The secret currency union

Πηγή: Nikkei Asian Review
By Thomas Mayer
16 Oct 2015

What is the largest currency union of the world? The European Monetary Union, of course, you may think. Wrong. It is the U.S. dollar union. In an interesting paper, Robert McCauley and Tracy Chan of the Bank for International Settlement have shown that a large number of countries have more or less strongly pegged their currencies to the U.S. dollar ("Currency movements drive reserve composition", BIS Quarterly Review December 2014). 

According to their estimate, the U.S. dollar plays a key role for an area accounting for about 60 percent of global gross domestic product. Thus, the U.S. dollar zone is six times as large as the euro zone. As is customary in a currency union, many banks and companies in the U.S. dollar zone have assets and debt denominated in U.S. dollars. Like the European Central Bank in the euro zone the U.S. Federal Reserve determines financial conditions in the dollar zone.

As a result, developments have recently been similar in the two currency zones. When interest rates in other EMU countries fell to the low level of Germany at the beginning of the EMU, credit surged in these countries so that states and private entities became over-indebted. With the subsequent renewed rise in interest rates the credit bubble burst and pushed EMU into crisis. For members of the dollar zone interest rates plunged when the Federal Reserve fought the financial crisis triggered by the collapse of the subprime segment of the U.S. mortgage market. 

Like the countries of the euro zone before, the countries in the dollar zone then experienced a credit boom that also led to over-indebtedness. When the Fed ended its policy of quantitative easing and began musing about raising interest rates, the member countries of the dollar zone came under pressure.

The crisis in the dollar zone has not yet reached the intensity of the euro crisis. But the crisis there could broadly follow the script of the euro crisis. When states and banks in the euro zone were on the verge of financial collapse, stronger countries began to give financial assistance. But it was above all the ECB that stabilized the euro zone. The ECB assumed the role of lender of last resort to commercial banks and funded capital flight from the crisis countries through its interbank payment system (Target2). It also launched a program (dubbed outright monetary transactions or OMT) that turned it into a lender of last resort to troubled states.

In the dollar zone, similar capital movements from the periphery to the center have begun. Like in the euro zone this will create shortages in the refinancing of dollar denominated debt. In contrast to the ECB, however, the Fed has no mandate to support orderly payment flows in the dollar zone. But if the Fed stands on the sideline, a shortage of dollar funding could lead to the collapse of banks and companies in the periphery of the dollar zone. This could push the global economy into the next recession.

What could be done to prevent this? The International Monetary Fund and the World Bank warn against interest rate increases of the Fed. But zero rates and bloated central bank balance sheets can only push the problem into the future -- at the cost of magnifying it. Others want the Fed to provide dollar liquidity through swap agreements with other central banks of the dollar zone. 

But will the American public tolerate the accumulation of large claims of the Fed against shaky foreign central banks? This is unlikely. In the end, there will be only one solution: the unwinding of the dollar zone. This may well be painful, but a crisis can also pave the way to a new beginning. I do not know how this will look like. But two things seem likely to me: Central banks will be stripped of most of their power, and formal or informal currency unions will be out of favour.

Thomas Mayer is founding director of the Flossbach von Storch Research Institute in Cologne, Germany.

Milton Friedman, Irving Fisher, and Greece

Πηγή: New York Times
By Paul Krugman
July 7 2015


I continue to be amazed by how many people regard debt relief and devaluation as wild-eyed radical ideas; of course, it matters most that so many influential people in Europe share this ignorance. Anyway, for the record (and for my own future reference) I thought it would be helpful to post what Milton Friedman and Irving Fishe rhad to say about the Greek disaster. OK, they weren’t writing specifically about Greece — Friedman was writing in 1950, Fisher in 1933. But their analyses ring truer than ever.

First, Friedman (why oh why isn’t there a full electronic copy of this essay online?):



That tells you everything you need to know about why “internal devaluation” has been such a costly strategy — and why the ECB’s failure to move aggressively early on to achieve and if possible surpass its 2 percent inflation target was a major contributing factor to this disaster.

Then Fisher on why austerity hasn’t even helped on the debt:

The basic story of the European periphery — not just Greece — is one of a poisonous interaction between Friedman and Fisher, which has produced incredible suffering while failing to reduce the debt/GDP ratio, which even in star pupils like Ireland and Spain is far higher than when austerity began; the only success has been in suffering long enough so that some growth has finally resumed, and they can call it vindication.

The bizarreness of the whole thing is how flaky, speculative ideas like expansionary austerity became orthodoxy, while applying the economics of Fisher and Friedman became heterodoxy bordering on Chavismo.

Rhodium Group » Greece: The Confrontational End-Game Is Here

Πηγή: Rhodium Group
By Jacob Funk Kirkegaard
June 12 2015

Now that Greek Prime Minister Alexis Tsipras has alienated the European Commission, which is his government’s only potential ally in the creditor group known as the Troika—European Commission, European Central Bank (ECB), and International Monetary Fund (IMF)—no credible bridge-builders are left to save Athens from itself. Further confrontation and escalation seem most likely (60 percent).

Tsipras’s angry denunciation of the Troika’s most recent proposals as “unacceptable, extreme, and illogical” effectively rules out concessions on his part. Striking a deal acceptable to the Troika would now be tantamount to performing the dreaded Greek political “somersault,” always denounced by Tsipras and Syriza.

The IMF’s appropriate decision to pull out of negotiations in Brussels this week makes it politically impossible for Chancellor Angela Merkel to give Greece a better deal. Greece may be able to meet its next payment to the IMF in late June by cobbling enough cash together by not paying suppliers and confiscating working capital at state-owned enterprises (SOEs) and local governments. But without an enforceable deal with Athens, an eventual nonpayment to the ECB in July now looks increasingly likely.

Such a nonpayment, as discussed previously, would scale back emergency lending to the Greek banking system, precipitating a banking holiday or immediate controls on access to the €133.7 billion in bank deposits,1 dooming the summer tourist season and plunging the economy into a severe recession, with obvious political impact on Syriza itself.

Default cannot be declared without a political decision by the IMF Board or the ECB, which the Obama administration and the IMF Board dominated by the Europeans would likely oppose. Instead, Greece’s creditors are likely to sit back and watch political turmoil engulf Greece.

Sorry to say, Syriza deserves such a fate. It has never presented a credible alternative set of reforms and policies to the proposals it has rejected. Had Syriza struck a deal in March by agreeing to a goal of a primary surplus of 1 percent, it would have been able to get through 2015 with extra money to spend. Agreeing to a 1 percent primary surplus target now would require more fiscal consolidation than a few months ago, as the economy has been allowed to deteriorate dramatically.

Syriza’s diplomacy in Europe (and beyond) has only isolated Athens further. Combining leftist rhetorical antiausterity with a right-wing nationalist coalition partner, and making overtures to Russia and Vladimir Putin, have not delivered one euro to its books. Even fellow far leftist parties around Europe now avoid Syriza and its model. Tsipras’threatening assertion that a Greek bankruptcy “would be the beginning of the end for the eurozone” and roil markets in Spain and Italyis seen as noncredible trash talk. It has only played into the hands of German finance minister Wolfgang Schäuble, who correctly said recently that Greece had removed any doubt that its own conduct is to blame for its predicament.

Three scenarios appear possible in this situation.

Spread the Blame. Theoretically Tsipras could submit a package acceptable to the Troika to the full Greek Parliament, inviting the opposition to help secure its passage. Such a step would release Troika funds in a matter of weeks and normalize the country’s financial system. Tsipras could remain prime minister in this scenario, despite the economic costs, though it would divide Syriza. Any such deal would also require more intrusive creditor inspections, undercutting Syriza’s nationalist credentials. Another crisis would be likely within a few months.

Unless, as part of this scenario, Tsipras reconfigures his governing coalition to include more centrist parties (or perhaps a national unity government), it is difficult to see the longer-term benefits of this solution.

Consult the People Directly. The Greek government might call a national referendum on a deal acceptable to the Troika in order to legitimize the political somersault its acceptance would represent. Any referendum would be de facto about whether the Greek people are willing to put up with the costs of staying in the euro. Such a referendum taking place in another accelerating economic emergency would most likely be approved (98 percent). But Greece’s economy would deteriorate in the weeks running up to the vote.

Syriza’s governing majority would almost certainly splinter in the process, with some MPs campaigning for and others against the referendum passing, so it is far from obvious whether Tsipras would have a governing parliamentary majority afterwards. As in the previous scenario, holding a referendum without also reconfiguring the governing coalition seems of limited long-term value.

Early Elections. Calling new parliamentary elections would be logical but unpredictable, and Syriza would probably be thrown out. On the other hand, with the main opposition New Democracy still led by the unconvincing former prime minister, Antonis Samaras, Tsipras might be able to convince voters that he remains their best option. New elections could empower some of the newer centrist parties. Given the ultimately risk-averse nature of aging electorates, however, a dramatic strengthening of the anti-euro fringe parties in KKE on the left and Golden Dawn on the right does not appear likely. There is therefore no real reason to fear new elections, due to the very small risk of “an even more extreme outcome.”

Through leadership control of electoral lists, new elections might produce a less radical group of Syriza MPs, but its smaller coalition partner ANEL (Independent Greeks) might falter in the voting. An election would thus result in prolonged haggling over formation of a government, causing more economic suffering. Once again, such a scenario would devastate the critical summer tourism season.

What are the options and costs for the euro area of these choices?

First, the deteriorating Greek economy will—eventually—require additional funding in the short term and likely a deeper further restructuring of the euro area’s Greek debt. Syriza has already cost other euro area taxpayers a lot.

Second, Tsipras’ failed personal diplomacy will have caused the scales to fall from the eyes of Merkel and French president Francois Hollande. They have no real incentive to spend domestic political capital to strike a deal advantageous to Greece to coax him toward the political center, now that it is increasingly obvious he is not even a closet centrist but largely seems to agree with the left wing of his party. The euro area thus has no real choice but to seek regime change in Athens.

Such a hard line would drive home the costs of Syriza’s failures to the Greek electorate, in the hope that new elections would deliver a new government in Athens, even if the cost is a deep recession from the ensuing deposit controls and financial chaos.

Would the Greek population then vote for parties more friendly to the euro area? Most likely, yes. The prospect of Greeks punishing Syriza for its deceitful promise to end austerity and reforms while other Europeans pay their bills is not guaranteed, of course. But Greeks are not likely to look kindly at leaders putting euro membership at risk.

The risk of a Greek crisis spreading contagion to other parts of Europe remains low. A regional recovery is under way, and the ECB is heavily intervening in bond markets. Syriza does not seem to have understood the hollowness of its threats to bring Europe down with it. In some ways there has never been a better time for Brussels, Paris, Berlin, and Frankfurt to nail a recalcitrant member state like Greece than now. The risks associated with more lasting instability in Greece will arise only as the end of the ECB’s asset purchase program draws closer in September 2016. The ECB’s exit from its quantitative easing (QE) bond purchases will become more tricky, as markets may at that time price new risks into other euro area bonds, however.

What are the risks of the so-called Grexident—something going wrong and Greece exits the eurozone and adopts a new currency in this confrontational scenario? Not zero for sure, but actually very close to zero. Introducing a new currency is no trivial matter, especially for an incompetent government like Syriza, but the threat of massive capital flight would likely stop the process before it started. As discussed before here, Greek public sector workers and retirees are not likely to accept being paid in a piece a paper (IOU) signed by Finance Minister Yanis Varoufakis. And certainly the foreign suppliers of essentials like food, medicine, and energy to the Greek economy would balk.

The most likely “Grexident scenario” is therefore not a new Drachma, but Montenegro—i.e., Greece becomes just another relatively poor unilaterally euroized non-EU Balkan economy. In Montenegro, the euro has been the only legal tender since 2002. But Montenegro has no access to the ECB or the EU budget and has a GDP per capita of just over €5,000—less than a third of Greece’s. Whatever the appeal to national dignity, the Greek electorate is not likely to allow such a calamity. Of course, the Greek people might democratically choose to become much poorer. But even this extremely unlikely scenario (2 percent) would not necessarily doom the euro area. Other euro members would suffer large financial losses (from loans to Greece and the losses on now-defaulted Greek collateral held by the ECB), which is the main political reason that departing from theEuropean System of Central Bankswould invariably mean also an exit from the European Union. Electorates elsewhere in the euro area would demand it. Such large and certain financial losses might, however, be acceptable, though it would obviously be irresponsible of Merkel and Hollande to even allow the slightest risk of a euro collapse.

Many academics and non-European central bankers assume that a “Grexident” would destabilize the euro and encourage more countries to drop out, turning Europe’s common currency into just another fixed exchange rate regime. Euro area politics would work to prevent such a development, however, because the remaining 18 members and their central bank would move to make it impossible for more members to quit. The economic devastation within Greece resulting from an exit from euro area institutions (but not as mentioned the euro currency itself) would by itself dissuade other countries from following its example. More likely, the remaining 18 members would opt for a new integrationist “Euro Area Treaty” for themselves. Such a salvaging effort would be difficult, but the experience of the last five years suggests that euro area countries would pull together and save their union. Had Greece been pushed out of the euro area, instead of leaving voluntarily against the will of other members, a new drive for euro area integration would probably fail.

More such integration could include conversion of the European Stability Mechanism (ESM) into a euro area budgetary entity with limited direct taxation powers. The ECB could decide to exit QE only by selling some longer-dated sovereign bond holdings back to the market as outright eurobonds, rather than as individual country bonds.

These steps add up to the likelihood of Europe pushing Greece to make the hard decisions about what they really want.

Soros Says Greece Now Lose-Lose Game After Being Mishandled

Πηγή: Bloomberg
By Tom Beardsworth and Francine Lacqua
March 24 2015


The chances of Greece leaving the euro area are now 50-50 and the country could go “down the drain,” billionaire investor George Soros said.

“It’s now a lose-lose game and the best that can happen is actually muddling through,” Soros, 84, said in a Bloomberg Television interview due to air Tuesday. “Greece is a long-festering problem that was mishandled from the beginning by all parties.”

Greek Prime Minister Alexis Tsipras’s government needs to persuade its creditors to sign off on a package of economic measures to free up long-withheld aid payments that will keep the country afloat. Since his January election victory, he has tried to shape an alternative to the austerity program set out in the nation’s bailout agreement, spurring concern that Greece may be forced out of the euro.

The negotiations between Tsipras’s Syriza government and the institutions helping finance the Greek economy -- the European Commission, European Central Bank and International Monetary Fund -- could result in a “breakdown,” leading to the country leaving the common currency area, Soros said in the interview at his London home.

“You can keep on pushing it back indefinitely,” making interest payments without writing down debt, Soros said. “But in the meantime there will be no primary surplus because Greece is going down the drain.”

Soros said in January 2012 that the odds are in the direction of Greece leaving the euro region.

“Right now we are at the cusp and I can see both possibilities,” he said in Tuesday’s interview.

Aid Payment

Tsipras is meeting with German lawmakers in Berlin on Tuesday after Chancellor Angela Merkel encouraged him to follow the path set out by Greece’s creditors. European Parliament President Martin Schulz said in an interview with Italian newspaper Repubblica that he expects a deal by the end of this week that will allow the release of at least some money.

The start of quantitative easing by the ECB at a time when the U.S. Federal Reserve is considering raising interest rates “creates currency fluctuations,” said Soros, one of the world’s wealthiest men with a $28.7 billion fortune built partly through multi-billion dollar trades in currency markets, according to the Bloomberg Billionaires Index.

“That probably creates some great opportunities for hedge funds but I’m no longer in that business,” he said. Soros, who was born in Hungary, said the war in eastern Ukraine between government forces and rebel militia supported by Russia’s President Vladimir Putin concerns him the most.

Without more external financial assistance the “new Ukraine” probably will gradually deteriorate and “become like the old Ukraine so that the oligarchs come back and assert their power,” he said. “That fight has actually started in the last week or so.”

Go ahead, Angela, make my day

'Πηγή:  The Economist
Jan 31 2015

IT WAS in Greece that the infernal euro crisis began just over five years ago. So it is classically fitting that Greece should now be where the denouement may be played out—thanks to the big election win on January 25th for the far-left populist Syriza party led by Alexis Tsipras (see article). By demanding a big cut in Greece’s debt and promising a public-spending spree, Mr Tsipras has thrown down the greatest challenge so far to Europe’s single currency—and thus to Angela Merkel, Germany’s chancellor, who has set the austere path for the continent.

The stakes are high. Although everybody, including Mr Tsipras, insists they want Greece to stay in the euro, there is now a clear threat of Grexit. In 2011-12 Mrs Merkel wavered, but then decided to support the Greeks to keep them in the single currency. She did not want Germany to be blamed for another European disaster, and both northern creditors and southern debtors were nervous about the consequences of a chaotic Greek exit for Europe’s banks and their economies.

This time the odds have changed. Grexit would look more like the Greeks’ fault, Europe’s economy is stronger and 80% of Greece’s debt is in the hands of other governments or official bodies. Above all the politics are different. The Finns and the Dutch, like the Germans, want Greece to stick to promises it made when they twice bailed it out. And in southern Europe centrist governments fear that a successful Greek blackmail would push voters towards their own populist opposition parties, like Spain’s Podemos (see article).

A good answer to a bad question

It could all get very messy. But there are broadly three possible outcomes: the good, the disastrous, and a compromise to kick the can down the road. The history of the euro has always been to defer the pain, but now the battle is about politics not economics—and compromise may be much harder.

Tantalisingly, there is a good solution to be grabbed for both Greece and Europe. Mr Tsipras has got two big things right, and one completely wrong. He is right that Europe’s austerity has been excessive. Mrs Merkel’s policies have been throttling the continent’s economy and have ushered in deflation. The belated launch of quantitative easing (QE) by the European Central Bank admits as much. Mr Tsipras is also right that Greece’s debt, which has risen from 109% to a colossal 175% of GDP over the past six years despite tax rises and spending cuts, is unpayable. Greece should be put into a forgiveness programme just like a bankrupt African country. But Mr Tsipras is wrong to abandon reform at home. His plans to rehire 12,000 public-sector workers, abandon privatisation and introduce a big rise in the minimum wage would all undo Greece’s hard-won gains in competitiveness.

Hence this newspaper’s solution: get Mr Tsipras to junk his crazy socialism and to stick to structural reforms in exchange for debt forgiveness—either by pushing the maturity of Greek debt out even further or, better still, by reducing its face value. Mr Tspiras could vent his leftist urges by breaking up Greece’s cosy protected oligopolies and tackling corruption. The combination of macroeconomic easing with microeconomic structural reform might even provide a model for other countries, like Italy and even France.

A very logical dream—until you wake up and remember that Mr Tsipras probably is a crazy leftwinger and Mrs Merkel can barely accept the existing plans for QE. Hence the second, disastrous outcome: Grexit. Optimists are right that it would now be less painful than in 2012, but it would still hurt.

In Greece it would lead to bust banks, onerous capital controls, more loss of income, unemployment even higher than today’s 25% rate—and the country’s likely exit from the European Union. The knock-on effects of Grexit on the rest of Europe would also be tough. It would immediately trigger doubts over whether Portugal, Spain and even Italy should or could stay in the euro. The euro’s new protections, the banking union and a bail-out fund, are, to put it mildly, untested.

So the most likely answer is a temporary fudge—but it is one that is unlikely to last long. If Mr Tsipras gets no debt relief, then he will lose all credibility with Greek voters. But even if he wins only marginal improvements in Greece’s position, other countries are bound to resist. Any changes in the bail-out terms will have to be voted on in some national parliaments, including Finland’s. If they passed, voters in countries like Spain and Portugal would demand an end to their own austerity. Worse still, populists from the right and left in France and Italy, who are not just against austerity but against their countries’ membership of the euro, would be strengthened.

And there are technical problems with any fudge. The ECB is adamant that it cannot provide emergency liquidity to Greece’s banks or buy up its bonds unless Mr Tsipras’s government is in an agreed programme with creditors, so any impasse is likely to trigger a run on Greek banks. By stretching out maturities, some of this could be avoided—but that may be too little for Mr Tsipras and too much for Mrs Merkel.

Hello to Berlin

So in the end, Greece will probably force Europe to make some hard choices. With luck it will be towards the good outcome outlined above. Greek voters may be living in a fool’s paradise if they think Mr Tsipras can deliver what he says, but the Germans too have to look at the consequences of their obstinacy. Five years after the onset of the euro crisis, southern euro-zone countries remain stuck with near-zero growth and blisteringly high unemployment. Deflation is setting in, so debt burdens rise despite fiscal austerity. When policies are delivering such bad outcomes, a revolt by Greek voters was both predictable and understandable.

If Mrs Merkel continues to oppose all efforts to kick-start growth and banish deflation in the euro zone, she will condemn Europe to a lost decade even more debilitating than Japan’s in the 1990s. That would surely trigger a bigger populist backlash than Greece’s, right across Europe. It is hard to see how the single currency could survive in such circumstances. And the biggest loser if it did not would be Germany itself.

The Euro Split and the Rebirth of the Black Market

Πηγή: NewEurope
By BASIL A. CORONAKIS
April 2 2013

The economic crisis of Europe is at a dead end.

Incompetent leaders, a distorted financial system, large and inefficient administrations in most member states, dysfunctional trade unions, flourishing local cartels and widespread corruption, are the main reasons of the crisis. As European leaders are themselves responsible for the crisis generating reasons in their countries, it is obvious that they cannot resolve the problems they have created.

They are all part of the problem and thus they will not try to resolve it. On the contrary, they will all try to maintain it as is with further temporary remedies (more controls, more taxes, more confiscation of citizens' assets) having in the back of their minds that in politics, there is nothing more permanent than the temporary.

However, such a situation cannot last forever and after the new element, the confiscation of assets (Eurogroup decision for Cyprus), has pushed the crisis beyond the point of no return, we understand that only two alternatives are left for the future of the euro and Europe.

A large event such as war or a popular revolt and for us Europeans large events are unpredictable. A war will be decided by others, i.e. USA, China, Russia and a popular revolt (with only precedent being the French Revolution) as it will be a “bottom-up” large event.

The second alternative is the rapid self-depletion of the obstructive structures created by the Euroidiots in their naïve efforts to save Europe and the ruling financial elite. This is what has begun to happen after the recent looting of the Cypriot deposits.

The “wise” decision of the Eurogroup to give a haircut to private deposits in Cyprus, introducing the concept of getting the citizens to pay with their savings the price of the corruption of their leaders (because this is in essence is the end result of the Eurogroup’s decision), gave birth to three different euros.

We do not believe that what is now happening was premeditated. Because if it were premeditated it could be controlled. It happened because Wolfgang Schaeuble, Jeroen Dijsselbloem and Olii Rhen (in this order) cannot see beyond their nose. It was a bloody mistake which now they cannot correct.

Indeed, the Eurogroup decision for Cyprus has automatically split the euro into three new currencies.

First the euro that ordinary citizens they know. The one which is deposited in the various banks on Europe and can be simply transacted by bank transfer to beneficiaries or used through plastic. This is the official euro and so far its value is “one to one.”

Second comes the euro of the blocked time deposits in Cyprus. The value of this second euro is less than “one to one.” Indeed as time deposits cannot be freely unblocked, even if one pays a penalty, they can be used as collateral for private loans in the free market certainly at an interest rate higher than the interest given by the bank to the blocked deposits. Such interest differential, to be best of our knowledge, varies from 5 to 20%. This is why the value of the this euro is less than “one to one.”

Confidence is an abstract concept, which takes time to build but is can be lost in no time. And this loss is what the Eurogroup has initiated with its naïve decision for Cyprus. People began losing faith to the European banking system thinking “Yesterday Cyprus, tomorrow Spain, after tomorrow France and from there the sky is the limit.” Under this thinking the “cash euro” was born.

The “cash euro” is the third new currency, which people all over Europe, starting from the South and the Southerns living in the North, begin collecting and saving under the mattress gradually as confidence in the European banks is fading out.

This may not be that bad, as it could trigger the beginning of the exit from the crisis in a human and natural way.

With ordinary people turning to hard cash, there will come a moment when most of their transactions with other ordinary people, merchants and providers, will be in the black. Realistically, once a transaction is in cash in times of stagnation and income losses, the first collateral damage will be VAT and the second will be part of the income tax of the seller. Indeed, with businesses at low and shops closing one after the other all over Europe, if one is given to opportunity to survive at the expense of paying VAT, why he should think it twice? As to the buyer, who when purchasing on debit or credit card does not think of the VAT, in the case of counting cash to pay do you think that will think twice to keep in his pocket the VAT?

With the new “cash euro” reality, if the Eurogroup does not manage to restore the confidence of citizens to the European banking institutions, a lot of small firms will emerge all over.

State budgets will be loosing VAT, big retail conglomerates will be loosing business, but the bottom line will be that the black economy will begin soaring, contributing to the exit of the economic crisis.

Juncker claims giving Greece more time will cost more

Πηγή: AGI.it
July 14 2012

Berlin - Greece keeping the Euro will cost more money to Eurogroup countries if it is given more time to pass the reforms.

EuroGroup president Jean Claude Juncker said so in an interview with German weekly 'Spiegel', when asked whether it would be best for Greece to quit the Euro.

"It is a fact - Jucker said - that the Greek government has not enforced the programme as we had agreed. It is just as clear that giving Greece more time to reach the established targets will cost more money".

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.

Greece Eyes Outcomes From Euro to Parallel Currency: Scenarios

Πηγή: San Francisco Chronicle
By Jennifer Ryan (Bloomberg)
June 6 2012

Below are some frequently asked- questions on the future of Greece as it prepares for second elections on June 17 and confronts the possibility of exiting the euro.

*T How have markets reacted since the May 6 election: Greece's benchmark stock index has fallen about 27 percent since the election, compared with a 7 percent decline by the Stoxx Europe 600 Index. Speculation that a country will leave the euro-area have increased. Odds on a euro breakup by the end of this year rose to 39.4 percent as of June 1 from 22 percent on May 4, data compiled by Dublin-based Intrade show. The odds of that happening by the end of 2013 have risen to 57.6 percent. 

 What will happen immediately after the results are known? The Greek constitution says that when a coalition can't be formed, the president must broker a government of national unity, and if that can't be done, new elections must be held. This is what happened after the May 6 election and the same pattern could repeat itself if there isn't a clear result on June 17. 

What are the possible outcomes of the vote? Credit Suisse AG says these are the three main outcomes: 

-- A pro-euro coalition (40 percent probability). This could result in a successful renegotiation of parts of the EU/IMF program and a continuation of funding. -- An anti-bailout coalition (40 percent probability): This could lead to a euro exit, depending on how confrontational the government wishes to be in its negotiations. An approach that involves cancelling the bailout terms could lead to a departure from the currency. 

-- A stalemate (20 percent probability): Under pressure from international partners, this could result in a unity government and an attempt to renegotiate the bailout. Even if a renegotiation was successful, implementation of reforms would be difficult. 

 What do the Greek people want? A poll on May 31 showed a vote would produce roughly the same pattern as in the first election: New Democracy had 23.9 percent support, while Syriza had 22.5 percent and Socialist Pasok had 12.6 percent, according to a survey conducted May 29-30 and published on the website of Athens-based Real News. The margin of error was 2.6 percentage points. The poll showed that 49.6 percent of respondents said they disagreed with Greece keeping the euro if all the austerity measures linked to bailouts had to be implemented, compared with 42.2 percent who said Greece should keep the euro "at all costs." 

 What happens after a government is formed? Goldman Sachs Group Inc. sees three possibilities:

-- Muddling through (most likely): Greece seeks to stay in the euro but doesn't agree to unconditionally implement the reform program. The most likely consequence is that the Troika ceases payments, though banks continue to receive European Central Bank support unless a political decision is made to withdraw central bank facilities. Greek membership in the euro depends on its ability to adjust to new incentives as the threat of exclusion from the rest of the bloc gains credibility. 

-- Slow exit (next-most likely): Greece is excluded from the euro area after the remaining members are given time to build firewalls against the shock, such as deposit guarantees and liquidity injections by the ECB. While there isn't a legal mechanism for exclusion, it could be done in practice by cutting Greek banks off from ECB facilities and payments systems. For the rest of the euro area, the firewalls are unlikely to be robust enough to deal with the impact of the Greek exit, while there may be fallout on markets because of the precedent that euro membership can be rescinded, Goldman says. 

-- Fast exit (least likely): Greece abandons the euro and introduces a new currency. A "sudden and abrupt" exit wouldn't give other nations time to prepare and an insufficient firewall could mean an unravelling of the euro area. 

 How much time would Greece have to arrange its affairs were it to choose a fast exit? Assuming Greece were to make the decision at the end of foreign currency trading in New York on a Friday, it might have about 46 hours to get its affairs in order before the opening of trading in Wellington, New Zealand on the Monday. In that time, officials might have to manage a potential sovereign default, plan a new currency, formulate a plan to recapitalize banks, stem the outflow of capital and seek a way to pay bills once the bailout lifeline is cut, economists say. 

 What might a new Greek currency be worth? 

Nomura International says its initial estimates suggest that a new drachma would plunge between 50 percent and 60 percent. National Bank of Greece SA, the country's biggest bank, says the new currency could plunge about 65 percent, wiping at least 55 percent from per capita income in euro terms. The recession would deepen by about 22 percent at stable prices, adding to the 14 percent recorded in the 2009 to 2011 period, it said. Unemployment would jump to 34 percent and inflation rise to above 30 percent, pushed up by the higher cost of imported goods, National Bank of Greece says. 

 Could this turn out as bad as what followed the 2008 collapse of Lehman Brothers Holdings Inc.? 

Much will depend on the ability of the euro-area's policy makers to quarantine Greece by increasing the size of its rescue funds, reinforcing banks and ensuring liquidity. If they don't do enough then "all hell breaks loose," says Barry Eichengreen, a professor at the University of California, Berkeley, and author of a 2006 history of the European economy. Bank of America Merrill Lynch strategists estimate the euro-region's gross domestic product would contract at least 4 percent in the recession that follows a Greek exit, similar to the decline after Lehman's bankruptcy. 

 What might officials do to prevent the euro region unraveling? 

Morgan Stanley says there is a 35 percent chance of a euro- region breakup by the end of next year and lists five possible policy responses to limit the fallout. In the near term: 

-- Aggressive ECB policy action. Potential measures include more long-term refinancing operations with longer maturities; relaxing the collateral guidelines on national central banks running Emergency Liquidity Assistance; large-scale purchases of private and government bonds. 

-- Recapitalization of banks via the European Financial Stability Facility or European Stability Mechanism. In the longer term: 

-- The creation of a federal deposit guarantee scheme. 

-- Fiscal union. 

-- The ECB becomes official lender of last resort for a federal Europe. Are there alternatives to a full Greek exit? Deutsche Bank AG's Thomas Mayer said in a May 18 note that the Troika could stop payments to Greece if it refuses to implement the program. A Greek parallel currency to the euro, which Mayer called a "Geuro," could emerge as the government issues IoUs to meet payment obligations. That would allow Greece to devalue without formally exiting Europe's monetary union and "keep the door open to a future return to the euro," said Mayer, who used to be chief economist to the bank and is now a senior adviser. 

What do European leaders want? 

Euro region officials say they want to keep Greece in the euro, though policy makers say that the country can't be forced to stay if voters reject austerity measures. German Finance Minister Wolfgang Schaeuble told the Rheinische Post in an interview published May 11 that the euro region would be able to cope better with a Greek exit now than a year ago.

Greece could begin again

Πηγή: LMD
By Costas Lapavitsas
June 2012

Greece is heading for an exit from the euro, and the rest of the eurozone periphery may follow, precipitating a huge change in the EU. After the crisis, Greece could slowly recover.

Greece is approaching the climax of its crisis, and its choices will influence the course of Europe for years. Although Greece represents only 2% of the European Union’s GDP, the impact of those choices will be wide.

The Greek crisis is fundamentally the result of its membership of the eurozone. Greece is paying the price for a belief in the ancient fallacy that possessing “hard” money puts a weak economy on a par with the strong. In reality, “hard” money is more likely to destroy a weak economy, a lesson about to be re-learned in Portugal, Ireland and Spain. Greece is heading for an exit from the euro and the rest of the eurozone periphery is likely to follow, with severe implications for the monetary union. Coping with an exit will require the reintroduction of economic controls, a major retreat from the neoliberal, pro-market approach to economic policy.

The Economic and Monetary Union (EMU) is often presented as a political step in the integration of Europe, a demonstration of solidarity among Europeans. The reality is quite different. The euro is an international reserve currency that can compete against the dollar and serve, first and foremost, the interests of big banks and enterprises in Europe. It is a peculiar form of money, created from nothing by a hierarchical alliance of independent states.

There are two fundamental problems with the construction of the euro, reflecting its peculiar make-up and leading to its failure. The first is the contradiction between monetary and fiscal policy. The monetary space of the EMU is homogeneous, and the European Central Bank (ECB) allows banks to borrow against the same interest rate benchmarks. But the fiscal space of the EMU is heterogeneous, and each state ultimately exercises sovereignty in collecting taxes and spending. The union has attempted to deal with the problem by imposing fiscal discipline via the Stability and Growth Pact, or the much harsher Fiscal Compact. But national sovereignty over fiscal matters has not been abolished.

The second problem is a much less noticed but equally severe contradiction: the monetary space of the EMU is homogeneous but its banking space is heterogeneous. There is no such thing as a “European” bank, only French, German, Spanish and other banks. Even though banks can obtain liquidity from the ECB in the “European” space, they are obliged to turn to their own state when their solvency is in doubt. Banks operate with transnational money, but they are ultimately national.

At the root of both problems lies the absence of a unitary or federal European state. Europe remains a continent of nations overlaid with an economic structure that pretends nations do not matter. Yet nation states have remained integral to the EMU. This reality is fundamental to the eurozone crisis and makes its resolution very hard.

Loss of competitiveness

The true cause of the eurozone crisis is cumulative loss of competitiveness by peripheral countries, not fiscal indiscipline. Germany has won the competitive race within the EMU by keeping its unit labour costs almost flat for nearly two decades. This has led to large current account deficits for the periphery, mirrored by large German surpluses. The deficits were financed for many years by cheap credit because of lax ECB monetary policy, causing the vast indebtedness of the periphery. The peripheral states are to all intents and purposes insolvent.

The EU has attempted to fix this with bailout loans. It has also imposed austerity and structural adjustment leading to wage reductions and the crushing of unit labour costs in the periphery. The shift has been violent, particularly in Greece, and the attendant social costs have been enormous. But the policy is hopeless since German costs have remained flat: peripheral countries would have to decrease wages without limit to claw back competitiveness and begin to catch up with Germany. The most likely outcome would be social explosion and the collapse of the eurozone.

The policy failure means that peripheral countries are now even less capable of servicing their debts, and the longer the crisis has persisted, the closer banks have been drawn to their nation states to obtain capital, to secure emergency liquidity assistance and make loans. The banking space of the EMU has become more strongly national as banks have more closely embraced their nation states. The monetary union is disintegrating from within.

Disaster could be forestalled only by major reforms. They would have to include, at the very least, the equivalent of a Marshall Plan to raise productivity and competitiveness in the periphery. Redistribution would be necessary in Germany, with a significant raise in wages. There would also have to be debt forgiveness for the periphery as well as a system of fiscal transfers to ease short-term pressures. The financial system would have to be thoroughly revamped and an overarching European authority created to guarantee its solvency.

Heading for an exit

Not only are these enormous changes unlikely to happen, but for the periphery it is probably too late already. EMU disintegration has brought worsening social unrest and peripheral countries are heading for an exit, Greece first. The bailout policies have pushed the Greek economy into an unprecedented depression: cumulative GDP contraction during 2010-12 is likely to be about 20%, while unemployment might reach 25%. The impact on wages and pensions has been devastating and there is a humanitarian crisis unfolding in cities.

Aggregate demand is extremely weak as investment has been falling for five years and consumption is on a downward path; exports showed some dynamism in 2010-11 but have hit a ceiling in 2012. The debt restructuring in March offered only minimal relief, and public debt remains insupportable in the long run. The troika of the EU, the IMF and the ECB demand further public expenditure cuts of €11-12bn for 2013-14 to achieve a substantial primary surplus. (Those whom the gods wish to destroy, they first make mad.)

The destruction caused by “hard” money has spread unevenly across Greek society. The ruling elite has suffered minimal damage, while the impact on wage labour has been devastating. Farmers have also been badly affected, but the gravest threat to social and political order has come from the demise of the middle class, including small and medium businesses, the self-employed and public employees. Not surprisingly, there has been persistent unrest and opposition to the austerity policies, including mass strikes, rallies, civic disobedience and a refusal to pay (tolls, official fees).

The May elections have shown that Greeks overwhelmingly oppose bailout policies, yet wish to stay in the EMU. The country is splitting into two political camps, one coalescing around the rightwing New Democracy, the other around the leftwing Syriza. New Democracy attracts those who have escaped the worst of the crisis, including the ruling elite; Syriza is fast becoming the mass party of wage labour and the impoverished middle class.

Both camps insist that they would like to stay in the EMU, but political instability is intensifying the pressure to exit. Unfortunately, it looks as if Greece will exit in chaotic conditions, and the trigger might be a bank run as depositors finally crack. But the basic elements of an exit are clear.

Organising exit

The first step would be to denounce the terms of the bailout agreements and default on the debt. Greece needs to get out of the vice of austerity, and it must stop chasing its tail by seeking to service an insupportable debt. Greece needs to take over the decision-making process, to confront the crisis and reshape its economy. It then needs to write off debt through an aggressive process, with an audit commission to examine the odiousness, legitimacy and social viability of the debt.

Default ought to be followed by reintroduction of the drachma, suddenly, probably over a weekend, with a short bank holiday. It would be necessary immediately to impose capital controls. The change of currency would cause a storm with monetary, banking and commercial aspects, which should be kept separate as far as possible.

There would be simultaneous use of the drachma, the euro and probably other forms of fiat money issued by the state. This would mean altering the accounting systems of banks and changing the denomination of contracts, which would cause a wave of litigation. The banks would be unable to support their balance sheets as some assets and liabilities issued under non-Greek law would remain denominated in euros. Banks would also lose access to ECB liquidity and would be hit by losses on defaulted public debt, so it would be necessary to nationalise banks immediately, issuing a blanket guarantee for drachma deposits; state guarantees should also be used to support private enterprises exposed to foreign debt. The capacity of the Bank of Greece to generate drachma-denominated liquidity should be re-established immediately.

On the commercial side, the exchange rate of the new drachma would collapse. In the short to medium term a falling exchange rate would boost competitiveness, allowing Greek goods and services to recapture the domestic market as well as expand exports. This is a vital step in reviving the Greek economy and strengthening employment. But in the very short term, there would be shortages of goods in which there is a trade deficit, including oil, medicine and some foodstuffs. It would be necessary to manipulate the exchange rate and use administrative measures to tackle the problem until the current account balance recovered.

The short-term shock of exit is part of the cost of escaping from the trap of the EMU. Greece would subsequently need an extensive programme of redistribution of income and wealth as well as industrial policy to steer its economy towards long-term growth. It would need to restructure its state, cleansing it of corruption.

A Greek exit would be a major event, probably opening the way for other peripheral countries to leave the EMU. The attendant changes would seriously damage the neoliberal institutions and ideology currently dominant in the EU. It is impossible to tell whether the euro would survive, but there is no doubt that Europe would face enormous costs, entering a period of turmoil with unclear outcomes. Much would depend on the organisation and self-confidence of the social layers that have taken the brunt of the failed experiment of “hard” money. But there is no reason why Europe could not move towards growth, with an alternative narrative of unity.

Whether Greece should leave the Euro

Πηγή: Midterm: Greece Debt Crisis
By Getting Nashty

Greece’s choice of whether or not to leave the European Monetary System (i.e. the Euro) and return to its own national currency is a difficult one. To a certain extent, remaining part of the Euro benefits the country by facilitating cross-border transactions within the Euro zone. However, to a larger extent, it burdens Greece by shackling its monetary policy in a time of economic crisis. In contrast, French and German interests are less conflicted and are strongly in favor of keeping Greece in the Euro zone.

The single currency facilitates cross-border transactions within the Euro zone by eliminating the need for, and the costs of, foreign exchange and hedging foreign currency exposure. However, at a time when the country would like to reduce its short-term interest rates to the lowest possible level so as to stimulate borrowing and investment, by having delegated its authority over monetary policy to the European Central Bank, it is forced to compromise with other ECB member countries, such as Germany and France. Those countries fear inflation in their own economies more than they fear recession in the Greek economy and therefore prefer to keep interest rates higher. Furthermore, because the French and German economies are more developed than the Greek economy, the latter is unable to compete with the former, absent lower wages. Though it’s possible for Greece to reduce wages in nominal terms (e.g. by cutting salaries in the public sector), it is politically difficult to do so. By contrast, if Greece were to return to its own currency, the country would allow that currency to fall in value relative to where it stood when Greece first adopted the Euro. The resulting pain of devaluation would then be spread evenly across the Greek economy, instead of disproportionately on public sector employees. This action would be politically more palatable. Going forward, the country would then regain the authority to set its own interest rates and to further devalue its currency, as necessary to remain competitive. To some extent, the risks Greece faces from unilaterally abandoning the Euro weigh against these benefits. Since the real burden of Greece’s existing Euro-denominated debt would rise as the exchange rate of its currency falls, any Greek withdrawal from the Euro would almost certainly coincide with, or follow, a default on that debt. While default would eliminate a significant burden on Greece, it’s likely the country would then be locked out of the capital markets for some time, putting additional pressure on public finances. It would also cause a crisis of confidence and the flight of capital out of Greece to countries that are more likely to maintain the values of their own currencies going forward.

However, since it’s almost inevitable that after the government defaults on its debts there would be a
run on Greek banks anyway, any concurrent / follow-on decision by the government to abandon the
Euro and devalue its currency would have little marginal cost and remain a net positive decision for the
country.

In contrast, France and Germany face significant risks if Greece were to abandon the Euro. To begin with, a default and devaluation by Greece is likely to encourage similar actions by other heavily indebted European countries, such as Portugal and Spain, whose economies are also less efficient than those of France and Germany. In addition to the losses that French and German banks would suffer as a result of holding much of those countries’ debts, the economies of France and Germany would lose their competitive edge within Europe. This is because as Greece and the other countries that follow it out of the Euro devalue their currencies, their purchasing power in Euro terms would also decline. Demand in those countries for what would then be more expensive French and German goods would decline as well. Conversely, France and Germany would consume greater amounts of what would then be cheaper goods from Greece and the other countries that follow it out of the Euro. This could lead to a renewed recession in France and Germany, whose economies are highly dependent on exports to the less efficient Euro zone members.

Assuming that (A) France / Germany are otherwise indifferent between (i) doing nothing and having Greece default but stay in the Euro and (ii) bailing out Greece but having it leave the Euro and devalue its currency, while (B) Greece is similarly indifferent between (i) defaulting but not leaving the Euro / not devaluing its currency and (ii) being bailed out and leaving the Euro / devaluing its currency, the payoffs to Greece on the one hand and to France / Germany on the other are as follows:

It thus seems that a Nash Equilibrium exists in the lower right corner (Bailout / Don’t Devalue). Clearly all parties would benefit the most by ending up in the lower right corner (Bailout / Don’t Devalue), but if France / Germany believe that Greece will devalue and/or Greece believes that France / Germany will not bail it out, the parties will end up in one of the other corners instead. To avoid this problem, the parties will need to negotiate carefully and build trust, so as to best coordinate their actions for the good of all concerned.

As Greece Turns Leftward, Its Tycoons Stay in Background

Andreas C. Dracopoulos, co-president of the Stavros Niarchos Foundation.

Πηγή: New York Times

By LANDON THOMAS Jr. and ELENI VARVITSIOTI

May 23 2012

ATHENS — While money pours out of Greek banks, and Europe debates whether Greece deserves its next handout, the people potentially in the best position to help shore up the nation’s finances are mainly keeping their heads down.

They are among the wealthiest Greeks — whether shipping magnates, whose tax-free status is enshrined in the constitution, or the so-called oligarchs who have accumulated vast wealth via their dominance in core areas of the economy like oil, gas, media, banking and even cement.

Astute investors, they have been reluctant to lend a hand to the Greek treasury through the risky proposition of buying government bonds. But they have also been slow to dispense funds to philanthropies trying to combat the mounting social ills that their nation’s economic collapse has wrought — drawing a sharp rebuke from the head of a foundation created from Greek shipping wealth, that has become Greece’s largest charitable donor in recent years.Mainly, though, they have done what Greeks from the richest to those of modest means have traditionally done: pay as little as they can in the way of taxes.

Many economists say the oligarchs are a big part of Greece’s economic problem, because they have capitalized on the insular, quasi-monopolistic approach to business that is one reason their nation has long lagged the far more competitive economies of many other euro zone nations.

The moneyed elite in Greece has always been secretive in nature, especially when it comes to its fortunes. Assessing the ultimate value of Greek private sector wealth is a near impossible task, because much of the money exists offshore, secreted away in Swiss bank accounts or invested in real estate in London and Monaco. And now with the country’s top vote-getter, the leftist firebrand Alexis Tsipras, talking more and more about nationalizing companies and industries and, in the words of his top economic adviser, “taxing the rich,” there is even more incentive to lie low.

Of course, the left is not alone in this view.

“Let’s be frank — the well-off need to pay their fair share of taxes,” Bob Traa, the International Monetary Fund’s representative in Greece, said in a speech last year in Athens.

Last year alone, an estimated 8 billion euros ($10.2 billion) in collectible taxes were in arrears — nearly half of the country’s budget deficit.

The nation’s tycoons have every incentive to keep their country in the euro currency union. The question is, are they willing to bear the cost of doing so?

“The oligarchs want to keep the euro — largely because of the banks which are so deeply integrated in the euro system,” said Costas Lapavitsas, an economist at the University of London. “But they are keeping quiet about it.”

But as children go hungry in Greek schools because their parents can no longer afford to feed them and the streets of Athens become home to growing numbers of desperate, jobless people, pressure is mounting on the country’s rich to do what the state can no longer effectively do: write checks.

After all, philanthropy is a Greek word. But with many wealthy Greeks still fearful of showing their financial hand, private giving to date has been relatively meager.

“I get the sense that almost nothing is being done,” said Andreas Dracopoulos, co-president of the Stavros Niarchos Foundation which was set up in the 1990s to put to charitable use the winnings of its shipping tycoon founder. “Everyone is saying let someone else do it, and so far I am seeing little action.”

This January, the Niarchos foundation, which describes itself as an international charity with offices in Athens, New York and Monaco, said it would donate 100 million euros to a series of projects aimed at helping Greeks cope with the economic crisis. They include an effort to give food vouchers to help destitute parents feed their children, as well as programs to attack the growing epidemic of homelessness in big cities like Athens and Piraeus.

Shipping analysts guess that the value of Greek shipping assets alone is about $85 billion — although they hasten to add that those assets underpin a substantial debt burden of around 300 billion euros ($380 billion) for the industry, which is heavily dependent on financing vessels that can cost hundreds of millions of euros each. And in the slack global economy, shipping — and shipping magnates — are feeling the pinch.

Thanassis Martinos, a second-generation shipping heir, said his company, Eastern Mediterranean, was having one of its worst years on record and was likely to lose money in 2012.

Still, he and some other shipping billionaires say they are doing their part. In addition to philanthropic giving, Mr. Martinos said it was important that the wealthier Greeks contribute by providing jobs for the country’s increasingly rootless youth, among whom employment is above 50 percent. That is why, despite the slump in his business, he said he had refrained from laying off workers.

“The biggest problem is not feeding young people,” he said. “It is giving them jobs.”

Another rich shipper, who insisted on not being identified because he did not want to draw attention to himself, said that he was providing thousands of free meals to families in and around his ancestral village.

Several shippers said they had also donated to a nascent campaign that is being organized by the trade group that represents Greek shipowners in Athens — although its president, Theodoros Veniamis, declined to say how much money they hoped to raise.

What the shipping magnates are not doing, though, is paying taxes. As with all shipping companies here, for example, Mr. Martinos’s fleet of tankers is based offshore, although the administrative offices are in Athens.

Greece’s income tax revenue is 7.3 percent of gross domestic product, well below the 11 percent average for euro zone countries, according to Eurostat. Even so, there has been little talk by recent governments or even by Greece’s financial backers about imposing taxes on shippers — a move, it is assumed, that would prompt them to take their business elsewhere.

That is a blow Greece would have trouble absorbing. The shipping industry employs about 200,000 people. And it brought in 13 billion euros in foreign exchange in 2010, making it the country’s top single foreign-exchange earner.

Would shipping’s special tax exclusion change under a left-wing government? It is hard to say. Euclid Tsakalotos, a top economic adviser to Mr. Tsipras said in an interview last week that the first thing Mr. Tsipras would do was to “tax the people that past governments have been afraid of taxing.”

Mr. Martinos says such an outcome is unlikely, given shipping’s vital role in the economy. Greek shippers are also some of the country’s largest investors, owning large tracts of real estate and interests in tourism, banking and media.

“I don’t think the policy will change,” he said. “Shipping is a net profit for Greece.”

Many shipowners and other wealthy Greeks are said to take the long view, arguing that Greeks will come to their senses in the next election and not vote in large numbers for Mr. Tsipras if they become convinced that it means a forced march out of the euro zone.

But privately, they cannot ignore the increasingly grim economic and social environment — which is why some have bolstered their already tight security forces by hiring more bodyguards.

Peter Nomikos, a 33-year-old shipping scion, has started a campaign to raise money from Greek businesses and individuals and then, through a foundation he set up in the United States, use those funds to buy back as many of Greece’s deeply discounted bonds on the open market as possible. The plan would be to retire them to help bring down the country’s staggering debt burden, which is now 350 billion euros — 165 percent of the nation’s G.D.P.

Mr. Nomikos is also building a microbrewery on Santorini, the island of his shipping forefathers. He says that he hopes to create a few jobs in the community and that he plans to contribute 50 percent of the profit to the foundation.

“No single person is rich enough to bail out Greece — not least myself,” said Mr. Nomikos, who through his beer company has already bought 100,000 euros worth of bonds at current rock bottom prices of around 15 euro cents on the euro.

Euro falls in Asia after France, Greece elections

Πηγή: EUbusiness
By AFP
May 7 2012

(TOKYO) - The Euro fell Monday in Asian markets after the defeat of ruling parties in French and Greek elections, as investors worried about a knock-on effect on European austerity measures.

At 7:25 am in Tokyo (2225 GMT Sunday), the euro was at $1.2982, down from $1.3082 on Friday at 2100 GMT in New York.

In France, Socialist challenger Francois Hollande was set to be confirmed as France's president-elect, after his predecessor President Nicolas Sarkozy conceded defeat, according to nearly complete results issued on Sunday.

With 91 percent of the ballots counted, the Socialist winner had 51.56 percent of the ballots while Sarkozy had 48.44 percent.


Analysts said the victory underscored the politically difficult task of selling austerity measures ushered in to tackle eurozone nations' huge debts, with Hollande advocating economic growth over deep public spending cuts.

"The Hollande win in France is not necessarily a surprise. However it brings home the reality that incumbents following the (European Union's) prescribed austerity measures are going to find it difficult to remain elected," National Australia Bank said in a note.

"What happens to these austerity measures now are what are weighing on (the euro)."

Greek voters meanwhile showed their lack of enthusiasm for belt tightening, dousing hopes that Athens will stick to its austerity pledges as parties opposing more cuts won almost 60.0 percent support in an election Sunday.

The two main parties suffered heavy losses, with the conservative New Democracy and the left-wing Pasok getting just 32.0 to 34.5 percent between them, down from 77.4 percent at the last polls in 2009.

New Democracy, led by Antonis Samaras, remained the largest party but it fell short of an absolute majority in parliament.

"Greece's elections may prove the more unstable, with the possibility of another in the near future," the bank said in its research note.

"As it stands there is no clear winner, but there are likely to be calls to ease up on the austerity reforms," it added.

The Obama presidency remains firmly in denial over the euro crisis

Hormats at the Senate Banking Committee hearing 

Πηγή: The Telegraph
By Nile Gardiner
Feb 17 2012

I’ve just read through the Congressional testimony delivered this week before the Senate Banking Committee by Robert D. Hormats, Under Secretary for Economic, Energy and Agricultural Affairs, on “Examining the European Debt Crisis and its Implications”. After reading it, one can only conclude that this is a US administration that refuses to publicly acknowledge the sheer scale of the huge debt crisis enveloping the eurozone. In fact there’s nothing at all in the testimony that even deals with the frightening reality on the ground across much of the EU. Incredibly, Greece is not even mentioned.

Hormats’ statement opens with the usual Obama administration fawningover the federalist vision of the European Project, and the drive for ever-closer union in Europe:

"America, since the days of Presidents Truman and Eisenhower, and Secretaries Marshall, Acheson and Dulles has recognized that a united and prosperous Europe is of enormous importance to the United States.

And we have recognized, since the days of Jean Monnet and Robert Schuman, that closer economic integration in Europe was an essential underpinning to a stronger Europe and its ability to be a robust ally. And we understood that a prosperous Europe was important to a prosperous America. That was true in the 1950s when we supported the Marshall Plan, and it is today".

It continues with a surreal discussion of the “economic recovery” supposedly being advanced by the EU:

"In addition to the steps the EU has taken to resolve the debt and banking crisis, which Under Secretary Brainard has just discussed, we also have seen a commitment, as evidenced by the results of the EU Summit on January 30, to address the current economic challenges not only through fiscal consolidation, but also by facilitating job creation and putting in place measures to assist member states in finding a path back to economic growth.

There is a lot more hard work ahead. And there are many difficult choices to make. But our European partners have laid a solid foundation on which to build, and we appreciate the enormous efforts the EU has taken to regain its economic footing".

Hormats’ colleague Lael Brainard, Under Secretary for International Affairs, also testified at the hearing. Brainard painted a misleading picture of a steadfast European response to the crisis, speaking of the EU’s actions in glowing terms:

The leaders of the euro area have pledged to do whatever it takes to stand behind the euro. And we have confidence the euro area has the capacity and the resources to stand behind that commitment. It is a common feature of financial crises that the pace of markets far outstrips that of political process. The challenge of delivering on European leaders’ commitment has been magnified by the considerable time that is required to secure agreement among 17 heads of state and permit deliberation and approval by 17 national parliaments. Despite these challenges, Europe has made enormous strides.

It is hard to see what strides exactly Europe is making in dealing with the biggest economic crisis on this side of the Atlantic since the Great Depression. What is missing from the Obama administration’s approach to the disaster unfolding in Europe is any acknowledgement of the real root causes of the deep-seated economic malaise – decades of socialist-style big government policies that have fuelled massive deficits and frightening levels of borrowing to pay for vast welfare states and unsustainable entitlement programs.

The European social model, coupled with the relentless drive to centralise economic and political power in Brussels and create an undemocratic European superstate, has combined to create a climate of pervasive economic decline. The Obama administration dare not speak the truth, not least because its own policies have closely mimicked the European experiment, that is now going down in flames. For this is a presidency firmly in denial over the spectacular failure of its own big government agenda, which is killing economic freedom, stifling prosperity, racking up massive public debts, and undermining liberty in the world’s only superpower.

The European Union offers a startling vision of America’s future if it continues down its current path, one that should be avoided at all costs.

Germany's Dilemma And The Future Of The Eurozone

Πηγή: Seeking Alpha
By James A. Kostohryz
Feb 3 2012

Several countries in the eurozone including Italy, Spain, Portugal, Ireland and Greece (PIIGS) are no longer able to raise new debt or even roll over old debt in private financial markets without multilateral assistance. Indeed, without massive intervention from the EU, ECB and other multilateral lenders to secure the financing of new deficits and roll-overs, these PIIGS nations will be forced to default on their debts and possibly exit the common currency.

As the largest and most powerful member of the EU, Germany will play a major role in determining the fate of the PIIGS and of the Eurozone (EZ) as a whole. German leaders must decide whether, how and to what extent their nation will be willing to underwrite comprehensive rescues of PIIGS economies.

Until now, German leaders have insisted on an orthodox approach: Germany has been willing to support emergency multi-lateral financing and other measures, but only on the condition that the aid recipients undergo harsh "austerity" measures. Their position has been that countries that are having difficulties raising money in financial markets must slash spending and raise taxes in order to balance their budgets and restore "market confidence."

It is now clear that such austerity policies have been making things worse rather than better. Austerity policies in the context of depressed economic and financial conditions have caused economies to shrink and fiscal deficits to balloon rather than contract. This, in turn, has caused confidence in financial markets to collapse. Furthermore, the only "confidence" that financial markets have expressed in European policy has been when they have gone in the opposite direction of austerity. The recent rally in risk assets in Europe and the U.S. as reflected in index ETFs such as (SPY), (DIA), (EWG), (EWQ), (EWI) and (EWP) have been in response to heterodox and expansionary policies such the recent implementation of LTRO by the ECB or the announcement of the EFSF in October.

As the economic and financial failure of austerity policies in current conditions has become increasingly clear, a growing number of nations inside and outside of the EU are trying to persuade Germany and the EU as a whole to reverse course. Leaders of governments in Portugal, Spain, Italy, Ireland and Greece have been joined by other nations and the IMF in loudly calling for Germany to support aggressive intervention by the ECB in Europe's sovereign debt markets as well as supporting more counter-cyclical fiscal policy. According to the IMF as well as many independent analysts, if Germany's response to the crisis does not change and the downward spiral in the PIIGS is not arrested quickly, the entirety of Europe will face an economic calamity.

The question is: What will Germany's response be?

What Will Germany Do? Factors That Will Influence German Decisions

A forecast of what Germans will ultimately do is not a simple one. Many analysts base their predictions regarding what Germany will do on what they opine Germany should do. This approach is deeply flawed. First, it is not obvious what the Germans should do. Second, even if it could be easily determined what should be done it is far from certain that this would in fact be done. Many idiosyncratic partisan political, personal and cultural factors intervene.

Indeed, if nations always did what they should, history would have witnessed far fewer economic crises, wars and other calamities caused or exacerbated by bad government choices.

So, in addition to acknowledging that it is very difficult to determine what Germany should do a priori, one must approach this inquiry from the proper cultural, historical and personal prisms of the people that will be influencing/making the decisions.

Keeping these basic observations in mind let us very briefly review a few important factors that will influence German decisions.

1. The perceived economic benefits of the euro to Germany. Many analysts, including myself, have noted the economic advantages for Germany of a "hard" currency shared by its European trading partners. Principally, from the perspective of Germany's mercantilist economic model, a common currency eliminates the ability of Germany's trading partners to employ their historic palliative of devaluation to correct persistent German trade surpluses gained via superior productivity growth.

The problem is that a proper analysis cannot end there. There is another side to the ledger of trade surpluses: Trade deficits are the necessary counterpart to trade surpluses; trade deficits are financed by debt; and the debt of trade deficit nations is financed by the accumulated surplus of trade surplus/creditor nations. Such an arrangement can support above-trend growth in a surplus nation such as Germany for a time. However, in the long run, increasing indebtedness of the deficit nations can turn into an solvency crisis which, in turn, devastates the savings pool and financial systems of the creditor nations.

That is, in fact, the situation that many Germans think that they currently find themselves in. An increasing number of Germans believe that continuing to finance PIIGS - either directly or through the ECB - is ultimately counterproductive because these nations have crossed beyond the threshold of insolvency. Thus, rescuing the PIIGS would simply be "throwing good money after bad," and saving the eurozone as it currently exists will to cost more than it is ultimately worth.

Right or wrong, Germans are becoming increasingly ambivalent regarding the economic benefits of the euro to Germany. Thus, judged purely on the basis of their economic self-interest, there is no clear consensus in Germany regarding what the nation should do. Germans would like to preserve the eurozone as it is. But they seem unwilling to pay what is required for its preservation.

2. Geopolitics. I believe that the geopolitical benefits to Germany of the EU are less ambiguous. The EU acts as a global economic superpower, with tremendous leverage in world affairs. And as the dominant partner within the EU, Germany is able to project power around the world - vis a vis the U.S., China and Russia, for example - far more effectively than it could if it had to act as a purely independent nation. The EU is a powerful geopolitical instrument that is at the disposal of Germany to defend and promote its industrial, financial and political interests around the world. This is undoubtedly a strong argument for promoting and perpetuating the EU system from the German point of view.

Of course, there is a downside to German involvement in the EU: As the dominant member of the EU, they essentially cede a considerable amount of scope to maneuver independently. That means that German interests can, to some extent, be held hostage by the whims of Greek, Portuguese, Maltese and other Mediterranean politicians. And this undoubtedly irks many Germans. Indeed, I believe many Germans fear that with respect to fundamental issues they could become isolated within the EU and their national interests be over-ridden by an alliance of what they consider to be "rinky-dink" powers.

On balance, I believe that the EU is a highly favorable arrangement for Germany. However, it is unclear how well Germans understand this. It often seems that German fears of being "ganged up on" by their EU partners are as great or greater than their ambition to wield the international powers that the EU structure provides them.

3. German historical self-consciousness. The history of the world wars make many Germans very reticent to assume the "bad guy" role within the EU. Many Germans are sensitive to being perceived as belligerent or intransigent amongst its putative allies in Europe.

By the same token, many Germans, particularly of the younger generation, are fed up of having to "pay" for the sins of their forefathers. Many Germans resent the expectation by other Europeans that they should somehow be less aggressive in pursuing their national interests than any other nation. Many Germans resent having to assume an apologetic and deferential posture.

On balance, for historical reasons, I believe that Germans would rather avoid confrontation within Europe and that will go to some lengths to do so. At the same time, I believe that the Germans can only be pushed so far before deep seeded resentments of large numbers of Germans bubble to the surface rather spectacularly. Germans are subject to a complex sense of humiliation and victimization regarding their past history and this could become a very divisive factor if and when political tensions rise in Europe.

4. The unification experience. Many forget that in the post-unification period and during the initial years of the euro project, Germany was considered "the sick man of Europe." All, Germans, particularly in the Eastern part of Germany where Chancellor Merkel is from, feel that they suffered greatly during the reunification process. For well over a decade, Germans had to tighten their belts and give up myriad "rights" that they had come to cherish as part of "structural reforms" in order to successfully execute the reunification process. While the "Club Med" PIIGS enjoyed relatively high growth rates and rising property values Germans experienced stagnation of their incomes and property values.

Many Germans now feel a sense of pride for having endured that era of "austerity" and believe that they are a success story that PIIGS should emulate. Furthermore, many Germans simply cannot countenance the notion that they should be called upon to bankroll policies that would prevent PIIGS nations from experiencing the austerity that is their duty to endure (and which many Germans even feel is richly deserved).

In sum, German perceptions of their reunification experience make it very difficult for them to be accepting of "bailouts" of PIIGS nations. Germans feel that the PIIGS need to fend for themselves just as the Germans themselves did for almost two lean decades after reunification.

5. German national character. To invoke culture in a discussion of economic or political policy is always fraught with risks, and even more so when discussing Germany. Yet however much people would like to deny it or ignore it, there is such a thing as national culture. And Germans, while hardly monolithic, tend to possess certain traits or combination of traits that distinguish them as a people.

I would say that high on the list of cultural traits that distinguish the German national culture is a characteristic that I will call "idealism" (not to be confused with the more technical philosophical sense of this term). In economic affairs, this idealism is reflected in a perceived need to adhere strictly to orthodox (i.e. "ideal") theories of balanced budgets and hard money in terms of fiscal and monetary policy. For example, expansionary monetary policy by the central bank is viewed as "money printing" by many Germans, and is anathema to their (idealistic) national sensibilities regarding how a central bank should manage the money supply. Similarly, Germans are apt to think that if fiscal deficits are a problem, that the solution must logically (ideally) be to immediately cut government spending and/or raise taxes.

The reality of Europe's economic and political situation today is one that I believe that many Germans will find it very difficult to come to terms with. Cutting spending and raising taxes at this time is precisely the wrong way to deal with the problems ailing Europe, both economically and politically. The most immediate requirements in Europe are more nearly the opposite of what their instincts impel them to pursue. The current economic and political situation in Europe requires unorthodoxcompromises and/or deviations to standard modes of thinking. Unlike Americans, that tend to have a more "pragmatic" outlook, the German tendency toward uncompromising "idealism" poses a severe obstacle to such flexible policies being embraced by the Germans.

I will note that the idealist that I refer to may be especially prevalent in the old Prussia (also the former East Germany), which is where Chancellor Merkel is from. This factor may not be entirely irrelevant in the current historical context.

6. International pressure. It would be a mistake to underestimate the international pressure that will be exerted upon Germany and its leaders in the coming weeks and months. Germany is essentially isolated in the world in its insistence on austerity policies. Even the IMF has come out strongly in favor of a course reversal, warning ominously of disastrous consequences if Germany does not strongly support monetary and fiscal stimulus.

It must be remembered that much of this pressure will be coming from allies and friends of the current German government. This includes the center-right technocrats that they have helped install in Greece and Italy and the center-right president of France whom Merkel has forged a close alliance with.

Indeed, as the crisis evolves, Germans will feel like the entire weight of international opinion will be falling upon them. This factor, combined with No. 3 above ,will exert a strong influence on German policy makers.

7. Domestic politics. In mid 2011, Chancellor Merkel and her government were in serious trouble according to the opinion polls. Merkel had committed a series of major political blunders on internal domestic matters and prospects for her reelection were looking extremely bleak.

The euro crisis has breathed new life into Merkel's political career. How did she engineer this turnaround? Merkel has cultivated what some Germans have called a "protestant poverty aesthetic." Others in Germany have conjured imagery of Merkel as the frugal and industrious housewife that looks after every last penny of her family's money. The bottom line is this: Merkel's hard-line policy of austerity for PIIGS is extremely popular in Germany. For example a recent poll revealed that an overwhelming 73% of all Germans oppose more contributions to a European rescue fund. Germans are even more strongly against ECB monetization of PIIGS debts.

Merkel has staked her political reputation on her tough EU policy of demanding PIIGS austerity. Indeed, given some of her own domestic policy missteps and the weakness of her government's coalition partner, her political viability probably depends on it. It is going to be very hard for Merkel to live down her own words and the austerity "brand" that she has cultivated.

Under these circumstances, it is difficult to envision the German Chancellor acquiescing to the sort of radical monetary and fiscal expansionism that would be necessary to save the PIIGS from their current economic and fiscal free-fall. Such an about-face would probably spell the end of her political career and could devastate her party.

Conclusion

Trying to predict the evolution of Germany's policy response is no easy matter.

On the one hand, Germany is under enormous international pressure to reverse course and abandon its insistence on austerity. On the other hand, judging by recent remarks and behavior by public officials, the German position does not seem to have budged at all. Furthermore, Merkel's performance in the polls seems to be internally ratifying her hard-line position, if not constraining her to it.

Clearly, German leaders are being buffeted by pressures on all sides and the decisions ultimately taken in this context will depend a great deal on the character and timing of a slew of events that are completely out of German control.

In this regard, I believe that a variety of factors between now and the end of April will strengthen the German impulse to resist further bailouts and erode the case in favor of them. For example, I expect that severe economic and fiscal deterioration in the PIIGS will make future bailout propositions much more costly and seemingly hopeless in the long term from the point of view of the ordinary German. Another factor relates to domestic politics in various European countries. I believe that politics in many European nations will take on an increasingly anti-German tone. For example, Greek and French elections in April will probably see the rise of parties that outwardly reject German austerity. Anti-austerity movements could also gain momentum in Italy and perhaps Spain.

Under such circumstances, I believe that a counter-reaction could develop within Germany. Aside from the sentimental revulsion involved, many Germans will conclude that bailing out the PIIGS would simply be throwing good money after bad in the long run.

The perceived inevitability of a PIIGS crisis, which is gaining ground in Germany, will constrain Merkel's ability to soften her policy, even if she was so inclined. Indeed, I doubt whether Merkel will be able to shift her policy unless the recession is already hitting ordinary Germans so hard that she will be able to present expansionary fiscal and monetary policy as a tool to protect German jobs as opposed to a rescue operation for the benefit of PIIGS. The problem is that by the time the pain is being felt to a sufficient degree in Germany, much damage will already have been wrought to the PIIGS and other economies and financial markets in the rest of the world.

Furthermore, it is important to understand that decisions regarding bailouts are not a matter that the Merkel and high level German officials can decide on their own. Germany's highest court has ruled any expansion of bailout commitments must be approved by parliament. German parliamentarians will be loath to go on the record supporting such bailouts.

Global markets seem to be discounting the belief that Germans will do whatever it takes to avoid a full-fledged euro crisis. This belief is usually based on a simplistic analysis of what Germany "should" do. The problem is that I do not think that it is clear that the Germans are convinced or can be convinced that financing ever larger bailouts is the "right thing to do." And even if Germany's top policymakers believed that, I think that many cultural and domestic political constraints stand in the way of such implementation.

If you believe that the Germans will reverse course quickly and underwrite a massive and comprehensive bailout scheme as proposed by the PIIGS themselves and now seconded by the IMF, then you should go out and buy equities such as Apple (AAPL), Microsoft, Citigroup (C) and Chevron (CVX) as well as ETFs such as (SPY), (DIA) and (QQQ), hand over fist.

On the other hand, if you believe that the Germans and other EU members will recoil at the prospect of a drastic policy about-face, then the downward economic spiral in the PIIGS will continue, diplomatic acrimony will rise, the prospect of major defaults will become more imminent and global financial markets will get hammered. Under such circumstances investors should either be heavily in cash and bonds or outright short.

I personally do not think that market participants really understand what an effective bailout of the PIIGS will entail or what constraints German leaders face in implementing such a bailout. I therefore believe that financial markets are not properly discounting the probabilities that German policy will impede a sufficiently quick and efficient response to the European crisis.

I reiterate my view that by the end of April, the S&P 500 (^GSPC) will initiate another leg down that will take the index down to the area of 950-1,020.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.