Sunday, 22 February 2015

The Greece austerity crisis - 02/21/2015

End of austerity’? Greece claims bailout battle victory, warns hard time not over
The Greek prime minister says a new agreement to extend the country’s bailout voids the previous administration’s austerity commitments. The politician said, “we won the battle, but not the war,” but believes further difficulties lie head

Greek Finance Minister Yanis Varoufakis (Reuters / Eric Vidal)

21 February, 2015

Alexis Tsipras made the comments in a televised statement on Saturday. He spoke of the “important success” of Greece being able to negotiate a funding agreement with eurozone ministers, which will see the bailout extended by four months.

The PM hailed this as, “the end of austerity and the bailout,” as Athens was able to severe ties with the ‘hated’ Troika group, which was responsible for making sure the country stuck to its bailout conditions and repay its international credдtors.

One must believe @BILD's tall stories (about us Greeks) at one's peril.

``We won a battle, but not the war. The difficulties lie ahead of us,'' he said, following an agreement to draft a new set of proposals and reform measures on how the country will pay back its debt, which it will have to present on Monday. Greek Prime Minister Tsipras is meeting with his cabinet on Saturday to discuss the proposals.

The four-month period will be a time to rebuild new relations with Europe and the IMF," Greek Finance Minister Yanis Varoufakis told reporters on Friday following the agreement."Greece has turned the page" and won some time to negotiate a better bailout deal, the official said, emphasizing that Greece had not used any threats or bluffs to reach an interim agreement.

For its part, EU creditors have insisted that Greece make a commitment to reform its budget to show it is serious about wanting to pay back the bailout money. Athens had originally asked for the loan to be extended by six months to get more time to renegotiate its €316 billion debt ($359 billion).

If I were a Syriza voter, I'd be very angry this morning.

Although Athens believes itself to be triumphant and sees this as the end of austerity, it could in fact be seen as a hollow victory. In reality little has changed and Greece is still facing a lot of difficulties after receiving very few concessions. Thus, the Troika group will be no more, but the European Central Bank, the International Monetary Fund and the European Union (who used to make up the Troika) will still make sure Greece sticks to its promises.

In the short term, however, this may be enough for Prime Minister Tsipras and Finance Minister Varoufakis to please the Greek electorate on a ticket of being able to halt deeply unpopular austerity measures that were agreed under the former government of Antonis Samaras, and saw taxes and public spending cuts spiking.

Varoufakis has been committed to stopping privatization of certain Greek state enterprises. He also said there would be no pension cuts and added VAT, which had been agreed by the previous administration. Critics of Syriza note the government does not know where it will find the money to fund these programs.

On February 15, around 20,000 protesters gathered outside the parliament building in the Greek capital for an anti-austerity, pro-government demonstration.

"We want justice here and now...for all the suffering Greece has gone through the past five years," 58-year-old Theodora, who has been unemployed for the last three years, told AFP.

Many of the protestors showered Prime Minister Tsipras and the new government with praise for challenging Brussels, and trying to end austerity measures, which have crippled the country.

Bailout Blueprint: Deal or Capitulation? ECB Prepares for a Greece Exit from Euro Zone

21 February, 2015

Bailout Blueprint: Deal, Capitulation, or Neither?

At the 12th hour 
Finance Chiefs Draw Up Greek Bailout Blueprint
 Negotiations led by Jeroen Dijsselbloem, the Dutch finance minister who chairs the eurogroup of 19 eurozone finance ministers, have produced a common communiqué on the extension of Greece’s €172bn bailout, according to a eurozone official.

The text was produced after nearly five hours of bilateral talks between Mr Dijsselbloem and key ministers, including Yanis Varoufakis, Greek finance minister, and Wolfgang Schäuble, his German counterpart. The eurozone official also said Mr Dijsselbloem was in direct contact with Alexis Tsipras, Greek prime minister, during the talks.

The text must now be presented to all 19 eurozone ministers for approval. “It will be fast,” said the official.

According to a Greek government official, the new text was also agreed by the three institutions that monitor the country’s bailout: the European Commission, the European Central Bank and the International Monetary Fund.

Mr Varoufakis had earlier insisted that Greece had made sufficient concessions to reach a deal to extend the bailout for six months after it expires next week and predicted that he and his 18 eurozone counterparts would reach an agreement.

He said Athens had “gone not an extra mile [but] an extra 10 miles” in its proposal for the extension, submitted to eurozone leaders on Thursday, adding it was now the turn of other ministers to meet Greece “not half way, but one-fifth of the way” to reach a deal.

Mr Varoufakis and a group of German-led eurozone countries are locked in a stand-off over the conditions of a bailout extension, with Berlin insisting the new Greek government agree to the terms of the existing bailout before it engages in negotiations over any changes in the programme.

Mr Tsipras’s government has refused, saying it was elected to end the current bailout, but has made significant concessions, agreeing to ask for an extension with some loopholes that would give it some leeway to negotiate terms.

Speaking after a meeting in Paris, the leaders of both France and Germany said they remained committed to keeping Greece in the EU’s common currency, but 
Angela Merkel, the German chancellor, added that Mr Varoufakis’ request needed to be changed before it would be acceptable.

There is a need for significant improvements in the substance of what is being discussed so that we can vote on it in the German Bundestag, for example next week,” Ms Merkel said, standing next to her French counterpart, François Hollande.
Is there a deal? Does it need to be changed? 

ZeroHedge reports according to, the preliminary agreement covers the 

following points:
  • 4 not 6-month extension
  • no completion of current program
  • no new austerity measures
  • no unilateral actions

If that's really the deal, then Greece bought time to speed up tax collections. In 

turn, that would strengthen its hand four months from now when this process 

starts all over.

As I pointed out previously, as long as Greece has a primary account surplus, it 

can stay on the euro. 
I have wondered if tax collections had shrunk so much ahead of Syriza's victory 

that it no longer has a primary account surplus.

ECB Prepares for a Greece Exit from Euro Zone 

Meanwhile, Spiegel reports ECB Prepares for a Greece Exit from Euro Zone 

 The European Central Bank is preparing for the event that Greece leaves the euro zone and its staff are readying contingency plans for how the rest of the bloc could be kept intact, German news magazine Spiegel reported in a preview of its magazine.

The ECB declined to comment on the report, Reuters reported.

The German magazine also reported that the ECB was pushing Athens to introduce controls on the movement of capital.

Earlier this week, the European Central Bank denied a report in a German newspaper that it wanted Greece to introduce capital controls to stem the outflow of deposits from its banks.

Germany΄s finance minister was hostile to Athens΄ proposal this week although the government softened its tone on Friday as euro zone finance ministers raced to break the deadlock.

I suspect the ECB has been preparing for Grexit for months, and that helps explain the hard stance of Germany.

Deal or not? Capitulation by Greece or not? More negotiations in 4 months? If the latter, Greece bought some time to get back to (or strengthen) its primary account surplus. 

Mike "Mish" Shedlock

What's Next For Greece, The Euro, And Markets?

21 February, 2015

First, a quick recap of what happened yestrday, courtesy of the WSJ:

#1: Germany Got What it Wanted, for Now

Germany spent the last few weeks insisting that it wouldn't scrap the bailout program and still lend money to Greece. The new left-wing government of Alexis Tsipras insisted that it wouldn't extend the program and instead sought some "bridge" financing from the eurozone. In the end, Greece asked to extend the program and pledged to follow its rules. The extension lasts until the end of June, just weeks before Greece must make several large debt repayments.
#2: Greece Got the Prospect of Some Leniency

First, the eurozone appeared to offer some leeway on Greece hitting its budget target for 2015. Given the sharp deterioration in the Greek economy and government tax receipts, that seemed inevitable. The eurozone statement also doesn't repeat the budget targets for future years of the existing program, which call for the government to run a surplus, excluding interest payments, of 4.5% of gross domestic product. Relaxing that requirement had been one of Mr. Tsipras's main goals.

#3: The Deal May Not Hold

By the end of business Monday, Greece must submit a list of legal overhauls that it wants to adopt, based on the current program. Mr. Tsipras has said he wants to replace many of the mandated changes. But a number of the ones he dislikes most--such as cuts in pensions--are also the ones considered most vital by the eurozone and the IMF.If the eurozone doesn't like his proposal, ministers will meet again to discuss their next move.

#4: Greek Politicians May Reject Deal

The deal appears to go against some of Mr. Tsipras's campaign pledges. Greece will still be subject to oversight by the European Commission, the IMF and the European Central Bank, whom he had vowed to kick out. Rejecting such conditions would have left Greece without access to funds and at risk of its banks being cut off from the ECB. That could have forced Greece from the eurozone, something the Greek public still opposes. But Mr. Tsipras's Syriza party and his coalition partner may not be happy.

#5: Greece Will Need More Money

Running lower budget surpluses this year, and possibly for years in the future, means Greece will need more funds. Eurozone officials have said they may lower interest rates on loans given to Greece, but it is unlikely to be enough. There is only around EUR15 billion ($17 billion) left in Greece's bailout, around EUR10 billion of which is in a fund for Greek banks. As it stands now, the deal says those funds should be reserved for the banks and not for financing the Greek government.

* * *

And next, courtesy of Peter Tchir Of Brean Capital, is one outlook on What's Next For Greece, The Euro, And Markets?

I’m sure that at this stage everyone is sick and tired of hearing about, reading about, or even thinking about Greece and GrExits, but it is impossible not to spend a couple of minutes looking at Friday’s “deal” and figuring out what that will mean for the future.

Garanimal 30%These “mix-and-match separates makes clothes easy to pair and fun to wear” is my new term for the optimistic outcome. Greece starts aggressively collecting taxes, makes progress on other “hot button” issues for the rest of Europe and gets a package designed for long term sustainability. I think we see European equities rally. European bank stocks rally. Credit spreads narrow considerably, and very quickly, a new deal is cut for Portugal. That is followed by renewed efforts to kick-start the economies of Spain and Italy. This would all be very good, and is possible, but already seems like the market is putting a higher probability on this occurring than I am. Greek bonds should do extremely well in this case. For the Euro, I think I can create believable scenarios that have a short covering spike higher on the back of this sort of watershed event, but I can also think of plausible reasons why it would resume its QE inspired downtrend.

GrExit 40%: I put the likelihood of a Greek exit at 40%, making it my most likely scenario. The 4 months is merely an attempt by both sides to revamp their plans for an exit. On the bright side, that considerably increases the likelihood of an orderly exit. They have to renegotiate the terms of all their existing loans from Euros into Drachmas (they should probably do the same with the bonds, but the loans are their big issue). That way the rest of Europe can still say they are getting paid in full – just in Drachma at likely an overly generous conversion rate, rather than in Euros. Greece CANNOT start a new currency and keep all of its outstanding debt in Euros. It would also give the ECB (probably with strong encouragement from the Fed) the time to create a realistic way to make the transition palatable for the banks – the Greeks will need solvent banks in the new world order. I believe that an orderly exit is fine, and I think with 4 months to do it, they are 75% likely to find a solution that works for everyone. Given all the parties at the table, the precarious status of some of those parties (political or financially) there is a risk that the GrExit is messy, which I put at 25%. While the markets should largely be able to ignore a well negotiated reasonable exit strategy, it will encourage parts of Spain, Italy, Portugal, and possibly even Finland to discuss exiting the single currency (they will want to maintain as many benefits of being in the EU as possible, without the currency or some of the more onerous regulations). Under the good exit scenario, risk assets in Europe struggle to continue their strong performance (the CAC, DAX, MIB, and IBEX are all up 10% to 15% this year). The new “better” Euro appreciates as investors start to bet that other weak members, requiring the most ECB support, also look to leave, making the Euro look more and more like the Deutschemark and crushing the large short base. The “messy” Grexit scenario hurts all risk assets as questions arise about who will pay what debt and when. Even with QE, I would expect selling of periphery debt and I think the Euro would drop precipitously as investors fled Euro denominated assets in droves. So maybe this is actually two scenarios – the Good Exit and the Bad Exit.

Kick the Can 25%: The Germans, who apparently have a word for everything, also have a work for Kicking the Can – its “EU Summit”. There is no group that is better than kicking the can the EU, and betting on any summit resulting in a statement that sounds great, that is really more just can kicking is usually the odds on favorite. I put that at a reduced probability this time around, as it might be causing more instability at home for many politicians, rather than less. Having said that, the prospect of potentially working through July and, horror of horrors, August, could be daunting enough that another 4 month kick could be given – especially if Greece makes some progress, just not enough. Remember, the EU “bailout” largely goes to cover paying back previous EU, ECB, and IMF loans. Some is new debt to fund the country, but that is the smaller amount. This is more of the same. If this scenario looks likely, expect more small moves in all asset classes – the moves will be relatively small and particularly vicious – and feel random after the fact – just like the past 3 weeks. It would warrant fading any strong view either way without sufficient evidence.

GerExit 5%: While this seems like such a low possibility, it does seem that Germany is becoming more and more isolated from the rest of Europe (with the possible exception of Finland which seems even more separated, both physically and fiscally). Is there a point where Germany just decides that “I’m going to take my ball and go home!” Does it get too tiring being the “only adult in the room” or at least believing that you are the only adult in the room? Does Germany believe that its system is superior enough to withstand the immediate pain from moving to a much stronger currency? Would they be more comfortable dealing with the issues of having a the Bundesbank run a new Deutschemark instead of feeling that they have to constantly act as the police of the European banking system? At some point, does the feeling that they are the only owns really sticking to the original plan become so frustrating that they decide it isn’t worth it? Would a German exit from the Euro be welcomed by others? In theory, a Euro without Germany and maybe some other strong members, would sell off dramatically. It should help the rest of the countries become more competitive, and if they still allow visa free travel, it won’t hurt the tourist trade as relatively rich Germans still come to the Mediterranean to spend their shiny new Deutschemarks. This seems like a very low probability event as Germany has been a key architect of the Eurozone and done so much to keep it together, but, it does in many ways seems to solve the issues faster and more conclusively than any solution focused on Greece.

What This Means For Trading

I think Friday’s outcome and the potential future outcomes boil down to a few simple things to consider
  • Friday’s bounce was rather weak. The S&P and NASDAQ both only managed to climb by 0.6%. Since Europe had already closed down for the weekend, almost all the short covering related to announcements would have to have been done in the U.S. market – making the pop even less compelling. A classic example of “buy the rumor, sell the news”? Treasuries still wound up the day only unchanged as well.
  • Unless someone senior from Greece says they are defaulting, or someone senior from Germany says they are kicking Greece out, any headlines from Europe should be ignored. Over time which of the scenarios seems most likely should play out, but until then, this is mostly noise.
  • I will be looking to see how Spain reacts – will Rajoy’s opposition view Greece’s extension as a victory for Greece and put renewed pressure on Rajoy? Will the Greek people feel like their leaders sold out too quickly and try to put an actual radical party in charge? It seems that a few days of EU Summits can take the radical out of a party.
  • We can now focus on the domestic situation. On earnings and growth and what it means to have a Fed far more interested in “normalizing” policy than intervening at every market blip?
Be Careful What You Wish For

Yes, we are all sick and tired of the incessant Greek headlines, but I am not so sure we will like what we see when we resume focus on our own economy

I have to admit that the chart is far less compelling on a longer term time horizon, but I wanted to end this note with a good segue into the new “meme” that I expect to dominate the news waves over the coming weeks – what is going on with the U.S. economy and is it really as good as the last NFP report suggested?

Germany Gives Greece Just Enough Rope: Varoufakis Says If Troika Rejects Reforms "The Deal Is Dead And Buried"

20 February, 2015

As usual, the fine print of any European "deal" is revealed not only after the agreement, but after the US market close. So for all those waiting for the real punchline, here it is - it also is the reason why Greece got until Monday to reveal the list of "reforms" it would undertake:

"We’re in trouble next week if creditors don’t accept Greece’s reforms", Greek Finance Minister Yanis Varoufakis says. "If our list of reforms is not backed by the institutions, this agreement is dead and buried."

That's bad. But... "But it’s not going to be knocked down by the institutions."
For his sake, let's hopes he is correct in predicting what the Troika, pardon, Institutions will do. Because this is precisely what Schauble meant when he said that the "Greeks Certainly Will Have A Difficult Time To Explain The Deal To Their Voters": under the conditionality of the Troika's approval, the Tsipras government now has to walk back essentially all the promises it made to the Greek people - promises which by some accounts amount to over €20 billion in additional spending - or the Troika, pardon Institutions, will yank the entire deal and the Grexit can then commence.

And that's the bottom line.

It's also the reason Schauble was gloating: because he gave the Greek government just enough rope with which to hang itself.

Then again, if and when the Tsirpas government is booted out next once the Greek euphoria turns to disgust and disillusionment, does Germany really want to negotiate with Golden Dawn instead?

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