Greece on the edge

At the moment we are in a sort of interregnum where things are getting progressively worse, but no crisis. The feeling is that this is all about to change next month

Greece Before the Abyss

Only Bankruptcy Can Help Now

Spiegel,

15 August, 2012

Greece has disappointed its creditors yet again. Now its government plans to ask for more time -- and needs billions more in aid. But Greece's euro-zone partners are unwilling to provide any more help, meaning that the only hope now is to admit defeat and let the country make a fresh start.

Officially, at least, everything is going according to plan. In September, officials with the troika -- made up of the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) -- are planning to travel to Athens to check on the progress that Greece has made with its cost-cutting program. Then, according to the plan, they could disburse billions more in aid out of the second bailout package for Greece, which the euro-zone countries and the IMF agreed on in February.

But, in reality, it is rather unlikely that all of the €130 billion ($160 billion) in the bailout package will ever be paid out. And what is even more unlikely is that the money would keep Greece from going bankrupt.

The assumptions on which the current program was based in February are no longer valid. At that time, it was thought that the Greek economy would only contract by 4.5 percent this year, but now it appears that this figure will be closer to 7 percent. This would mean even fewer tax receipts and even more social expenditures. What's more, given these circumstances, it's almost irrelevant that the Greek government is expected to ask for a two-year extension, to 2016, of the agreed austerity plan.

One thing is clear: In addition to more time, Greece also needs more money. And those who have been financing it thus far -- primarily the major euro-zone countries and the IMF -- are either unwilling or unable to give the country any more. In political terms, that is completely understandable: One can only imagine the earful that German Chancellor Angela Merkel would get if she were to present a third aid package for Greece before the Bundestag, Germany's parliament. In fact, the members of her own conservative coalition would probably chase her out of the building.

Truth be told, Merkel only has herself to blame for the fact that she is stuck in this pickle. She dug in her heels too much in insisting that the problems of Southern European countries could only be solved by drastic belt-tightening, and that what the Greeks were really lacking was the will to do what was necessary. Now she can hardly abandon this way of interpreting the crisis.

Delaying the Inevitable and Necessary

If it was ever the goal of Merkel and her allies to rescue Greece from bankruptcy, then they have failed. The only thing the drastic austerity measures have done is to exacerbate the economic crisis and push Greece's debts even higher. Nevertheless, the creditors have insisted on moving forward with their plan -- even though it already became clear long ago where it was heading.

The end of this approach now appears to have been reached. Neither euro-zone countries nor the IMF can provide Greece with more aid without sacrificing their own credibility. Given these circumstances, there is only one option left: Greece must go broke.

European politicians have balked from taking this step -- probably also because the new permanent bailout fund, the European Stability Mechanism (ESM), which is supposed to cushion the economic impacts of a Greek bankruptcy, has yet to enter into force.

Instead, they have tried to buy time with the help of a dangerous interim arrangement: The Greek government is supposed to borrow the money it needs from the ailing Greek banks. In return, the banks receive sovereign bonds that they can, in turn, provide as securities for new loans from Greece's central bank. In this way, Greece's central bank is financing the Greek state in what is really just a kind of shell game that gets riskier the longer it is played. In any case, all euro-zone countries will in the end be jointly on the hook for these liabilities.

A Greek bankruptcy would already be costly enough at the moment. Estimates say that it would cost Germany alone some €80 billion. Lest this figure climb any higher, the right thing to do would be to finally make that one fateful step.

No matter how unpredictable the consequences of a Greek bankruptcy might be, it appears to offer the only chance to resolve the messy situation. In this way, Greece would be free of its debts and would have a chance to make a fresh start -- either as part of the euro zone or not. And the creditors in Berlin and Brussels could finally free themselves from the spiral of threats and rescue actions that they have gotten themselves into.

Pretty Soon We Need To Start Talking About Greece Again...

Joe Wiesenthal

Business Insider,

26 April, 2012

Quick warning.

We'll need to start talking about Greece again pretty soon.

It hasn't been at the front of anyone's mind in awhile, and that's in large part because Europe is shut down for the month, but come September, the question of Greece's fate in the Eurozone will become an issue again.

In a recent note, Dan Greenhaus at BTIG wrote:

A few clients have asked for some specifics surrounding our "fall nervousness" related to Greece and Europe. Simply put, we assume the next Troika report on Greece will begin in at a meeting in mid September, the 14th to be specific. It’s impossible to see anything occurring in the Greece front before then -- even as the economy implodes on itself. And if things go less than swimmingly during the review, the next trance of monetary support might not come until the IMF annual meeting in mid October. Admittedly, concerns about Greece are..not what they once were but if you’re concerned about a Grexit and what effect it might have on sentiment, as we are, then the fall brings the next "launch window."

Morgan Stanley's Gregory Peters also pointed out in a recent note that September will bring turbulence, some of which will be Greece related:

September bristles with risk for investors. The Troika returns to Greece in early September; the German constitutional court will rule on the ESM on 12 September; and ECB bond purchases are conditional on Spain or Italy formally applying for assistance. The Fed meets informally at Jackson Hole in late August, and the FOMC convenes on 13 September. In Vincent Reinhart's view, substantial action (particularly QE) is very unlikely.

Meanwhile, reports say that Greece will seek a 2-year austerity extension during talks next week between the Greek Prime Minister Samaras and the heads of France and Germany.