Greek default

Ready For Tanks In The Streets In Greece?

Karl Denninger

Market Ticket,

15 July, 2012

Oops...

The new Greek finance minister, Yannis Stournaras, until recently a professor of  economics at the University of Athens, hasn’t learned yet the art of extortion  that is required to accomplish anything at all during negotiations with the  Eurozone.

....

.... Inspectors of the “Troika”—the EU Commission, the European  Central Bank, and the International Monetary Fund, which have agreed to bail  out Greece under certain “conditions”—were back in Athens earlier in July to  check on the agreed-upon structural reforms and meet with government officials  to determine if these certain “conditions” have been met. The inspectors already  expected the worst, after a three-month hiatus while Greece was embroiled in  political turmoil and two elections, an interregnum during which nothing was  implemented.

Apparently, it was even worse. Elements of their preliminary report due by  the end of July seeped  out: it painted an “awful picture”; of the 300 specific measures to be  implemented by now, 210 were completely ignored and left by the wayside. This is  the report that the Troika will use in deciding whether or not to send the next  bailout tranche to Greece.

Well now.

The key question is this: Have European nations (read: Germany) taken the time they've had to "brace for impact" from a disorderly Greek default and exit?

The best question to ask in that regard is this one: Who still holds Greek debt that is not marked at or near zero?  Because if the answer is "The ECB" then there's a wee bit of trouble.  If the answer is "Deutsche Bank" and/or "Bundesbank" or, for that matter, any other major financial institution throughout Europe, well....

Remember that the "subslime" problem wasn't so much that bad loans were made.  That happens all the time. It was that people lied about the leverage they were carrying with those loans, in that they had alleged "swaps" that would make them good even if they defaulted, and thus were carrying little or nothing in reserve against them. When the swaps become imperiled and capital calls came, there was no money to meet them.

In a just and honest world where we actually had penalties for fraud and people went to prison when they committed it in big financial institutions there would be little of this, because the risk would simply be too high of a 20 year date with Bubba, exactly as this serves as a meaningful deterrent for someone contemplating holding up the local convenience store.  Oh sure, some people are too drug-addled or simply stupid to care and they take the risk, but the fact remains that if the only penalty for holding up the local Stop-N-Rob was that you had to give back some of the loot there would a line out the door of people wearing ski masks with guns in-hand!

Yet this is the model on which we have built our so-called "financial system."  There is essentially zero risk of prosecution; this is proved at this point with the Statute of Limitations having either run or being close to doing so for most of the crimes during the housing bubble and its aftermath, being limited in most cases to either five or seven years.

Just remember one thing folks -- Greece is basically out of money (again) and without the next Troika tranche it will have to default on not only its debt to its internal banks (which will set off a cataclysmic mess internally in the nation) but in addition government worker wages and benefits will not be able to be paid.

Still, nobody is talking about the truth there or here: Government cannot spend more than it taxes, and when government is in debt it must in fact spend less, since it must over time pay down that debt.

Until that discussion and honest debate takes place there is no resolution, either in Europe or in the United States, that can or will work.