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Greece Next Next Steps
With the Greek tempest-in-a-teapot about to hit Whale-size, as Tsipras says he will not join the coalition and Venizelos says that Syriza's participation is a prerequisite (via Bloomberg), it seems now would be an opportune time to look forward (not backward at the GGB2s dropping below EUR17 for the first time ever!). As we were among the first to state that their would be a second (if not more) election in Greece, we look at the schedule of events in Europe over the next few weeks (including the payments due on the PSI holdout bonds), and discuss the scenarios and consequences of a Greek exit (for both Greece living without Euro support and the Euro-zone coping with a Lehman-event).
Via UBS:
Bank Of America: Hot topic: Dra(ch)ma
In a former piece analyzing scenarios for the euro area (here), we highlighted that in order to stabilize the euro economies, the euro area needed to address its three main problems: a beleaguered banking sector, sharply deteriorated fiscal positions and weak EU institutions. We believe all three are inter-related and should be dealt with in a coordinated manner. Six months down the road, we have a look back at the extent to which these problems have been addressed and how the euro area could tackle a Greek disorderly default scenario. We find the euro area has so far failed to make meaningful progress on the banking sector, has not strengthened EU institutions materially and in particular in the case of Greece made little progress on the fiscal position. Therefore the threat from Greece remains real, and Greece exiting the euro area would likely have contagion effects that cannot easily be addressed in the current set-up.
Timeline of events for Greece
The next weeks are crucial for Greece, as political paralysis could threaten the new program, potentially triggering tail risk scenarios that could eventually result in an exit from the euro area. New elections in June (10 or 17 June) appear very likely, but it remains unclear whether these would deliver a government that implements the agreed-upon program, or even a government at all. At this stage, based on media reports, in our view two options still appear to be on the table: a coalition led by New Democracy that allows for further muddling through, and, with similar probability, a government led by Syriza that refuses the Troika program and eventually is forced by a collapsing economy to exit the euro. A low probability scenario would be a temporary exit, as that would implicitly include support from the EU.
Consequences are not only for Greece but also for the euro area
There are two streams of events and policy responses when analyzing the consequences of Greece exiting the euro area. One is how Greece copes with the exit – which is important, as it will make the government follow a harder or softer stance when trying to negotiate with the Troika. The other is how the euro area ring-fences itself to avoid a Lehman-type – or worse – event.
Greece: living without euro support
Before Greece decides to default and eventually exit the euro, the country could face the temptation of closing its budget deficit by using IOUs to pay salaries and fund a bank recapitalisation, which risks establishing a shadow currency. How long Greece could be within the euro and live with its own internal currency is an open debate. The main issue in our view, would be that this domestic shadow currency would not enable Greece to fund its current account deficit, making it likely that Greece would default on its external debt (about €370 billion including portfolio and other foreign investment liabilities).
In the event of a default and an exit scenario, Greece must reintroduce its own currency and ensure the proper functioning of its banking sector. Failure to meet its payments would put Greece into default position, the effects of which could in our view result in the following:
- Deposit flight would be very likely (not only in Greece but possibly spreading to other peripheral banks). Indeed, Greek banks have already lost 30% of heir private sector deposits since their peak in late 2009.
- Greek banks would likely require an immediate recapitalization and face a liquidity shortfall, given that Greek debt would no longer be eligible as collateral for ECB operations (through Target 2 Greek NCB owes about €109bn to the ECB; although the ESCB holds c.€50bn of government bonds directly through the SMP). And, the ECB would likely veto the Emergency Liquidity Assistance (another €60bn) following a default, again making an exit from the euro area likely following a default.
Euro area: coping with a Greek Lehman
Contagion could follow quickly, through two channels: the banking sector, and the fear of other countries defaulting on their debt. As recent data show, adjustment in Portugal is proving difficult, particularly due to weak growth. Ireland could also be affected, especially in the context of today’s slower global growth environment. Contagion would imply that Italian and Spanish yields, already under pressure, could rise further.
Policy response
In the event of a disorderly default, the euro area would be expected to proceed with forceful policy actions. We believe the euro area would need to use all policy tools at its disposal. Given the contagion risks to large countries, the piecemeal approach with limited commitment would have to be replaced by the “full bazooka.”
- The ECB could cut rates to 0.50%, and renew its liquidity provisions (most likely in the form of another 3-year LTRO); The ECB would probably have to commit to buy unlimited amounts of Spanish and Italian government debt to stop contagion to these countries. This commitment would have to be supported by all remaining euro area countries to be credible and require a renouncement of the ECB’s effective senior creditor status.
- Major central banks could open currency swap lines to avoid funding problems in major currencies, as during 2008/09, but possibly at lower costs.
- Banks would have to be ring-fenced, via deposit guarantees and capital injections, over and above the ECB’s liquidity support described above. This would possibly entail state injection of capital (even if only in the form of promissory notes), ie, nationalization, or European money (euroization). The deposit guarantee would have to be backed jointly by euro area governments to be credible.
- A European funded bank recapitalization, a European deposit insurance scheme, as well as the ECB’s purchases of government bonds would require further surrendering of fiscal power to the European Commission.
- Capital controls would potentially need to be introduced between the euro area and the rest of the world. Such controls are allowed under special circumstances that could threaten stability, and the scenario under consideration clearly qualifies.
- Going forward, the fiscal stance as well as other economic policies (such as industrial policy) would have to be redesigned at the euro area level to ensure growth could kick start as quickly as possible
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DEFAULT!
Can one "take steps" while in FREE-FALL?
Ya know, its getting harder and harder to read these Euro stories. With all the acronyms, its worse than reading a military disinformation (5:00 O'clock Follies) briefing chart. Can't they just declare it all under the Reichsbank and be done with it? Much quicker reading and saves ink for the FED.
The two greatest words in the English language!
"DE-FAULT!"
"DE-FAULT!"
"DE-FAULT!"
The two most confused words on ZH, there their. Must have been a Math Major, or Maths as we say in UK..
Mrs.Carberry: Fecking Greeks!
Colm: It isn't the Greeks, it's the Chinese he's after.
Father Ted: I'm not after the Chinese!
Mrs.Carberry:I don't care who he gets as long as I can have a go at the Greeks. They invented gayness!
I know...its all imploding, but nevermind all is well for today...and tomorrow and tomorrow.
We interrupt this logical news with a bulletin.
The FED printing press is out of ink and paper. Dow is back negative. Carriers have been dispatched to your local office depot. Beware of men in black frantically buying supplies.
That is all.
The fact this market is green shows just who is running it 100%...
Eat shit and die Bernanke!
You would think all the commentators and talking heads would say.
"You know this is a bunch of BS."
Greece is dead - Spain is dying - and crooks run the "good" bank of JPM.
The market should have sold off like funnel cakes at the fair.
And the most insane idea of the year so far...
U.S. lawmakers push for tactical nukes in S. Korea
http://english.yonhapnews.co.kr/news/2012/05/12/0200000000AEN20120512000...
That's gonna go so well with China and NKorea, I can already feel it...
In other news...
DeKalb officer investigated after allegedly kicking pregnant woman in stomachhttp://www.wsbtv.com/news/news/dekalb-officer-investigated-after-alleged...
U.S. Concerned Netanyahu, Mofaz May Attack Iranhttp://www.israelnationalnews.com/News/News.aspx/155690#.T6zqzeg7VEN
Oops! Air Force Drones Can Now (Accidentally) Spy on Youhttp://www.wired.com/dangerroom/2012/05/air-force-drones-domestic-spy/
Accidentally my ass.
US Defense Secretary: Intelligence Reports Indicate Al-Qaeda Presence In Syriahttp://www.rttnews.com/1883528/us-defense-secretary-intelligence-reports...
How long before we have to go ``save Syria from Al-CIAda``?? Oh wait, we put them in power in Libya...
Banks prepare for the return of the drachmahttp://finance.yahoo.com/news/banks-prepare-return-drachma-083804551.html
Baby, 18 months old, ordered off plane at Fort Lauderdale airport
http://www.wpbf.com/news/south-florida/Baby-18-months-old-ordered-off-pl...
Psychopath cops beat homeless man to death
http://www.youtube.com/watch?feature=player_embedded&v=8JXPpfgbe_I
Puppycide in Fulton, MO
After kicking in doors, killing a family pet, pepper-spraying and attempting to kill two caged puppies, and generally terrorizing a neighborhood, the only charge filed against the Fulton man was misdemeanor marijuana possession. He was released the same day.
http://www.keepcolumbiafree.com/blog/puppycide-in-fulton-mo/
But eh, keep voting folks, it'll solve everything!
Border Controls...
The Schengen Agreement is dead
Tylers:
You all forgot to circle May 20/21 for AAA missle launches over Chicago.
When this article says "European" followed by "funding" or "recapitalize" it means German, right?!
It only gets bitter from here...
Does anyone know how the Euro denominated mortgages will be handled - if they call a bank holiday and start paying everyone in a devalued Dracma - are the mortgages devalued or will they have to eat the 50% higher service payment and the mortgages stay in Euro's? Curious...
How it will work is they'll devalue the Dracma/Euro by 50% but to off-set that they'll (occupants) only be able to live in 50% of the house... There, fixed...
You all are buying into the sell side meme that Greece must leave the Euro.
Why? Suppose they have new elections, the far left takes over, tears up the agreement AND STAYS IN THE EURO? Suppose they stay? Why not stay? They owe the money whether they leave or stay. No creditor will allow a redenomination of debt to Drachmas, so why leave.
What is going on is the sell siders are DESPERATE for the Euro to go up. If the burden of Greece were removed, it would skyrocket.
This is all bullshit we're seeing. Greece has no reason to leave. The far left government could tear up the agreement and refuse to cut budget and then point out that 95% of each tranche from the EU goes to EU banks (loans to Greece from the IMF and ECB) and if they cut off Greece's tranches, then those loans don't get serviced. So they can play hardball on this and again . . . why leave the Euro?
Why leave the Euro? Because it is too strong for their economy and they need to devalue. I agree, the LAST thing Germany wants is a stronger Euro, but at this point, it isn't up to the Germans, it's up to the Greeks to decide what they do with their economy. Being indentured servants to the ECB with no growth and abject poverty for the next 30 years is probably not in the Greek's best interest however.
Are the Greeks lying corrupt weasels? Yes. But for every contracting party there is a counter party, and nobody forced those banks to loan the money to the corrupt Greeks.
But you missed the point.
Leaving the Euro doesn't change anything for Greece. They Can't Redenominate Debt. They owe it. They have to pay it. In Euros.
If you were a creditor owed 100 billion Euros and the Greeks told you, "we're changing that debt to Drachmas at XXXXX D per Euro", you would say NO! The contract is written in Euros and so it will remain.
So Greece has nothing to gain by leaving.
And if Greece says no. What then? You enslave their people?
Says no to what? Remaining in the Euro? Polls say 80% want to remain in the Euro. What do you mean they are saying no to?
What they said no to was the bailout conditions. Not the Euro.
Are you saying that they insist on making their payments in Drachmas? The creditor can shrug and say I need XXXXXXX Drachmas for this payment, not YYY Drachmas, because your Drachmas are only equal to X Euros. Greece says no. The creditor goes to court, wins and Greece has to pay.
If they don't, then they don't get oil allowed in.
it's more like an old school chapter 7 flush- today you have 350bln euro in debt, tomorrow you are debt free and the counterparty eats it- hey it's a write off... free money all around. they can barter for oil direct from iran until they get those off shore oil fields producing... which by the way, is the real reason germany wants greece in bondage... they get the juice, the precious juice.
so greece has EVERYTHING to win and nothing to lose.
Much easier than that. You refuse to ship them any food medicine fuel equipment, metals etc. unless they pay in cash ($ or EUs). But they don't have enough EU or $ reserves, so checkmate. That's what happened in the Argintina default, but Argiintina had lot of natural resources, food, metals, oil etc, so they could survive. Greece, not so much.
Moral: if you want to stiff your creditors you better be self-sufficient, applies to companies and also individuals. If you're lazy and self-indulgent with a bloated public sector (i.e. Greece) your'e in trouble. So, maintain your most valuable asset, your competence in technical areas required to live.
The Greeks can dafault and say "F You". Iceland said "Pound Sand" and got debt repayment terms based on GDP performance. Why wouldn't the Greeks do the same with their own currency which gives them economic freedom over their own country?
No pilliage. They can't.
There is no bankruptcy court for sovereigns. Iceland's situation was not sovereigns. It was British deposits in Iceland banks that went under.
Greek debt is Greek GOVERNMENT debt. Completely different thing.
If the Greeks say We Default! We aren't paying (note that after the PSI they owe mostly the ECB and IMF now), then the ECB and IMF shrug and say we don't recognize your default, you still owe the money and you will pay, and if you do not, we will put a surcharge on your 400,000 barrels per day of oil imports and that surcharge will make your payments.
And so, Greece can default, but it won't mean anything. They have to pay. There is no bankruptcy court to expunge their debt.
And so again . . . I point out there is no reason for Greece to leave the Euro.
With that logic, then the Argentinian Government couldn't default in 2001 either...However, they did...
So, you think the EU will roll tanks into Greece and force them to pay in hard barter or gold? Gas? Oil? I bet on Greece telling them to suck it, and a total renegotiation with a new currency.
A country can default and it has happen time and time again in history. Have you heard of Brady Bonds? Do you know why they were set up? Hint: Think LATIN AMERICA. No one is going to make them pay in oil or gold or anything else. You can as a sovereign walk away from your debts. Are there major problems with that? Yes, of course there are but it can be done, and as time goes on, it will look a hell of a lot better then what the Greeks are going through now.
Have you BTFD? YFI!
true enough, no bk court for sovereigns... which just means there is no one to tell them "no". they simply exit the euro conventions and recant the accords and they are free.
everything to win and nothing to lose.
Look at the Yeoman like work put in by the FED printing press on JP Morgan.
Average Volumn 30,060,000
Today 165,000,000 and counting.
This will surely go down in the Jedi mind trick hall of fame.
So someone tell me which cds we should sell out of pur portfolio if we want to shove that dildo a little further up jamie dimons ass
Can the rest help buy buying FAZ? Shorting jpm? Selling specific bonds in the bond portion of a personal portfolio? What can we do?
So the problem is - what they lose - the FED gives right back. Today alone 4 billion in stock purchases to keep the stock from dropping more than 10%. Come monday, they will buy more.
Shorting the stock I don't think works in the short term. To many talking heads saying what a wonderful leader Dimon is and how the company is on track to make 4 billion a quarter.
The kick the big bully in the nuts play has not yet materialized. If it is - it is a long long play in metals and it may not show itself for a while.
Maybe take a look at their warrants and think about shorting them.
Sorry Joe, but Im guessing you don't have the abillity to keep Dimon up at night. JPM has $150bbn of market cap, $184bbn of book equity and $2 TRILLION of assets. They make enough revenue in 7 days to cover their $2bbn loss.
Even if you just focused on FAZ - it trades 15mm shares a day = $350mm.
Of course i dont have enough but collectively we can. Some of us are willing to sell bonds and buy back our hedges if we knew which specific ones and i am getting conflicting advice. Somebody surely has a hedge fund buddy out there
Much easier for Greece to print directly the euro notes needed in order to pay their bills. They have the tools to do that (printing press etc), with the aid of a compliant central bank governor. The ECB could then declare that certain series of euro notes (those printed by Greece without the ECB consent ) are fake, but that would surely freak everybody in Europe, (plus the need to quarantine Greece in order to avoid the fake/unauthorized notes to reach other countries)
We often hear talk of forming a bad bank whereupon all the toxic debt is piled and a good bank which receives all the revenue generating items. Then, the bad bank is imploded and all the bag holders cry at having no recourse. Meanwhile, the sharks that split with the prize are fully satisfied and ready to feast upon fattened whale the next go-round.
Is it too late to divide the nation of Greece into two. Create a new state - Macedonia which encompasses all of Greece except for a newly created island-nation-state of Tinos. Upon that new little island nation state pile all of the pension and public debt of former Greece. If Tinos were outside the EU, her default would not harm the power of the Euro as Tinos will move to recapitalize the debt in TDrachmas. Banks get to cleanse their books, a scapegoat is created, and the paper mill can get back to printing.
Granted I don't now squat. Oops, the short bus is leaving without me...Peace out.
It's a legitimate question and is often suggested as a solution. It usually falls apart because one man's debt is another man's asset. Whoever is the counterparty of the paper put into the bad bank will object IN COURT to the process.
In general, relevant parties have to agree to change ownership of an asset, and there is also the very significant problem that a "bad bank" is still a bank and has to comply with reserves requirements. If all it has are valueless assets, then it does not comply and the maneuver can't take place.
Look. There IS no solution other than the Greeks dropping out. The Keynes solution is dead. Krugman still advocates MORE borrowing and stimulus spending, but the TRUTH is that governments never pay down the debts when things improve, They borrow MORE!!!!!! It is the Keynesian debt-death spiral.
http://confoundedinterest.wordpress.com/2012/05/11/greece-fails-to-form-unity-government-us-treasury-yields-fall-again-its-all-greek-to-me/
FYI, from www.bankingnews.gr : 11/05/12 - 19:52
Endgame Bitchez. Greek bank looking to sell the only money making part of its operation before the lights go out at home ...
So, the Germans have two choices, the same choices they had 2 years ago.
1) Greece defaults, Germany pays off bad debts (in the trillions) and make the German banks whole (and perhaps some other EU ones too), maybe need to do the same with Italy or Spain (or both). The "Euro" (more like a Deutschmark at this point) appreciates 25% - 35% and 'poof' goes that German surplus balance of trade and competitive advantage due to trading on the back of an artificially weak currency.
2) German industry, knowing they will be screwed if they allow the currency to appreciate after a Greek default, decides to transfer money ad infinitum to the PIIGS.
Either way, Germany loses big time.
What will happen when Greece leaves the Eurozone......I am sure Obama will give them billions for rebuilding.....trillions probably...and a case or two of KY Jelly
When finally Greece defaults / leaves the Euro / declares the bankruptcy, the EUR/USD will, after a momentus drop, skyrocket.
I'm starting to sense some increased rhetoric in the MSM regarding Europe. Things are not looking good. Much of Europe is already in recession and many countries are approaching or above 20% unemployment. It's a foregone conclusion that Greece is exiting the Euro. There's a complete lack of faith in governments...I don't like what I see coming...
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