Investors tip Greek election picks

Managers look at peripheral investment opportunities as Greek election looms.

Πηγή: FTadviser
By Bradley Gerrard
June 11 2012

Fund managers have tipped a potential opportunity to invest in peripheral Europe, as Greece heads into a second round of elections.

The country held elections last month but no outright winner emerged and the parties with the most votes were unable to form a coalition. The focus now is on new elections set for this Sunday (June 17).

The contest is expected to be a two-horse race between the centre-right New Democracy party led by Antonis Samaras and the leftist coalition Syriza led by Alexis Tsipras.

Mr Tsipras has said he wants to alter the conditions attached to any further bailout funds Greece receives from the EU, which has previously insisted on stringent austerity measures in Greece in return for funding. Data from recent opinion polls suggests a Syriza lead at present.

SVM Asset Management co-founder Colin McLean said if Greece fails to meet the EU’s conditions and is forced to leave the euro the new drachma would devalue sharply against other currencies – and this would “reset” the economy.

“There would be investment opportunities in Greece, particularly in more export-led or tourist businesses,” he said.

Mr McLean added he tended to be “more pessimistic” on whether the single currency will remain intact, in spite of the difficulties economies with new currencies would face in paying back their euro debts.

“If Greece was the only country in trouble it could be given special treatment but there is nothing which can be done for Greece which can’t then be done for Spain,” he said.

David Tan, head of the global rates team at JPMorgan Asset Management, agreed that the drachma’s depreciation would plunge Greece into a “deep recession” that could eventually throw up buying opportunities.

Ken Hsia, manager of the £26.8m Investec European fund, said the group’s 4Factor quantitative analysis is “not steering” him towards peripheral European companies at present.

But although he said he was unsure as to whether Greece would exit the euro, the manager added that an exit and default for the Mediterranean economy would benefit it –albeit after a short-term hit.

“It seems like the only way for them to improve their economy is to get that rush of adrenaline of a more competitive currency,” he said. “However, if they do that, the people who hold their debt will lose out.”

Mr Hsia said the issue of “who takes the pain” was presently being discussed in Europe.

“But history shows [a default] is a reasonable solution for the people of an indebted country,” he said.

Are The Markets And Politicians Underestimating The Impact Of A Disorderly Greece Default And Eurozone Exit?

Πηγή: Forexpros
By The National Bank of Canada
March 4 2012

For the first time since the beginning of the eurozone debt crisis, there is growing belief among a number of politicians and analysts that Europe would be able to weather the impact of a disorderly Greek default and exit from the eurozone, or, more specifically, that the contagion effect on countries such as Portugal, Spain and Italy would be limited. Taking this position would have been nearly unthinkable not so long ago. This new line of thinking is exemplified by the following public statements made by certain high profile European politicians and business leaders:

“The costs are much less than a year ago. We have bolstered our emergency funds. And we have a budget pact, with additional measures to bring down budget deficits. The risks of contagion have strongly decreased.” (Dutch Finance Minister Jan Kees)

“It’s not the end of the world if someone leaves the eurozone.” (European Commission Vice-President Neelie Kroes)

“It might be something which would allow Greece to get a new start … to create an economy that can create jobs.” (Luxembourg Finance Minister Luc Frieden)2 The risk from Greece leaving the eurozone has “lost much of its horror.” (German Economy Minister Philipp Roesler)

Greece would have better chances of economic recovery if it left the eurozone. (German Interior Minister Hans-Peter Friedrich)

Franz Fehrenbach, chief executive of industrial company Bosch, Klaus-Peter Mueller, chairman of Commerzbank AG, and Wolfgang Reitzle, CEO of industrial gases producer Linde AG, are but three examples of German business leaders that have publicly come out in favour of Greece exiting the eurozone.

Even Wolfgang Schauble, the foreign minister of Germany, arguably the country’s second most powerful politician after Chancellor Merkel, is now in favour of letting Greece default and exit the eurozone.6 For now at least, the markets appear to share these optimistic views. Unlike 2011 when every new turn in the eurozone debt crisis sent markets into a panic, this year the markets appear to have become increasingly complacent to events in the eurozone. For example, they barely reacted to the riots in Greece or the difficultly the European Union (EU) had in agreeing to the conditions for the latest Greek bailout package. There are indeed more reasons to be confident about the eurozone debt crisis than before:

The European Central Bank (ECB) has provided the banks with ultra-cheap financing, thus heading off a potential bank crisis.

Foreign bank exposure to Greece has dropped significantly and sovereign debt yields have markedly declined in Spain and Italy.

Some also feel the markets have regained their sanity in not according Greece, which accounts for less than 2% of the EU’s GDP, too much importance.

Despite these positive factors, we still continue to believe that the markets are underestimating the economic and geopolitical implications of a disorderly Greek default and eurozone exit. In chronicle order, they include:

1. Holders of Greek debt would be forced to take an 80%-90% haircut.

2. Creditor countries would be compelled to honour the guarantees they made on the bailout fund and recapitalize the ECB. This is after having long assured their citizens this scenario would never occur, adding momentum to the growing backlash against the EU’s governing parties and political elites.

3. European banks would be exposed to even higher levels of public and private sector losses. In addition to having bailed out heavily indebted countries, they would be forced to bail out politically unpopular bankers as well.

4. The markets would immediately move on to the next weakest link in the chain: Portugal. Investors, fearing a default, would start dumping Portuguese debt on a large scale.

5. The capital controls implemented by Greece following its bankruptcy and eurozone exit would be taken as a stark warning by the Portuguese and others to withdraw their cash from their banks while they still could (a replay of what happened in Greece). This panic would be reinforced by the sight of cars and boats beings searched at Greek ports and borders in an effort to prevent Greeks from sneaking euros out of the country.

6. In an effort to limit the contagion, the EU would be forced to put together a second bailout package for Portugal.

7. The bailout fund and/or the ECB would have to purchase significant amounts of Spanish and Italian bonds to prevent their yields from spiking. Given its heavy exposure to Portugal, Spain would be particularly impacted.


Bank Exposure

8. The collapse of Greece, the economic downturn in the EU and domestic public pressure would cause Irish and Portuguese governments to increase pressure for partial loan forgiveness. This would fly in the face of pledges made by Germany, France and other countries that the partial debt reduction given to Greece was a one-off event.

9. A bankrupt Greece would still require significant financial assistance because the drachma would not immediately be accepted as a form of payment by other countries. Greece would thus need assistance from the EU/IMF to pay for imports of food, medicine and energy, as well as recapitalize its banking system. Having their tax dollars still being sent to Greece even after it has defaulted would further anger the citizens of creditor countries.

10. The demand for more funds to calm the markets would coincide with record levels of opposition by the citizens of creditor countries to further bailouts. Opposition to bailouts would rise from over 60% in countries such as Germany and Netherlands to over 80% after the collapse of Greece. After all the time and money spent in the futile attempt to save Greece, there would be very little public support to begin the process all over again with Portugal and other countries.

11. Support for formerly marginal anti-EU parties on the extreme left and right would surge, causing coalition governments to collapse in Finland and the Netherlands.

12. The Greek collapse and worsening of the European economic environment would cause Italy, Spain and even France to openly challenge the wisdom of the German-driven austerity approach. They would likely forge a coalition to pressure Germany to ease up its policy of aid in exchange for harsh austerity measures. This would make it all the more difficult for EU countries to find common ground.

Conclusion

To summarize, the demands for even more funds to contain the impact of a Greek bankruptcy and eurozone exit would run into an unprecedented level of political opposition that would strain and, in some cases, lead to the collapse of governing coalitions. The divisions between the major EU countries would also widen, seriously impeding the EU’s ability to effectively deal with the crisis. The political climate would be even further poisoned by the economic downturn the European Union finds itself in, a situation many Europeans blame Germany for worsening by its push for the implementation of harsh austerity measures.

The dilemma facing Germany is particularly difficult. Chancellor Merkel’s government approved the latest bailout in the face of severe public opposition (62% of Germans, in a recent poll, opposed this measure). Germany’s constitutional court, meanwhile, warned that any rescue fund exceeding Germany’s national budget – estimated to be 306 billion euros for 2012 – could threaten economic stability and violate Germany’s constitution. Germany is currently on the hook for 211 billion euros of the bailout fund (a figure it promised not to go beyond). If Germany agreed to finance further bailouts in the event of Greek collapse, there is a risk that Germany’s liability would surpass 306 billion euros. This would not only have legal ramifications, but it would also ignite a massive political backlash.7 A similar political backlash would occur in other countries such as the Netherlands, Finland and Austria.

The following picture is a recent front page headline from Bild, Germany’s largest newspaper, urging politicians to vote against a second bailout package for Greece worth about 130 billion euros (which did get approved). This headline is reflective of the growing public opposition in Germany to further bailouts. One can only imagine what this headline would be saying if Germany was asked to provide even more funds to help stabilize the eurozone following a Greek collapse.

Greeks seek elusive bailout deal, EU tempers fray

Demonstrators from the communist-affiliated trade union PAME march by the parliament in protest against the new austerity measures in Athens February 7, 2012.

Πηγή: Reuters
By Renee Maltezou and George Georgiopoulos
Feb 8 2012

Greek parties will try again on Wednesday to agree a reform deal in return for a new international rescue to avoid a chaotic default, after delays prompted some EU leaders to warn that the euro zone can live without Athens.

One deadline after another has come and gone. Leaders of the three parties in the coalition of Prime Minister Lucas Papademos postponed on Tuesday what had been billed as a crunch meeting because of missing paperwork, according to one official.

Papademos - a technocrat parachuted in last November to secure the new 130 billion euro ($172 billion) rescue from the IMF and European Union - is trying to persuade the party leaders to accept austerity and reform measures which are likely to prove unpopular with an already angry Greek electorate.

Papademos is expected to meet the leaders at about 12:30 p.m. (5:30 a.m. ET) to discuss the draft deal struck with the IMF and EU, a government source said. Most points have been settled but the leaders would be asked to make a choice on options on some fiscal issues, he added.

Facing a parliamentary election possibly as early as April, coalition leaders have shown little sense of urgency, seemingly deaf to demands from euro zone leaders to make up their minds fast. Greece faces bankruptcy next month unless it gets the rescue funding to meet big debt repayments then.

"We can't say a plain yes or no unless we have assurances from the relevant authorities of the state that these actions are constitutional and will lead the country out of the crisis," said George Karatzaferis, who leads the far-right LAOS party.

"There is time. When it comes to the future of the country, we will find the time," he told reporters on Tuesday night.

Some financial markets showed hope that Greece would pull off the bailout deal. Prices of German government bonds, which investors buy at times of uncertainty for their perceived safety, fell on Wednesday. The euro also hit a fresh two-month high versus the dollar.

Euro zone officials say the full package must be agreed with Greece and approved by the euro zone, European Central Bank and International Monetary Fund before February 15.

MISSING PAPERWORK

The party official said on Tuesday the heads of the conservative New Democracy, PASOK socialists and LAOS had yet to receive the draft agreement with the EU and IMF half an hour before they were supposed to meet Papademos.

Party leaders have hesitated to accept the tough terms of the deal, which are certain to mean a big drop in living standards for many Greeks.

An opinion poll on Wednesday showed that PASOK, which ruled Greece until the government of George Papandreou collapsed last November, has most to fear when elections are held to replace the interim national coalition of Papademos.

The monthly survey by Public Issue for Kathimerini newspaper showed support for PASOK had collapsed to eight percent from the nearly 44 percent it took when it returned to power in 2009.

Austerity imposed by the coalition has hit traditional PASOK voters hard, many of whom have turned their backs on all the government parties. Support for the Democratic Left, which refused to join the coalition, surged to 18 percent.

Unions staged a 24-hour strike on Tuesday, and protesters tussled with police outside parliament, chanting: "No to mediaeval labor conditions!"

Deadlines are losing significance. Last weekend, Finance Minister Evangelos Venizelos said a deal had to be done by Sunday. Then the parties sailed past a Monday deadline to give their response to the EU, promising that Tuesday would be the day for decisions.

Such apparent dithering is a challenge to the authority of German Chancellor Angela Merkel, whose government is a major funder of Greek bailouts. She said on Monday that "time is of the essence" and expressed bewilderment about the delays.

UNFORESEEABLE CONSEQUENCES

Greek resentment is increasingly directed at Germany. Striking protesters burned a German and Nazi flag in central Athens on Tuesday.

Merkel tried to calm the atmosphere, saying that forcing Greece to abandon the euro would have "unforeseeable consequences."

"I will have no part in forcing Greece out of the euro," she said in response to a question from a Greek student at a meeting with young people in a Berlin museum.

Euro zone countries cannot be forced out of the currency bloc by their peers. But some policymakers are starting to say in public what they have been saying in private: that if Athens fails to accept the terms, they might not do much to prevent Greece falling out of its own accord.

Dutch Prime Minister Mark Rutte said the euro zone could live without Greece if it did not keep its side of the bargain.

"We are currently so strong in the rest of the euro zone, in the countries who have the euro, that we can handle an exit of Greece - a Greece which runs into serious trouble," Rutte told Dutch public broadcaster NOS.

"They really have to implement all the measures they have promised to take. If that doesn't happen we can't help them," he added.

Such comments awaken deep fears among Greeks that they will be cast adrift from the euro zone and left with a new national drachma currency which would probably dive in value.

($1 = 0.7646 euros)

A Modern Greek Tragedy

Πηγή: Electric Politics
By George Kenney
Feb 7 2012

Greece makes up about two percent of the European Union's economic activity. A rough comparison may be the greater Miami area within the United States. Municipal mismanagement in Miami, of course, could not in one's wildest imaginings bring down the dollar. So how is it possible that the Greek debt crisis might wreck the Euro? This is something of a rhetorical question since financial experts have long known the answer: internal Eurozone balance of payments adjustments aren't possible without either fiscal redistribution among Eurozone members or national wage derogation to boost competitiveness. Without adjustments, sovereign default not only becomes possible, but contagious. Absent fiscal redistribution — an option seemingly foreclosed by European leaders — the question financial experts can't answer, however, is how far a Eurozone member's wage levels can fall before the country experiences a political explosion. Perversely, led by Germany, the Europeans seem determined to find out.

Who is really at fault? The conventional answer is, the Greeks: they borrowed too much, they spent beyond their means, and now they must pay the money back. On the other hand, the situation is roughly analogous to an unqualified homebuyer getting a cut rate mortgage with balloon payments that they could never hope to make. Shouldn't the lender bear some responsibility?

Though the Europeans claim not to have known until 2004, three years after Greece joined the Eurozone, that Greece had cooked its books to meet Eurozone entry requirements, surely the Europeans were not unaware that Greek notions of accounting paperwork were, shall we say, elastic. Moreover, the European industrial powerhouses had much to gain. With Greece able to sell Euro denominated bonds at low interest rates Greece was able to buy, for example, French Fremm frigates, Super Puma helicopters, and Rafale fighter aircraft, and German S-214 submarines, Leopard tanks, and Siemens rolling stock. The profits were real, and immediate, the risks of a sovereign default theoretical, somewhere over the horizon. Whether Greece really needed these and other major purchases was, to the vendors, immaterial. France and Germany happily would have sold their hardware to Miami, if they could. Not everything that Greece bought with borrowed money was a waste, but that's not the point. Greece and the Eurozone authorities had fibbed to each other in a calculated way, with eyes wide open, so it's not at all unreasonable to suppose both are at fault.

Arguably, indeed, the fault accrues much more to Eurozone authorities than to Greece because, politically, the Europeans have long dodged the critical fact that their limited currency union is unworkable. In particular, Europe has dodged the German question: the largest economy in the Eurozone cannot pursue export driven growth and unending balance of payments surpluses without causing extreme harm to weaker Eurozone members. From that perspective Greece is little more than a convenient scapegoat for failed European leadership.

The Europeans are moving from delusion to delusion. The buzz now is that it won't matter if Greece returns to the drachma — other Eurozone members, Germany especially, are tired of the Greeks being Greek. They don't want to make available any additional, large bailouts. And only after Greece accepts the most severe fiscal punishment — having already seen its GDP shrink by 12% since 2008 — thus symbolically submitting to a moral code that glorifies plunder, will previously promised rescue funds become available (and even then the rescue funds are to be divvied up firstly among lenders, leaving the Greek government on a shoestring). So say Europe's elites.

The reality, however, is, if and when Greece leaves the Eurozone the exact same balance of payments crisis will recur immediately with regard to the next weakest member and/or the one most vulnerable to derivative trading in sovereign debt. That could be Portugal, even Italy. The limited structure of the Euro makes such crises and the threat of defaults unavoidable in the long run. We are now in the long run.

The Europeans may well congratulate themselves that they have called the Greek bluff. Instead, the Greeks should call the European bluff, forcing European leaders to either rework the Eurozone into a real fiscal union with transfers from wealthier to poorer members (including a European Central Bank willing and able to back up Euro denominated bonds that are under attack), or else give the project up entirely. In short, the Greeks should say "HELL NO!" to further fiscal austerity.

Greece gets an ultimatum from EU but there is life after the euro

Πηγή: Irish Independent
By David McWilliams
Feb 8 2012

Are the Germans about to give up on the Greeks? Are they about to allow the Greeks to leave the euro? It certainly feels like that. The EU has just issued an ultimatum to Greece. All the talk of a friendly deal is gone. Greek politicians say they need more time to examine the austerity attached to the release of the next tranche of the €110bn loan.

But austerity isn't working and the Greeks know it. Athens adopted the troika's strict budget targets in May 2010 -- nearly two years ago -- in return for a €110bn rescue. Last year the Greek economy shrank by 6pc and the country's budget deficit is still close to 10pc of GDP. Its current account deficit is also stuck at 10pc of GDP and anyone who could have got their money out of Greece will have done so ages ago.

With no credit, unemployment has risen to 18pc. As we pointed out in this column last week, over half of young Greeks are out of work. This can't go on. And as the great American economist Herbert Stein observed, "when something can't go on forever, it will stop".

Leaving the euro now must be an option for the Greeks, because they are looking down the barrel of what they see as years and years of indentured slavery to foreign creditors. Maybe they will vouch for the uncertainty of a new drachma rather than the absolute certainty of 10 years of contraction. Who wouldn't?

At the highest level in Europe the cracks are beginning to appear.

In Brussels, Jose Manuel Barroso -- maybe thinking that his native Portugal will be next -- insisted that eurozone leaders would continue to strive to keep Greece in the euro. This was in contrast to Neelie Kroes, the Dutch commissioner who suggested to the Dutch press that a Greek exit wouldn't be a big deal.

The Portuguese should be worried because with the latest round of cheap ECB financing, the Germans may be confident that they could allow Greece to go overboard without capsizing the project. The language has changed in the past week. Up to now, the deal was to quarantine Greece on a drip-feed of money, keeping it barely alive but sending the message out that while Greece is different, the family will look after it.

The Greeks are gambling that they can get cash without having to cut yet more.

They are hoping that they can just borrow more and more to maintain their standard of living. The Greek threat is if you don't give us cash, we bring the whole thing down around you. The Greek position or ace is that Germany will blink first. Up to now this might have been the case.

But much has changed over the past week. The ECB is now lending enormous quantities to European banks at 1pc for the next three years. By the end of this month it will have lent close to €1 trillion. The banks are getting a free 5pc carry on this and are delighted.

The Germans might now be thinking that we have enough liquidity from the ECB to call the Greeks' bluff.

Emboldened by the fall in Italian and Spanish bond yields, what if the Germans see beyond the Greek threat?

If they cut Greece off and inject money into every other nook and cranny of the eurozone, maybe they can get rid of Greece and manage the shock. If this could be achieved, the Germans would be delighted. This would allow them to get rid of a delinquent member and send a strong signal to the rest of them that more messing won't be tolerated.

If this is an accurate interpretation of the last few days, then it will be reminiscent of the demise of the Gold Standard in the 1930s.

Back then the French behaved like Germany now. The French wanted to punish the Germans when the Germans, like the Greeks, desperately needed to roll over huge borrowing they owed to the Americans.

While the Greeks now are a different proposition to the Germans in 1932, the end game was the same. The Germans abandoned the Gold Standard but the French couldn't control the consequences.

In fact the Swedes were the first to see through the Gold Standard. They abandoned it, printed money, allowed their exchange rate to fall and slashed interest rates. And guess what? Sweden was the first country to come out of the Great Depression.

Could the Greeks do the same as the Swedes? Yes why not? At the moment, Greece is facing a generation of austerity. It has to borrow 10pc of its GDP just to pay for its imports each year. Its economy is in freefall. The deal with the euro is that every country has to become more German to survive. Greece will never be Germany, so what's the point?

Leaving the euro would lead to months of chaos as savings were converted to the new drachma. The local banks would see their balance sheets wiped out, if they were to pay their foreign creditors, so guess what? They won't pay. They will pay in drachma. Inflation will take off and wipe out the debts, which have been converted from euros. The government will balance its books overnight or will borrow heavily from its central bank, which is printing the new drachmas.

It will be the cheapest place in Europe to go on holidays. And like all the other countries that abandon a strict currency regime that they can't bear -- such as Iceland a few years back -- the economy will start to grow again. They will fall back on the IMF to stabilise the economy with a big loan, which will be senior to all the defaulted stuff. This worthless debt they will buy back at some ridiculous price. And life will start again.

On the 20th anniversary of the Maastricht Treaty, that's the way things are likely to work out.

Once the world sees that there is life after the euro, as there was after the Gold Standard and lots of other now defunct currency arrangements, the financial markets will ponder who is next.

Don't be fooled that this European debt story is over. It is not; in fact the interesting bit hasn't even started yet.

It's Time To End the Greek Rescue Farce

A protester burns a flag of Germany during a protest in Athens: Making enemies with an entire people

Πηγή: Spiegel
By Stefan Kaiser
Feb 7 2012


Whether it be an escrow account or a budget commissioner, the latest demands by Germany show just how absurd negotiations over Greece's future have become. It is high time to bring an end to this tragicomedy.

For the past two years, Greece has wrangled with the euro-zone states and the International Monetary Fund (IMF) over its so-called "rescue." Austerity measures have been agreed to, aid has been paid and private creditors have been forced to accept "voluntary" debt haircuts. Despite all this, Greece is in even worse shape today than it was then. Its economy is shrinking, the debt ratio is rising and the country and its banks have been cut off from capital markets. There isn't even the slightest sign that the situation might improve. Something has gone very wrong with this rescue.

But none of the protagonists seem to have grasped this. They continue to negotiate as if things are business as usual, they let one "final ultimatum" after the other pass and they persistently fail to realize that their discussions have started to verge on the absurd. It would be a lot better to end this farce.

For weeks now, the Greek government has been negotiating with private creditors and the troika comprised of the IMF, European Union and European Central Bank (ECB) over a second bailout package. But it is already clear that this aid package will not save the country. It appears it will only delay a Greek insolvency -- and it will serve to create new hardships for the country's population.

It is time for politicians to admit that their carrot and stick strategy has failed. The idea that the country can be freed from its debt quagmire though austerity programs and aid pledges tied to conditions just isn't going to work. It won't even work if private creditors forgive part of the country's debt.

Broken Promises

For months, Greek government politicians as well as the so-called rescuers in Berlin, Paris and Brussels have all been deceiving themselves. Each supposedly final rescue package is followed by yet another, and austerity pledges aren't being adhered to.

That has a lot to do with domestic political considerations. German Chancellor Angela Merkel and French President Nicolas Sarkozy must convey to their voters that they have the situation and, especially the Greeks, under control. Meanwhile, the government in Athens must, out of self-preservation, limit the burdens to its own people as much as possible.

That's why both sides repeatedly agree to promises that everyone knows they will not be able to keep. The current rescue package, for example, officially agreed at the euro summit at the end of October, already has to be improved because it has become too small.

The Greek economy is shrinking faster than assumed. And the austerity plan Greece approved last summer under pressure from its euro-zone partners is also failing to live up to expectations. That's no wonder, either, because €50 billion of the €78 billion in total savings pledged was tied to proceeds from privatizations that, not surprisingly, have failed to generate the profits expected.

Out of Thin Air

The truth is that it must have been obvious to all parties concerned, including the Germans, that the figures were pulled out of thin air. What kind of investor would invest so much money in a country that, for the foreseeable future, will be stuck in a serious economic depression?

The supposed rescue efforts have culminated in the latest German proposals. The German government would like to send a "budget commissioner" to Athens to keep an eye on the Greeks. If that doesn't work, then the Germans also want, at the very least, to be able to impound Greek accounts if they don't pay back their debts through an escrow account.

The suggestions have justifiably provoked outrage. Quite apart from the humiliation these measures would entail for the Greeks, Athens would almost certainly find a way to circumvent them. In the end, Germany would wind up turning an entire nation into its enemy without even gaining anything.

Greece Must Go Bankrupt

Perhaps, the Greece rescuers on both sides of the negotiating table should try being honest for a change. Here's the truth: If the country is to lastingly reduce its mountain of debt and, at some point, be able to borrow money on the capital markets again, then it needs a comprehensive debt haircut. In other words, it needs to go bankrupt.

And it's not just private creditors who will have to forego a large part of their outstanding Greek debts. It is also other European countries and the European Central Bank. That would be expensive for taxpayers across Europe, and it would also be economically risky. Indeed, no one knows what consequences a Greek bankruptcy would have for other crisis-ridden countries like Portugal, Ireland or Italy. But at least it would be an honest solution.

Of course, things wouldn't stop there. The euro-zone states would also have to build a bigger firewall around the remaining crisis countries in order to prevent contagion. They would have to help some banks that get into trouble as a result of a debt cut. And they would have to provide Greece with a real opportunity to get back on its feet and start growing under its own steam -- in other words, a kind of Marshall Plan.

All this would be very expensive, and German taxpayers would also be forced to do what they have feared from Day One -- which is to pay for Greece. But this solution has two major advantages. The payments would be limited, and they would actually help Greece.

And unlike everything that has been negotiated up until now, the solution would also be worthy of being called a rescue package.

Nerves wearing thin as Greece extends talks deadline

Greek trade unions have called for a general strike on Tuesday

Πηγή: EUobserver
By VALENTINA POP
Feb 6 2012

BRUSSELS - Greek talks with international lenders on a €130bn bail-out have gone into further overtime as the technocrat premier struggles to secure the backing of political parties for more spending cuts.

The government had sought to wrap up the deal over the weekend, but after marathon talks, Prime Minister Lucas Papademos was able to announce only a partial deal in support of the austerity measures demanded by international lenders.

In a statement Sunday night, Papademos said the party chiefs had agreed to reduce public spending by 1.5 percent of the country's gross domestic product, cut wages and labour costs and recapitalise their cash-strapped banks.

According to official figures, some €65bn has been pulled out of Greek banks since 2009, out of which around €16bn was sent abroad, mainly to British and Swiss accounts.

"The prime minister and political leaders will meet again tomorrow to complete the consultations on the content of the programme," the statement read.

Wage cuts and a pensions freeze are said to be the most contentious points, as no party wants to be associated with such measures ahead of the April elections.

Antonis Samaras, leader of the conservative New Democracy party, said the country was "being asked for more austerity, which it is unable to bear."

In return, Papademos is said to have threatened to resign if there is no agreement, Greek daily Kathimerini reported.

The country is now in its fifth year of recession. The unemployment rate is at 20 percent and the number of homeless people on the freezing streets of Athens has increased by 25 percent since 2009. The International Monetary Fund, itself one of Greece's lenders, has admitted that the social costs are too high.

In protest at the planned cuts, the country's biggest trade unions have called for a 24-hour strike on Tuesday.

A spokesman for the Socialist Pasok party said political leaders were given a noon-deadline on Monday to agree on the cuts, so that the government could present the deal to a teleconference or snap meeting of eurozone finance officials. But as one EU official put it, "with Greece, no deadline is for sure."

The ultimate deadline for Greece is 20 March, when it has to repay €14.5bn worth of bonds for which it desperately needs the second bail-out. But a preparatory phase of four to six weeks is needed prior to that in order for the finance ministry and banks to implement the so-called private sector involvement - bond-holders taking 'voluntary' losses of more than 50 percent, which should also be part of the €130bn bail-out deal.

In an interview with Der Spiegel, eurozone chief Jean-Claude Juncker did not rule out that Greece may be declared bankrupt if the deal is not sealed in time.

"If we were to establish that everything has gone wrong in Greece, there would be no new programme, and that would mean that in March they have to declare bankruptcy," he said.

Juncker mentioned a promised privatisation drive and the struggle against rampant corruption in state administration as two areas that needed particular attention.

Top banker Josef Ackermann, head of both Germany's financial giant Deutsche Bank and the International Institute of Finance negotiating with the Greek government, on Saturday warned that if Greece were to go bust, the entire financial system would be shaken.

Speaking at the Security Conference in Munich, the Swiss banker said: "It's not only about Greece, it's about Europe," adding that other troubled euro-countries would be immediately affected. Portugal, already under a bail-out programme, is seen as the next country in line in case of a Greek default.

Meanwhile, German Chancellor Angela Merkel and French President Nicolas Sarkozy are set to hold talks and a joint government meeting in Paris on Monday.

Germany's fierce opposition to the European Central Bank or national governments taking losses on their Greek bonds along with the private sector is another reason why the negotiations in Athens have stalled for weeks.

Argentina as a blueprint for Greece

Πηγή: Jerousalem Post
By AARON KATSMAN
Feb 2 2012

Your Investment: Instead of delaying, why not just admit the truth: Declare bankruptcy and start fixing.

The common wisdom being bandied about by analysts is that Greece needs a bailout and must remain part of the euro zone or else a global financial Armageddon will ensue. According to the Sydney Morning Herald, International Monetary Fund Managing Director Christine Lagarde said during a speech in Germany, “We need a larger firewall,” warning that otherwise the world could slide into a “1930s moment” of isolationism, which led to the Great Depression.”

I guess the question is whether this is actually true. After all, the IMF has a tradition of messing up these situations. Just look at the Asian financial crisis of 20 years ago, or the Latin American crisis of a decade ago. The IMF prescription in these crises exacerbated and prolonged the problems for more time than was needed.

The IMF and the European Union are pushing for a bailout of Greece in exchange for austerity measures. The problem is that the bailout money they are talking about is barely enough to keep the country solvent for a month or two. It sure seems like a black hole. Keep pumping more and more money into Greece in order to delay the inevitable. Is this sound policy? Is this the solution to prevent a “1930s moment”?

Don’t cry for me Argentina

A decade ago, another country was in similar dire straits as Greece is today. No, I am not talking about Israel, which was certainly teetering on the brink, but rather Argentina. There are many similarities between Greece and Argentina, and maybe we can learn from the Argentinean model and apply it to Greece.

Mario I. Blejer, a former governor of Argentina’s central bank, and Eduardo Levy-Yeyati, one of its former chief economists, jointly penned an opinion piece for Bloomberg about the Greek crisis, and they pointed to a lesson that can be learned:

“The first has to do with the timing and size of the debt exchange. In this regard, Argentina’s lessons are clear: Delaying the unavoidable and then defaulting belatedly, unilaterally and in a disorderly fashion, imposes significant costs in real activity, with no visible benefits. True, markets need to see some pain to be convinced of a country’s willingness to pay, in order to accept a default. But Argentina, like Greece now, went way beyond that. By the time Argentina defaulted in 2001, it had experienced four years of recession and its gross domestic product had declined by about 22 percent. How much pain should Greece endure?”

Bob Adelman wrote in the New American about the similarity between then and now: “The Argentine crisis had been brewing for years (some say as far back as 1913 when the welfare state began to be installed) but came to a head when a new government was elected in December 1999 and found itself facing years of mismanagement and fraud left over from the previous administration, including much higher debts and deficits than had been claimed. In December of 2000, Argentina fell for the siren song of the IMF (“we’re here to help you”) and received its first bailout.

“IMF aid made the problem worse. The Argentine currency, the peso, was tied one-to-one to the American dollar and had become grossly overvalued. With foreign trade declining and interest payments to the IMF increasing, the government couldn’t continue supporting the peso. An overnight devaluation of the currency took place, dropping the peso’s purchasing power by 40 percent over one weekend and beginning an inflationary spiral that reached an annual rate of 5,000 percent by the summer of 2002.”

Just do it

Instead of punting the problem down the road another three or four months, why not just admit the truth: declare bankruptcy and start fixing the problems like Argentina? By starting off with a clean slate and a devalued currency, the Argentines where able to extricate themselves from the mess, and from 2003-07 they averaged 9% growth. It wasn’t easy for them, but in the end Argentina has a flourishing economy.

Greece should declare bankruptcy and leave the euro so that it will be free to take the steps it needs to get its economy back on solid footing. It should bring back the drachma, let it devalue and then export its way out of the mess. Greece can’t do that if it is tied to the euro and constrained by EU rules. No one says this will be easy, but it will ultimately lead to living within its means and having a solid economy.

Ansgar Belke, a professor at the German Institute for Economic Research in Berlin, said: “What happened in Argentina proves that it is possible for a country to come back after bankruptcy and once again play an important role in international financial markets. I always supported a restructure of debt in Greece. The damage would not be as grave as is commonly feared. Greece is a relatively small country. A restructure would stagger a few German and French banks... but this scenario is more sensible than the massive credit that we’re currently giving.”

The Right Decision Is For Greece To Finally Default

Πηγή: Seeking Alpha
By Eric Parnell
Feb 1 2012

The cost of freedom has been found. It's 130 billion euros. And in the end, this is a cost that the stock market should be prepared to bear to maintain this freedom.

Greece may soon face a very unsettling choice as it works to negotiate a settlement on its debt. German government officials are now calling for a European commissioner to replace the Greek government in directing its fiscal policy including spending and taxation. In other words, the Germans are calling for the Greeks to surrender their national autonomy. Frankly, this is an outcome that is simply unacceptable. And if giving up liberty becomes a requirement to avoid default, taking the pain that comes with default is the better option no matter what the cost.

Greece certainly did not walk alone down the path that brought it to this point. When Greece joined the euro currency union, it ceded control over its own monetary policy. In exchange, Greece became a part of a community that enabled it to borrow money at much lower rates. And borrow they did. Why did they borrow this money? In many instances, it was to buy goods from neighboring European exporters including most notably Germany. So in short, Germany gains a happy customer in Greece that is able to spend even more by joining the euro club. In good times, it appears that everybody wins. Germany increases its exports and Greece seemingly enjoys greater consumption and a higher standard of living.

Greece clearly lacked discipline by borrowing too much money during the good times, which is now coming back to haunt them. And they now must endure the hardship resulting from this mismanagement. But did the Germans or Eurozone leaders closely scrutinize Greek borrowing practices when the economy was still thriving? Absolutely not. And were Greece's borrowing practices discouraged at all by its Eurozone partners while the economy was still humming along? Once again, no. After all, exporters such as Germany were directly benefiting from Greece's additional spending, no matter how they got access to the money.

But now that Greece is collapsing under the weight of too much debt, vicious scrutiny and heavy blame has descended upon it. Does Greece bear responsibility for borrowing too much money that they were never going to be able to pay back? Absolutely. But do Germany and the European Union also bear responsibility for allowing the situation to go unchecked for so long and spiral out of control before finally doing something about it? Absolutely.

When you invite someone into your club, you simply can't reap all of the benefits of their excessive behavior and then blame them for the costs when you did nothing to curb this behavior along the way. It goes without saying, when it comes to borrowing money, it is best to act prudently. Whether you're a country, a company or a household, you should almost never borrow more than you can afford to pay back. And if you do, measures must be in place to swiftly correct this behavior before it spirals out of control. Both of these principles have been lacking in the Eurozone for many years, and it has now finally boiled to the surface not only for Greece but also several other nations across the region.

So here we are today, and it's all come down to this. Greece needs at least 130 billion euros in liquidity to avoid insolvency. Included among this is an upcoming 14.5 billion euro debt refinancing that must be completed on March 20. Surrendering fiscal sovereignty is now being offered up as a precondition for receiving this money. But here's the problem. Even if they receive this latest rescue package, Greece is never going to be able to pay these loans back in the end. Their economy lacks both the size and the growth potential to make it work. Therefore, giving up fiscal autonomy to receive more liquidity still only postpones the inevitable insolvency. Good effort to this point, but it's just not worth it anymore.

It is at times like these that tough decisions must be made, and the right decision in this case is for Greece to finally default, as giving up fiscal autonomy is simply not an option no matter what the cost. When presented with such a price, it's time to just get on with it already and default.

Give Me Liberty AND Give Me Financial Death!

A default would be a tremendously painful experience for Greece. An exit from the euro currency and a reintroduction of a new drachma would be a likely. This new currency would immediately devalue sharply and would likely have little value outside of Greece. Domestic inflation would likely spike higher and unemployment would most certainly rise sharply. Such are the costs of having borrowed too much money in the past that cannot be repaid. But by finally accepting this insolvency outcome and effectively ripping off the bandage, Greece will move more quickly toward an economic resurrection.

The economy will live again, and it will do so in a better, healthier form. It will take some time, but it will come much sooner than continuing on the current path of hopeless austerity. Most importantly, Greece as a country and as a people will maintain their autonomy. And the rest of the world will also benefit by diverting precious resources toward more productive pursuits than proving endless liquidity to insolvent countries.

A Look Across The Ocean Shows The Way Out

One has to look no further than Iceland to see what Greece might expect from accepting a default. In late 2008, Iceland simply had no choice but to sustain the immediate direct hit of crisis head on. They were not part of any currency union, and the magnitude of the bad debt in their banking system was multiples in size relative to their economy. Facing an insurmountable problem, Iceland allowed its banks to fail and effectively went into default. And a very difficult period of economic pain followed that included skyrocketing inflation and unemployment. But by accepting this pain right up front, they were able to begin working to restore their economy in the aftermath.

Where is Iceland now just over three years later? The economy is resurrecting itself and an economic recovery now appears fully underway. A deeply devalued currency has enabled Iceland to boost growth through exports. The employment picture is also improving. And the country has already regained its investment grade credit rating and is once again accessing credit markets to borrow funds. While far from perfect, both current conditions and the outlook are vastly better today for Iceland than they are for Greece. And their sovereign independence was never in doubt along the way.

It could be argued that allowing Greece to default encourages more irresponsible behavior in the future. Perhaps this is correct, but that will be for future creditors to decide, not other sovereigns, when the time comes that the country wants to try and borrow money again. In the meantime, enduring the painful economic correction will be enough to remind the Greek people of the importance of maintaining fiscal responsibility once their economy is restored to working order.

Finding The Cost Of Freedom In Stocks

A Greece default would likely place heavy pressure on global stock markets. But what is the alternative at this point. Suppose Greece is rescued from default at the cost of surrendering its autonomy. Should we believe that other countries are not far behind in stumbling down the same path? After all, Portugal may soon arrive at a similar end sooner rather than later at this point. And what of Ireland, Italy and Spain? Or even France for that matter?

Will more European commissioners be installed to direct fiscal policy for nations all across the continent before it's all said and done? Will the people of any of these nations be at all comfortable with such a prospect? I think not. And how much more must healthy economies be infected in trying to rescue those that are beyond repair anyway? Widespread social unrest is a far greater dilemma than declining stock prices.

So what could we expect from global stock markets in such an episode? The immediate downside for stocks could be significant. Much of this pressure would likely come from the European banking system, which will be forced to liquidate assets in order to absorb and manage the losses associated with this bad debt. This would likely lead to a spillover effect into the global banking system. And in some cases, banks may even fail. But the potential for such bank failures argues all the more for getting on with the cleansing process now.

Nobody wants a complete collapse of the global economy and its financial markets, so all the more reason to deploy the precious remaining capital resources toward supporting ailing banks today while cleansing the system instead of acting in vain by propping up sovereigns that will never be able to return this capital in the end. The more we can get out in front today and direct the process while controlling the damage associated with the cleansing process, the better.

Stocks would eventually bottom following such a cleansing process. But they would likely bottom at a level that would make much more sense from a fundamental perspective than where they trade today. And a stock market based on fundamentals instead of stimulus driven euphoria might even encourage the return of many investors that opted to walk away from stocks in the last few years out of sheer frustration by trading activity that too often did not make sense.

It is also important to remember that attractive investment opportunities will continue to exist even in the face of crisis. Selected areas of the market outside of stocks would likely perform exceptionally well during such an unwind scenario. Leading among these is U.S. Treasuries of all durations including long-term U.S. treasuries (TLT), as capital takes flight toward perceived safety. Agency MBS (MBB) would also likely hold steady and provide a yield premium relative to comparable duration U.S. Treasuries.

Both gold (GLD) and silver (SLV) would also likely perform exceedingly well following the initial liquidation phase of the unwind process due to their safe haven characteristics as hard assets and currency alternatives. And not every stock would necessarily be taken down by such an unwind scenario, as a selected group of stocks have demonstrated the ability to generally hold steady if not even rise during periods of extreme stress over the last few years. Representative names include Family Dollar (FDO), McDonald's (MCD) and WGL Holdings (WGL).

Bottom Line

Now is the time to get on with the corrective process. Sovereignty must not be sacrificed for the sake of avoiding default. And if we have reached the juncture where this outcome is even being mentioned for consideration, then now is the time to take the medicine and get on with the cleansing process. If countries must leave the Eurozone in the process, so be it.

Continuing to throw money at countries that will never be able to pay it back is not a solution. And the benefit of keeping the stock market artificially inflated for a shrinking number of participants seems hardly worth it now that national sovereignty is coming into question, particularly when investor confidence in markets seem to be deteriorating anyway.

Instead, allowing these wobbling economies to undergo the corrective process and letting the system cleanse itself is a solution. Will it be unpleasant? Yes. Will it take time? Yes. Such are the cost of the excesses that came to lead us to this point. But these costs are worth it if they can help countries maintain their autonomy while at the same time working toward a new dawn and true fundamental basis for growth not only for Europe but the world. And it is conditions such as these that a genuine bottom can be established in global stocks and a new secular bull market can finally get underway.


Disclosure: I am long TLT, GLD, SLV, FDO, WGL, MBB.

Disclaimer: This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.

For Greece default is the only option

Employees of the Greek ministry of culture hold wooden crosses during a march in Athens on 17 January to protest at new debt talks between government, employers and Greece's institutional creditors.

Πηγή: The Guardian
By Costas Lapavitsas
Jan 23 2012

Negotiations to reduce Greek debt have been suspended after no agreement could be reached last week. At some point in the near future Greece seems certain to default on its obligations. But the drama surrounding the talks in Athens, Berlin and Paris shows that there will be nothing co-operative about Greek default. It is a ruthless contest dominated by the so-called troika: the European Union, the European Central Bank, and the International Monetary Fund.

At every turn the interests and rights of people across Europe have been disregarded. Negotiations have proceeded in secrecy. Greece, whose government is led by an unelected central banker, is represented by a team of politicians and technocrats who have performed lamentably during the crisis. They have hired bankers Lazard Freres and lawyers Cleary Gottlieb, renowned sovereign default specialists, although the benefits remain to be seen. Those who are owed money by Greece have been represented by the International Institute of Finance, a self-styled mouthpiece for bankers. Other lenders, including hedge funds, have no collective representative.

The troika has accepted that Greek debt must be reduced to sustainable levels; but it also wants the reduction to appear voluntary because, if the lenders were coerced, Greece would be declared in formal default, and banks and financial markets would be thrown into crisis. The troika would also like the reduction to be on terms that would allow immediate fresh loans to Greece – an urgent step if the country is not to stop repayments altogether – and wants Greek debt held by official bodies, including the ECB, to remain intact. Not surprisingly, the circle is proving hard to square.

The debt in question is €200bn. About half belongs to Greeks – banks, social security funds and others – who are first in line to bear the costs of reduction (the "haircut"). Less than a quarter belongs to international banks, and a good part of the rest to hedge funds.

The deal proposed by the troika is geared to the interests of lenders, particularly international banks. The face value of the debt would be reduced by 50%, and the remaining debt would be replaced by new long-term bonds bearing a low interest rate, perhaps less than 4%. The new bonds would be subject to British law, which favours lenders.

The losses for international banks would be modest. Even so, they are angling for a higher interest rate, although their bargaining power is weakened by reliance on the state for liquidity and capital. The real blow would fall on Greek banks, which would effectively go bankrupt. The Greek state is thus desperately seeking fresh loans to replenish its banks' capital. Much of the expected reduction of its debt would, therefore, be immediately voided. A cruel blow would also fall on Greek social security funds and small bondholders, with losses probably passing on to pensions and savings.

Meanwhile, hedge funds have been buying Greek debt at low prices in the hope of being paid at, or near, full value. Since Greece has to make debt repayments of almost €15bn in March, huge amounts of European taxpayers' money could potentially be transferred to these vulture funds. The speculators could possibly be coerced into the deal by applying Greek law, but if the reduction were not voluntary, there could be a chain reaction across financial markets.

The worst aspect of the deal is that it is unlikely to benefit Greece long term. The original plan was to bring debt down to 120% of GDP by 2020, but the "rescue" programmes of the past two years have forced the country into a real depression. The IMF now thinks that Greek debt will be on a much higher level by 2020 – clearly unsustainable. It is seeking deeper reductions, but the price would be even harsher cuts in wages, pensions, and public spending. The social repercussions on an already weakened country would be horrendous, quite apart from the political difficulties of introducing further severe austerity.

It is clear that Greece has little to expect from a debt-reduction process led by the troika. It should take charge of its own predicament, abandoning the charade of voluntary haircuts. For that, it needs to default in a sovereign and democratic way by immediately declaring a cessation of payments.

Greece should then publicly audit its debts to decide what should be paid and how. The objective should be to restart economic growth and to avoid disruption of basic social services. Debt would inevitably be cancelled, including official debt held by the troika, and there should be negotiations with the lenders under full public scrutiny. Only then could this dreadful saga come to a close, allowing Greek society to take the first steps on the long path to recovery.

In Spite of Antics and Best Efforts, Greece Default Likely: UBS

Πηγή: International Business
By ELEAZAR DAVID MELÉNDEZ
Jan 24 2012

The chief economist at Swiss banking giant UBS said Tuesday afternoon that Greece would likely default on its sovereign debt obligation, putting underwriters of insurance against such an event on the hook for billions of dollars in payments.

Speaking at a fixed-income conference in New York, Larry Hatheway, the London-based chief economist for UBS, said the current discussions amongst bondholders and eurozone officials -- which would have creditors accept 30 cents on the dollar for their sovereign debt assets -- were "probably not even enough to appropriately reduce Greece's public debt."

Bondholders, represented by industry group Institute for International Finance, have been haggling with European authorities to determine how much they will get paid on their Greek sovereign notes. While preliminary agreements to take a 50 percent "haircut" were made in October, over the weekend, European authorities pushed for a more punitive scenario that would leave them with a discount on their bonds closer to 70 percent. The bondholders, and the eurozone finance ministers that must approve any decision, are currently at an impasse.

"Discussions with Greece and the official sector are paused for reflection," a spokesman for the Institute of International Finance said Friday, according to Reuters.

At a conference organized by capital market research firm TABB Group, Hatheway noted the bondholders "will probably have to acquiesce even if they're balking at the moment." But he suggested that might all be in vain. He pointed to the fact that less than two months from now, on March 20, the Hellenic Republic has a €14.5 billion debt payment due and "Greece does not have the money for that debt."

If Greece were to default, it could trigger the payment on thousands of credit default swap agreements, derivative contracts privately agreed to between financial institutions to protect themselves against the risk of sovereign debt repayment failure.The International Swaps and Derivatives Association, a private organization, would make the official proclamation as to whether actions by the Greek government constitute a default, triggering the CDS obligations.

No one knows exactly who would owe how much, and some market participants fear at least some financial institutions, having underwritten the insurance, will not be able to come up with the promised payments. The Depository Trust and Clearing Corporation, which serves as a clearinghouse for some financial derivatives, says the total value of CDS agreements written to insure against a Greek default is some $68.2 billion. It estimates that, were a default to occur, some $3.2 billion would change hands.

Previous "haircut" discussions with bondholders, including the preliminary agreement in October, have been done in such a way as to specifically prevent triggering CDS obligations. And many in international finance are still looking for a "voluntary" swap solution that does not end up trigerring payment on these derivatives.

Tuesday, for example, IMF Managing Director Christine Lagarde said on French TV that a Greek default "would not be envisageable," accoridng to the Wall Street Journal.

Charles Dallara, a managing director at the IIF, also seemed optimistic on the prospect of a bondholders receiving a voluntary cut.

"I'm actually quite confident that if we can reach a voluntary accord that we can mobilize a very high participation," Dallara said on CNBC Tuesday.

But Hatheway sees no other way.

"If it is done in a way that forces a re-structuring in an involuntary manner," he told the New York conference Tuesday, speaking of a Greek default "it will cause risk premiums to rise" for other countries like Italy and Spain.

Hatheway is not the only significant market voice to have stated Tuesday a Greek default was on the way.

Earlier in the day, Standard & Poor's managing director for sovereign ratings, John Chambers, told a different New York conference that "in all likelihood, the very least that would happen in Greece is an exchange that would qualify by our criteria as a default," according to Bloomberg.

Another participant in the same event as Hatheway, Robert Burke of Bank of America, had told the audience his clients were expecting to be paid on CDS obligations in case of a Greek default.

"I don't get a sense of panic", Burke, head of OTC clearing for the Charlotte, North Carolina-based bank told a panel on credit markets. "There's only so much you can move around before trigerring credit event definitions."

Scare Tactics in Greece

Πηγή: New York Times
By GRETCHEN MORGENSON

Nov 19 2011

AS the debt mess in Europe deepens, bankers are pressing Greece’s bond holders to swallow big losses.

Leading the charge is BNP Paribas, the big French bank, which has been hired by the Greek government to help persuade investors to accept a deal that would cut the value of their investments in half.

On paper, this restructuring would be voluntary. Bond holders would exchange their old Greek bonds, at a 50 percent loss, for new ones that would mature in 30 years. Painful, yes. But in theory, such a move would help Greece get a handle on its debt, and that would be good for everyone.

Behind the scenes, however, BNP officials seem to be twisting some arms. A big point of contention is — surprise! — derivatives.

Investors who own Greek debt and have bought insurance on it, in the form of credit default swaps, wonder why they should accept the offer that’s on the table. If Greece stops paying after the restructuring, those swaps are supposed to cover their losses, much the way homeowners’ insurancewould cover a fire.

The International Swaps and Derivatives Association agrees. The group, which represents the industry and is largely controlled by big banks, says anyone who doesn’t like the offer can walk away. “If a payment is missed, trigger the C.D.S. and be made whole,” the group said on its Web site.

BNP and its client, Greece, want to corral as many investors as they can. The more bond holders they persuade, the more that Greece would benefit — and the more the bank would collect in fees.

So it is perhaps unsurprising that some recent meetings have taken on a forceful tone, according to three portfolio managers who attended three different sessions with BNP Paribas. The investors spoke on condition of anonymity because they feared retaliation by the bank.

Contrary to what the I.S.D.A. says, the BNP Paribas bankers have been telling bond holders that their credit insurance may not pay off down the road, because after the restructuring is completed, the terms of the old debt might be changed, these money managers said.

Normally, investors would shrug off such an argument.

But the warnings from BNP Paribas carried weight, the money managers said, because of one of the officials who was making them. She is Belle Yang, a BNP specialist who also happens to serve on a powerful I.S.D.A. committee. The panel, the “determinations committee” for Europe, decides what constitutes a “credit event” in Greece or elsewhere on the Continent.

This is the committee that will likely rule that the Greek deal would not constitute a default. That is because the restructuring would be “voluntary.” Some investors who were counting on their credit insurance would be out of luck.

In the meetings, the investors said, Ms. Yang identified herself as a member of the committee. That itself was unusual, because the names of I.S.D.A. committee members are normally kept confidential. The association doesn’t disclose them, and lists only panel members’ employers — 15 large global banks and financial services firms. Those institutions include Bank of America, BNP Paribas, Goldman Sachs, BlackRock and Pimco.

One of the money managers who attended the meetings said Ms. Yang’s presence seemed to raise a conflict. Ms. Yang works for BNP, which stands to profit from the restructuring. She is also on the I.S.D.A. panel, which will determine if credit default swaps pay off.

One of the money managers said he pointed out Ms. Yang’s dual role at a meeting.

“You’re on the determinations committee, your firm is earning a big fee and trying to scare me into tendering my bonds,” he said he told her. He said Ms. Yang replied: “No, I’m just trying to help tell you what could go wrong.”

A BNP Paribas spokeswoman declined to comment.

According to one of the money managers, Ms. Yang told the investors that one potential hitch would be if Greece were to change the terms of its old bonds. Ninety percent of those bonds are governed by Greek law, so the government could, in theory, redenominate an issue, say, from $1 billion par value to $100 million. This would require holders to deliver far more bonds to receive the amount of insurance they thought they were owed.

Responding to an e-mail request, Ms. Yang declined to comment, citing “our policy not to comment on matters to do with the I.S.D.A. Determinations Committee.”

It is interesting that an I.S.D.A. committee member would argue that credit default swaps may not pay out. The organization is already facing criticism over its expected ruling that the Greek restructuring is voluntary.

The I.S.D.A. wields enormous power in the derivatives market. Since 2009, it has required that all contracts struck with its members adhere to rulings by its committees on credit events. Before then, counterparties could take disputes to arbitration or court.

The money managers with whom I spoke said BNP Paribas seemed to be motivated either by its desire to generate fees from the exchange or, perhaps, by worries about its own exposure to Greece. They wondered, for instance, if BNP Paribas has written a lot of insurance on Greek debt. If so, getting people to unwind such swaps now would be less costly for BNP than having the insurance pay off.

If investors think debt terms can be changed by fiat, they will flee the market. Ditto if they find that their insurance can be made worthless. Indeed, some of the volatility in European debt recently may be attributed to investor fears about these issues. The discussions with BNP Paribas confirm the view of some investors that credit default swaps are not insurance at all, but rather instruments that big banks use to benefit themselves. The secrecy of who serves on I.S.D.A. committees feeds this fear, as does the fact that these panels are both judge and jury.

“Market forces like to think of market pricing as having symmetry,” said David Kotok, founder of Cumberland Advisors, a money management firm in Sarasota, Fla. “But a system which requires decisions by parties who have vested interests on one side is asymmetric. A surprise rule change or an interpretation which was understood by some and misunderstood by others also defeats symmetry. In the case of credit default swaps, both elements apply.”

Compared to this, Greece was just a sideshow. Italy could blow Europe to pieces

Πηγή: mailonline
By DANIEL HANNAN

Nov 10 2011

Watching the cost of servicing Italy’s debt surge past the level that triggered bailouts in Greece, Ireland and Portugal, I found one of Kipling’s verses forming in my mind:


This is midnight — let no star
Delude us — dawn is very far.
This is the tempest long foretold —
Slow to make head but sure to hold.

Italy is the third-largest economy in the EU, and the eighth largest on the planet. Its outstanding debt of €1.9 trillion (£1.6 trillion) accounts for 25 per cent of all the debt in the eurozone.



Too big to fail? Italy is the third-largest economy in Europe

The Greek crisis was never a serious threat to Europe. Greece accounts for less than two per cent of the EU’s economy. A default by Athens could be managed as a controlled explosion. A default by Rome, on the other hand, would blow the European economy to smithereens.

The calamity now overtaking Italy was ordained when the euro was launched. In order to qualify, governments were supposed to have brought their total debts below 60 per cent of GDP; Italy’s was 114 per cent.

Several economists pointed out at the time that admitting the Italians would be like inviting an elephant into a coracle but, as usual in the EU, political dreams trumped economic reality.

For several years, markets pretended that all debts in the eurozone were equally safe — that Italian and German debt, for example, were interchangeable. Eventually, though, the realisation sank in: the Italian economy was not growing, which meant its debt, in relation to its GDP, was as high as ever.

The loans that had been pressed on the Italian treasury over decades suddenly looked vulnerable.

Yesterday, panic set in. Those who have lent money to Italy are no longer confident that they will get it back. Naturally enough, they demand a higher interest rate to compensate for the risk of losing their loans. Their fear thus risks becoming self-fulfilling, as Italy is unable to afford the interest rate. The prospect of Italy defaulting on its debts looms.

Those commentators who imagine that we Eurosceptics are enjoying our told-you-so moment couldn’t be more wrong. The eurozone takes 40 per cent of Britain’s exports, and comprises our friends and allies. A recession there will mean another downturn here.

Failure

There are no good outcomes now, only gradations of failure. We can at least, though, pick the least bad of the three available options.

Option One is a disorderly default. Italy is beginning to experience a run on its banks as its citizens, anticipating a devaluation, move their savings abroad. The government might find itself unable to meet basic costs, and so have to welch on its outstanding debts.

Since no one would then lend it money, it would have to print lots of lira very quickly to pay the salaries of its soldiers, policemen and other vital public servants. The knock-on consequences for the eurozone and, indeed, for everyone else, would be disastrous, setting off a chain of bankruptcies across Europe

Option Two is a controlled departure. Italy would leave the euro and devalue its currency. Goods and services would become cheaper, boosting Italian exports and helping the economy to grow again.

Toppled: George Papandreou was forced to back down on his promise of a referendum on the Greek bailout package

This option might involve Italy writing off some of the debt it owes, but the default would be partial. If, by contrast, Italy remains in the euro, a full default — that is, writing off all debts — is hard to avoid.

Option Three is to struggle on as now. The rest of the eurozone will keep flinging money at Rome, the European Central Bank will purchase even more Italian bonds, and the IMF will step in with a loan. Option Three is the worst, because it prolongs and magnifies the problem. For more than two years, now, EU leaders have pursued this course, forcing new loans on to countries that couldn’t meet their existing liabilities, treating the debt crisis with more debt.

When their strategy fails, they accelerate it. What was initially sold as a bridging loan to tide Greece over for a few months has become a runaway train: bailout-and-borrow, bailout and-borrow, bailout-and-borrow.

So determined are EU leaders to pursue this course that they are prepared to remove elected prime ministers who stand in the way. When George Papandreou dared to suggest allowing the Greek people to vote on the loans-for-austerity package, he was toppled. The same thing happened to Silvio Berlusconi when he declared, six days ago, that ‘since the euro was adopted, most Italians have become poorer’.

Corruption

His statement was, of course, true. But Brussels functionaries understood Berlusconi’s game. What he was effectively saying was: ‘I don’t especially care whether we leave the euro; if you Eurocrats want to save it, you come up with the cash.’

Five days later, he had announced his resignation. The leader who had survived allegations of tax fraud, procuring underage sex, corruption with Mafia links, who had shrugged off investigations by 789 prosecutors and magistrates (by his own count), was brought down by the EU machine.

That’s how much the survival of the euro matters in Brussels.So why is the EU bent on pursuing a policy which is impoverishing its peoples? Why is it inflicting deflation, destitution and emigration on its southern members? Why is it lumbering its northern states with massive tax rises?


Resignation: Italian premier Silvio Berlusconi will leave his post after austerity reforms have been passed

Because, for supporters of the single currency, this was never about economics. As the German Chancellor, Angela Merkel, told her MPs last week: ‘If the euro fails, Europe fails. We have an historical obligation to protect by all means Europe’s unification process begun by our forefathers after centuries of hatred and bloodshed.’

Put in those terms, of course, the issue is literally beyond argument. If you oppose the euro, according to Mrs Merkel, you’re in favour of war.

By any objective measure, though, the euro is stoking rather than soothing national antagonisms. The relationship between Greece and Germany is now worse than at any time since — well, since World War II.

What should the EU do instead? It should oversee the phased unbundling of the single currency.

Supporters of the project insist a euro break-up would be technically unfeasible, but this is nonsense. All the countries in the single currency have recently managed to change their currency: that’s how they joined the euro in the first place.

It works just as well when leaving a currency union. I asked a Slovakian economist how his country had managed the transition when it divorced the Czech Republic in 1993.

‘Very easily,’ he replied. ‘One Friday, after the markets had closed, the head of our central bank phoned round all the banks and told them that, over the weekend, someone from his office would come round with a stamp to put on all their banknotes, and that, until the new notes and coins came into production, those stamped notes would be Slovakia’s legal tender. On the Monday morning, we had a new currency.’

The protestations that it cannot be done will strike British ears as familiar: it’s precisely what we were told about the Exchange Rate Mechanism, a forerunner of the euro in which a basket of European currencies shadowed the Deutschmark and which Britain joined in 1990.

Betrayal

Remember how the Establishment lined up to tell us that leaving the ERM would wreck our economy? Remember John Major’s claim that it would be ‘the inflationary option, the devaluer’s option, a betrayal of the future of our country’?

In the event, our recovery began on the day we left it in September 1992 after two years’ membership, and continued for a decade-and-a-half before Gordon Brown blew it away.

Members of the eurozone are, of course, free to make their own mistakes. If they are prepared to pay in order to keep the project going — or, more precisely, to make their peoples pay, since Eurocrats are exempt from national taxes — that is their right. What is unaccept-able is to send Britain the bill.

We are already on the hook for £12.5billion in the Greek, Irish and Portuguese bailouts — a sum equivalent to £500 for every household in the land. If we pursue the same failed policy in Italy, the sums will be far higher. We could end up contributing the £40 billion the Treasury plans to commit to the IMF.

All to prop up a currency which we didn’t join. We surely should not pay for the privilege of impoverishing our neighbours.

Daniel Hannan is a Conservative MEP for South East England

Greece is set to drop Euro for its native Drachma currency

Πηγή: The Coming Depression
Nov 8 2011

The first German company apparently already expected with the introduction of the drachma in Greece! The tour operator TUI has sent a letter to Greek hoteliers (available BILDde) the hotel owner now be asked to sign a new contract in the event of a currency changeover.

It states:

“If the euro should not be the currency (…), TUI is entitled to pay the sum of money in the new currency. Der Wechselkurs richtet sich aus an dem von der Regierung vorgegebenen Wechselkurs.” The exchange rate shall be made ​​at the exchange rate set by the government. ”

Background: Experts predict that a new Greek currency could lose shortly after the introduction of up to 60 percent in value. TUI will therefore already now make sure that invoices for the company’s first exchange rate is calculated – possible without a loss in value. Source (1) Translated from German from The Bild

Greece needs to start all over again as a country, and work to become a modern, sophisticated and enlightened society. Really and truly, it needs to begin totally from scratch and without international bankers printing their currency!

Greeks tend to have an exaggerated pride, ethnocentricity and chauvinism to them that precludes any form of honest and painful self-analysis.

Apart from its enormous economic and financial challenges, Greek civic values and principles also require a complete overhaul. Greece still does not recognize any ethnic minorities within its borders; minority rights are non-existent. Everyone is Greek.

Greece is also engaged in an asinine and futile “name dispute” with its northern neighbour, the Republic of Macedonia. This, despite the fact that over 135 nations, including Canada and the United States, recognize the Republic of Macedonia by its constitutional name (which has been an independent state since 1991). Because Greece does not recognize its own ethnic Macedonian minority, and has a dark history in its policy toward and treatment of the Macedonians, it is acting as an obstacle to Macedonia’s accession to the EU and NATO until it revises its name. It is a matter that is not winning Greece any credibility or respect. Even England and Ireland have reached an historic rapprochement, symbolized by Queen Elizabeth’s recent landmark visit to Ireland.

Going bankrupt is the easy part! Changing work ethic and attitudes, reducing government spending, increasing productivity, reducing inflated pensions and then trying to explain to the population where their pensions are gone will be very hard. Forming the EU under one currency may have seemed like a good idea, but when you bring distinct cultures together who have very different views on finances, productivity, work ethic, etc, perhaps this was doomed to failure.

Makes you think that any movement to a North American currency would result in many of the same issues. Canada should NEVER enter into such an arrangement.

This is what happens when a country loses its own currency, and gets tied to a currency that it cannot devalue. The country can live beyond it’s means for many years, not just through government borrowing but through general private access to easy credit via foreign banks and as the debt increases the currency doesn’t devalue greatly…which means that the cost of borrowing stays low until it stops…there is no feed back mechanism to limit access to credit and thus debt. The Euro is the root cause of the economic problems in the smaller EU states (and this was easy to predict as the transition to the Euro made imports so much cheaper but destroyed exports), but the large states like Germany find this arrangement profitable because it drives down the Euro just enough to make German goods competitive on the world market and thus many North Americans are now driving Volkswagens. If Greece drops the Euro, the net long term result will be a rise in the Euro relative to world currencies, and an end to the export boom in Germany.

Pundits’ analysis’ seem to miss two fundamental factors. First, that Greeks have no interest in cleaning up their house. They are perfectly satisfied with the status quo. Have you ever tried to show a Greek a way to work more efficiently? You’d think in light of the current economic situation they’d be more open to improvement competitiveness and efficiency. But alas, they are not. Secondly, the likes of France and Germany have a lot to gain from brining Greece down to its knees and keeping it there.

For either bankruptcy or austerity to be effective, Greeks need a change in their mentality, but sadly, the majority of them aren’t willing. Those who are, leave. And those who have the courage to turn back are unable to be heard over those satisfied with the status quo.

References:

(1) Translated from German from The Bild