Wednesday 22 February 2012

Greece - the mainstream view


The mainstream view
Greeks will suffer for five years as part of resolving eurozone crisis
Scale of cuts required to implement rescue package prompted analysts to raise spectre of another debt crisis later this year

21 February 2012 19.59 GMT

Greeks will suffer austerity measures for another five years as the price of their government securing a €130bn (£109bn) bailout to prevent national bankruptcy and chaos within the eurozone, it has emerged.

The scale of the wage and spending cuts required to implement the rescue package prompted an array of analysts to raise the spectre of yet another Greek debt crisis later this year and the country's exit from the euro as recession deepens.

But Olli Rehn, the EU economic and monetary affairs commissioner, said Greece had lived beyond its means for a decade and savage cuts in labour costs were vital to restore competitiveness and growth.

The Greek prime minister, Lucas Papademos, and finance minister Evangelos Venizelos talked up the agreement, reached after 14 hours of talks at 5am on Tuesday, as "avoiding a nightmare scenario."

José Manuel Barroso, the European commission president, said the deal "closes the door on an uncontrolled default, with all its economic and social implications that would mean chaos for Greece and the Greek people." The deal helped push the Dow Jones index in New York over 13,000 for the first time in almost four years.

Senior EU officials admitted, that, after enduring wage cuts of 30% since 2009, Greeks would suffer a further 15% reduction in the next three years and even more cuts would be required after that.

The country's economy, which contracted by 7% last year, is forecast to decline by a further 4.5% this year, stagnate in 2013 and then grow by 2% in 2014. But officials conceded that the Greek rescue programme is "accident-prone" and their forecasts are high-risk. Greece has been in recession for five years, losing 17% of its GDP.

Unemployment, now running at around 20%, is expected to remain above 18% this year and next, be just below 17% in 2014 and still be above 15% in 2015.

The Greek government has barely a week to implement tough "prior actions" to release the next tranche of loans enabling it to pay €14.4bn of debt by March 20 and securing final eurozone approval for the second bailout within less than two years.

These include legislation to set up a blocked account to ensure that EU/IMF loans are used to service debt, not meet current spending on health, pensions and the like.

Thereafter, subjected to unprecedented budgetary surveillance by an increased posse of inspectors and advisers, Athens will have to find further savings equivalent to 5% of GDP by the end of 2014.

Rehn indicated this could be eased by a clampdown on tax evasion, aided by officials from other EU countries. They and others are to be permanently stationed in Athens to "further strengthen Greece's institutional capacity".

The UK government welcomed the deal. David Cameron said the next step was "constructing a firewall large enough to prevent contagion within the eurozone."

European diplomats indicated that next week's EU summit would be asked to endorse proposals to merge the lending capacity of the existing eurozone bailout fund, the EFSF, with that of the new European Stabilisation Mechanism – giving a firewall of between €650bn and €750bn.

This is short of the €1 trillion suggested by eurozone leaders last autumn or the €2trn foreseen by markets. Christine Lagarde, IMF managing director, held out for EU commitments on this firewall before committing her organisation to a contribution to the Greek bailout.

Wolfgang Schauble, the German finance minister, said, the IMF share would be just €23bn, including €10bn rolled over from the first €109bn Greek rescue package. This is short of IMF loans to Portugal and Ireland but may be a sticking point for non-euro IMF members such as Britain.

George Osborne, the chancellor, said at a meeting of all 27 EU finance ministers: "Of course resolving the Greek situation is only part of resolving the eurozone crisis but I think we took a really significant step towards that last night and it's good for Britain because resolving the euro zone crisis is the biggest boost Britain could get for its economy this year.

"The important thing about this deal is that they have tried to get Greece into a reasonable place vis-a-vis its debt sustainability. That's been the crucial missing ingredient." The deal is designed to cut Greek debt to 120.5% of GDP by 2020 from the current 160%.

This breakthrough was provided when Jan Kees De Jager, Dutch finance minister, persuaded Schauble to back a scheme for the ECB to release its profits on its holdings of Greek debt to national central banks to lend onto the EFSF.

This helped governments reduce the interest charged to Greece for its first bailout by up to 1.5 percentage points.

Private bondholders were leaned upon to accept an increased "haircut" of 53.5% on the nominal value of the Greek debt they hold – or 74% of the bonds' net present value. They agreed to avoid a "disorderly default".

But the deal could still unravel, with Jorg Kramer, Commerzbank chief economist, suggesting debt levels will rise as recession deepens and/or resumed growth falters.

Jennifer McKeown, senior European economist at Capital Economics, said there was a risk of a eurozone exit later this year because of the austerity measures, social unrest and deeper recession.


From Zero Hedge...
For Greece, "Tomorrow" Has Arrived


21 February,2012

Submitted by Mark Grant, Author of the Financial Commentary: "Out of the Box"

Tomorrow Has Arrived
The day dawns with a deal for Greece that is full of smoke and mirrors; lies and deceptions. It is a deal pretty much as expected and, as I have said before, now the realities are going to be confronted. Europe has spun the agreement and the Euro has rallied some and the S&P futures are up but the next few weeks, I am afraid, will hold some serious disappointments. The page turns today because now we are about to confront not what is told to us but the actuality of what has been presented to us and just what will happen as a result.

How many European Union officials does it take to change a light bulb?
None. There is nothing wrong with the light bulb; its condition is improving every day. Any reports of its lack of incandescence are an illusional spin from people that unfortunately know how to add and subtract. Illuminating rooms is hard work. That light bulb has served honorably, and anything Mark Grant says undermines the lighting effort.

The Smoke and Mirrors
The IMF has not yet stated what its contribution will be to Greece and will not, they tell us, until the middle of March so that we will not know until then the real size of the bailout. The much promoted $176Bn bailout may not be accurate if the IMF pulls back on their allocation.

The projections for the growth of Greece, even in the leaked document provided by Reuters, utilize assumptions that will not be met, which has been the case every time, each time, for the last two years so that fuzzy math is being touted once again and the new/new projections will, in my opinion, come nowhere close to the truth.

The IIF agreed to further cuts last night for private investors, which no one but they have agreed to, so that shortly we will see how many institutions go along with the scheme and how many will sue as a result of the forced haircut that cuts about 74% from Net Present Value. We will also see law suits in London concerning the $18Bn of Greek debt that is governed under British law which may have quite interesting results. The Troika’s projections rest upon a 95% participation by private investors and I think they are living in a dream state if this is their expectation. In a Reuter’s article this morning they report: "The 32 members of the IIF's larger creditors' committee had a least 44 billion in euros in residual holdings.” If this is correct then the IIF is only representing 12.2% of the Greek bondholders.

The ECB has swapped their bonds with Greece and taken a senior position to private bond holders clearly indicating that they can swap their bonds with a sovereign nation to change any clause they do not like and if they can do it with Greece they obviously can do it with any other nation so that we will soon see law suits challenging this operation. We may also see, as a result of this, some institutions not subject to European manipulation, selling their positions as they do not wish to be subordinated to the whims of the ECB. I would also make note that the ratings agencies may take due note of this action and might reduce the ratings of all of the sovereign nations in Europe based upon this action. In evaluating a sovereign there is credit risk and political risk and I assert that the political risk has now been greatly magnified.

The ECB tell us that they will give their profits on the Greek bonds bank to the European central banks except there are no profits, only severe losses presently, so that all of this talk of profits is really the expectation of getting their money back at maturity which is years away. Their claim in the Press is not just misleading but an outright charade of mis-direction.

Greece will shortly be placed into “Default” by S&P and Fitch which will trigger default language in all kinds of securitizations including Greece’s $90Bn in derivatives and may cause disgorgement from accounts that are forbidden to hold defaulted bonds.

After the country has been placed into “Default” the banks will soon follow and once again there will be all kinds of consequences in interbank lending, securitizations, collateral agreements et al from all of this.

The CDS contracts for Greece may or may not function as they stand but, as I am quite certain will happen, not enough bond holders tender their bonds for the new debt so that Greece will pass the “Collective Action Clause” which will certainly trigger CDS in my opinion and if not will show the fallacy of that market.

The structure of the deal puts the IMF/EU/ECB clearly in control of the finances of Greece so they have replaced some sort of Czar with the bureaucrats of the Troika and the country no longer will control its own finances as they traded away their sovereignty for cash. In fact, an escrow account will be set up for Greece which will be controlled by the Troika and Greece is being forced to change their Constitution pledging to pay their creditors before providing any money for the country. A quick study of the math reveals that Greece will get about 19 cents on the Dollar and the rest of the money is the sovereign nations of Europe paying back their banks with the money they have supposedly lent to Greece. Greece is now nothing more than a conduit for the nations of Europe to pay back their own financial institutions. 

Now we will see if the Parliaments in Europe will go along with this plan as many still have to approve it and a careful reading of the math involved here may be troubling for some governments especially Finland and the Netherlands.

We will also see, with Greek elections looming, how the citizens react to all of this either in the polling booths or in the streets as an additional $4Bn of spending cuts have been mandated by the Troika and they state that the money will not be paid to Greece 
until they are implemented which must be by the end of February.

The total outstanding debt for Greece will now rise to $1.270Tn as new debt pays off old debt in a country with substantial negative growth so that the real situation, regardless of what we are told, worsens.

In early May Greece faces its next bond payments so there may be a re-do for all of this in several months’ time.

If Greece is actually going to get the next round of the bailout then the other side of the coin is the increased debt being taken on by the other countries in Europe which could cause more downgrades as the new debt to GDP numbers are assessed.

“A sleight of hand is not magic; just a trick. It is amazing to me these days how proficient the EU and the ECB have become in turning tricks.”
-The Wizard

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