Tuco
El Tuco's picture

Sometimes all you got left is your style.....so if you're going down for the count make it good....

Mon, 05/21/2012 - 19:51 | 2449208 HungrySeagull
HungrySeagull's picture

That may be so.

The open wound channel the size of a soft ball will be rather difficult in the morning though.

Make em hurt enough so that they will remember you and think twice about doing it to some other schmuck.

Mon, 05/21/2012 - 20:00 | 2449240 francis_sawyer
francis_sawyer's picture

I was always kind of fond of the 'Triple Lindy'...

Mon, 05/21/2012 - 20:15 | 2449277 The Limerick King
The Limerick King's picture

 

 

Doomsday in Europe is soon

Banksters will print to the moon

You better get gold

The kind that you hold

It's gonna be handy come June

Mon, 05/21/2012 - 21:09 | 2449391 francis_sawyer
francis_sawyer's picture

I lived in Italy for 12 years (Umbria)... The E45, which cuts up central Italy from Terni to Cesena had this little patch that was always closed for about a 12 mile stretch... As you exited for the detour, there was a sign that said "APERTO GUIGNO" (open in June)...

Nobody ever knew which June they were talking about... After 12 years, I moved back to the US... 5 years later I went back to visit & the sign was still there & the road still wasn't open...

Patzienza!

Mon, 05/21/2012 - 22:34 | 2449582 THX 1178
THX 1178's picture

Apocalypse Europe is nigh

Money printing will certainly be high

You better buy silver

The kind you can... uhhh

I'll never be good as you (sigh)

Tue, 05/22/2012 - 02:49 | 2450045 tenpanhandle
tenpanhandle's picture

 

 

Apocalypse Europe is nigh

Money printing will certainly be high

You better buy silver

The kind they don't deliver

and be a good ol' boy drinkin whiskey & rye

 

Tue, 05/22/2012 - 05:51 | 2450155 Mitzibitzi
Mitzibitzi's picture

Apocalypse Europe is nigh,

Money printing will certainly be high,

But when they come for your gold,

They'll smugly be told,

My boat sank, so now it's bye bye.

Mon, 05/21/2012 - 22:34 | 2449585 potlatch
potlatch's picture

I'll go with Achilles' Last Stand -- aka "the wheelchair song" . 

 

Custard Pie is too happy a song for this matter we are... wait, how come I am thinking of Led Zeppelin?

 

 

Mon, 05/21/2012 - 17:34 | 2448928 Sudden Debt
Sudden Debt's picture

Let me give you my account number my dear good friend and just go nuts :)

Mon, 05/21/2012 - 18:21 | 2449047 Gully Foyle
Gully Foyle's picture

Race Car Driver

GENEROSITY
Zen master Ryokan (1758-1831) lived austerely and simply in a little hut below a mountain. One evening a thief visited the hut only to find nothing there to steal. So he went off into the night. Ryokan caught up with him: “You may have come a long way to visit me, and you should not return empty handed. Please take my clothes as a gift.” The bewildered thief took the clothes and slunk away. Ryokan sat naked, watching the moon. “Poor fellow,” he mused, “I wish I could give him this beautiful moon!”

Mon, 05/21/2012 - 21:02 | 2449375 BigJim
BigJim's picture

Later that evening Ryokan froze to death.

Mon, 05/21/2012 - 22:37 | 2449591 potlatch
potlatch's picture

umm, yes?  and your point is?

Mon, 05/21/2012 - 17:07 | 2448848 YesWeKahn
YesWeKahn's picture

X rated materials garranteed once Greeks are leaving the euro.

Mon, 05/21/2012 - 17:07 | 2448850 bob_dabolina
bob_dabolina's picture

Germany leaves eurozone goes back to the marc. Remaining ez nations issue euro bonds.

Win-Win.

Mon, 05/21/2012 - 17:15 | 2448882 walküre
walküre's picture

Germany is lucky to come out alive a 3rd time when this shit show is over.

Same as it ever was.

Mon, 05/21/2012 - 17:30 | 2448914 ATM
ATM's picture

Ain't going ot happen. The hwole point of the Euro was so that the German's could control the funding source for their exports to the rest of Europe. They were sick and tired of lending to the Greeks, Italians, Spanish only to be paid back with worthless paper.

The end result is going to be a Federalization in Europe and money printing. Lots of money printing.

Mon, 05/21/2012 - 17:42 | 2448922 bob_dabolina
bob_dabolina's picture

They were sick and tired of lending to the Greeks, Italians, Spanish only to be paid back with worthless paper.

worthless paper vs. worthless promises; same diff/no diff

In my thesis the Germans would be lending to nations backed by private/public investment via eurobonds.

Win-Win

Mon, 05/21/2012 - 17:58 | 2448988 Segestan
Segestan's picture

If only they had demanded payment in Gold, no need to deal with these clowns . Instead they have a foreign power holding their gold. Oh well,  I quess that was one of the casualties of losing a war.

Mon, 05/21/2012 - 18:05 | 2449005 francis_sawyer
francis_sawyer's picture

They shoulda given Oppenheimer a few more black beauties... Oh well...

Mon, 05/21/2012 - 21:50 | 2449491 Marginal Call
Marginal Call's picture

If they had demanded payment in gold, then they don't sell any Mercedes or BMWs to Club med.  It defeats the point of vendor financing, which is to keep selling shit even though everyone is broke in the hopes they can pay some day.  No vendor sales = bust.  Vendor financing = can kicking.  Club Med default = vendor bust.

Mon, 05/21/2012 - 18:46 | 2449082 bobola
bobola's picture

(posted 3 hours ago online)  Secret €100bn aid props up Greek banksBy Ralph Atkins in Frankfurt;

http://www.ft.com/intl/cms/s/0/a7087224-a360-11e1-ab98-00144feabdc0.html

There has been no official announcement. No terms or conditions have been disclosed. But Greece’s banking system is being propped up by an estimated €100bn or so of emergency liquidity provided by the country’s central bank – approved secretly by the European Central Bank in Frankfurt. If Greece were to leave the eurozone, the immediate cause might be an ECB decision to pull the plug.

Extensive use of “emergency liquidity assistance” (ELA) to help banks in the weakest economies has been one of the less-noticed features of the eurozone crisis. Separate from normal supplies of liquidity and meant originally as a temporary facility for national authorities to use when banks hit problems, ELA proved a lifesaver for the financial system Ireland and is now even more so in Greece. As such, it has given the ECB – which has ultimate control over the facility – considerable power to determine countries’ fates.

Mon, 05/21/2012 - 19:11 | 2449124 Master Pimp
Master Pimp's picture

now we are talking!

See Tyler, no german arschenhalle can touch our deposits!

We greeks are the supreme pimps of finance!

do you see what happens with JPM CEO and CIO> They are all Greeks!

At the end of the day, Germany still owes as hundreds of tonnes gold, war reparations, etc!

our  money is insured by the ECB so you can all say anything you want, but they are obliged to guarantee our deposits up to 100K

we were paying isurance premium all these years

ECB and Budesbank can go sodomize each other, oK?

Greece is the last land responsible for the current economic mess!

Bundesbank knew the consequences of their queer euro experiment right  from the start

It is all a fascist plan to steal our trillion dollar oil and gas!

but at the end, German banks and industries are going to take it up the arschenhalle!]

and tsipras will rim with him fist schauble and merkel

 

Mon, 05/21/2012 - 19:45 | 2449197 crouton
crouton's picture

+1 Brüno

Mon, 05/21/2012 - 19:14 | 2449132 trebuchet
trebuchet's picture

this was reported on bankingnews.gr over the weekend

 

EFSF is stepping in with liquidity assistance which will rollover ECB funding /keep ELA open so atm it looks like people are playing musical chairs with their money to cover the growing withdrawals from Greece. 

 

The article commented on "whay wait till the 17th/16th/15th?" The answer is the unecertainty of whether the govt/currency holds.

 

but the end game is clear for all: not enough eurodeposits ACROSS europe to cover the capital needs, so yes, more liquidity pumping is coming. 

I said this a week ago, oh well.... 

 

 

Mon, 05/21/2012 - 22:24 | 2449556 RockyRacoon
RockyRacoon's picture

Oooh!  A prophet.  Tell us what is happening next week so we can prepare.

Mon, 05/21/2012 - 23:22 | 2449667 MsCreant
MsCreant's picture

Youse a funny Rocks!

Mon, 05/21/2012 - 19:36 | 2449178 BKbroiler
BKbroiler's picture

They were sick and tired of lending to the Greeks, Italians, Spanish only to be paid back with worthless paper.

Right on.  Talk about a plan that backfired.  Contagion is a bitch.

Mon, 05/21/2012 - 20:33 | 2449306 eaglefalcon
eaglefalcon's picture

The Germans could have demanded a collateral for the loans. Dismantling the Acropolis and moving it to Pergamon museum would be a good plan.

Mon, 05/21/2012 - 19:42 | 2449192 Umh
Umh's picture

Are you really saying that everyone in the Euro except Germany is an idiot?

Tue, 05/22/2012 - 08:29 | 2450325 goldinpenguin
goldinpenguin's picture

The PIIGS have been pulling down the euro aiding German export pricing.If the Euro goes blooey and the Germans have to go back to a Mark on steroids (the Uber-Mark) then the Greeks and the other little PIIGS will have pulled the Germans into the pain fest. It's German jaw-boning vs Greek black mail.

Mon, 05/21/2012 - 17:08 | 2448851 CPL
CPL's picture

Can't click the buy button on buying gold fast enough on kitco.com.

Mon, 05/21/2012 - 18:59 | 2449109 Shocker
Shocker's picture

The tax kills the deal everytime, same with shipping prices.

Do NOT follow this link or you will be banned from the site!