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Wednesday, May 16, 2012

Fed Watch: Greece is Running Out of Time

Tim Duy:

Greece is Running Out of Time, by Tim Duy: I have repeatedly described myself as a Euroskeptic. The current combination of politics and economics looks likely to at worst doom the Euro to failure, at best to commit the Continent to a deep and long-lasting recession. Moreover, the pace of deterioration in Greece, combined with an economic structure that seems completely at odds with much of the rest of Europe, seems to make a Grexit all but impossible.

That said, I am horrified at the ongoing willingness of European policymakers to still be playing chicken at this point. I assumed that my skepticism would ultimately be proved wrong as the European Central Bank would ultimately cave and effectively monetize national debt across the Eurozone, and that Germany would come to this conclusion as necessary to save the single currency that they have long-championed. That ultimately, the Eurozone would step up and take greater responsibility for this mess, understanding that while the Greeks have mismanaged their economy, they should never have been admitted to the Eurozone in the first place.

Instead, Europe situation is now akin to two or three trains running full-speed at one another, and by the time someone finally pulls on the brakes, it will be too late. By the time key actors step into action, irreparable damage will have been done

Consider that one of those trains, Greece, has no driver, nor will it until June 17 when fresh elections are held. Combine that with a deteriorating fiscal situation - believe it or not, it actually continues to get worse. From Bloomberg:

The level of funds in Greece’s state coffers has fallen below 1.5 billion euros ($1.9 billion), Imerisia reported, citing “reliable information.”

If the state doesn’t receive predicted revenue for the rest of this month, it will find it difficult to pay for social services, pensions and public-sector wages, the newspaper said.

This was confirmed by the outgoing leader:

Greece's outgoing Prime Minister Lucas Papademos has warned the country's political leaders the government may have difficulty in meeting its cash obligations as of the start of June, a Greek newspaper reported Monday.

In a note Papademos sent to Greek President Karolos Papoulias and discussed in Sunday's meetings between the president and party leaders on forming a coalition government, the prime minister said it is likely Greece will have significant difficulties in covering its cash payments in June, according to newspaper Ta Nea, citing unnamed sources from Papoulias' office

Now, further consider one of the proximate causes of the new fiscal shortfall:

Greece' s budget revenues have reportedly dropped by 10.2% in April compared to the same month in 2011, as daily Kathimerini reports quoting provisional figures the Finance Ministry is studying. The election period did nothing to help state receipts as the tax collection and monitoring mechanism traditionally relaxes ahead of polls, and did so again this year despite the crisis.

It has been said before, but is worth saying again - how did this economy pass the bar to Euro membership in the first place? If officially sanctioned tax avoidance remains in effect, and we have another month until the new elections, I can't imagine that the fiscal picture is going to do anything but go from bad to worse. Or from worse to as worse as it can get.

Given the deteriorating fiscal position, Greece will eventually need a larger bailout if it is to stay in the Euro. Simply put, if they can't pay their bills with Euros, they will need to issue their own currency. Deep in a piece on the failed efforts to collect property taxes via electricity bills, the FT brings us this from a "friendly trader":

When we talk about Greece “running out of money” in coming weeks/months, the combination of dire recession, plus non compliance in Revenue collection will speed the day that Civil Servants and suppliers are paid in IOU’s or “New Drachma” in the absence of any funding from the EU/IMF…

Once IOU's start circulating, the clock will start ticking. Either they get replaced soon with actual Euros, or they start trading as currency. In other words, time is growing very, very short to find a solution that keeps Greece in the Eurozone.

Meanwhile, is the final run on Greece's banks underway? From the Wall Street Journal:

Greek depositors withdrew €700 million ($898 million) from local banks Monday, the country's president said, as he warned that the situation facing Greece's lenders was very difficult.

In a transcript of remarks by President Karolos Papoulias to Greek political leaders that was released Tuesday, Mr. Papoulias said that withdrawals plus buy orders received by Greek banks for German bunds totalled some 800 million.

A bank run in the absence of a functioning government. Is there anyone ready to push the button on a bank holiday with capital controls? Or is this about to devolve into a free-for-all flight of capital?

Meanwhile, Germany and France are holding to the official line. From the FT:

“We want Greece to stay in the euro,” Ms Merkel said. “We know that the majority of people in Greece see that.”

The Greek government had also agreed on a rescue programme with the IMF and the EU after lengthy negotiations, she said. “I believe that memorandum must be respected.”

This ignores the small point that the last bailout was certain to fail from the start. The message remains that no one but Greece is making the decision to leave the Euro:

“We have to respect that there will be new elections in Greece,” she added. “We will make it clear that we want Greece to remain in the eurozone, and that is what the citizens are voting on.”

But out comes the unspecified carrot:

That meant fulfilling the commitments in the EU and IMF programme, she said, but added: “We will also give proposals to Greece to encourage growth.”

Mr Hollande went further, saying that “I hope that we can say to the Greeks that Europe is ready to add measures to help growth and support economic activity, so that there is a return to growth in Greece.”More carrot with stick would have been helpful two years ago. Now it is looking like too little, too late. And what kind of measures are these? Direct bilateral transfers from Germany, which would be helpful? Or more loans to add to those that Greece can not already afford?

In other news, in the wake of its two LTRO operations, the ECB is back to neglecting its role as lender of last resort. As a consequence, Spanish yields are now solidly back above 6%, with Italian yields in close pursuit. Apparently, investors are not convinced that the supposed firewalls are sufficient to control contagion. European policymakers have fallen short of the mark. Again.

Bottom Line: I don't see how European policymakers can be anything but terrified that this whole experiment is unraveling at a frightening pace. Yet they keep barreling ahead on this disastrous path, ensuring that things continue to get worse before they get better.

Update: Three more from Tim Duy:

Central Bank FAIL - ECB Edition: From the Wall Street Journal:

The steady outflow of deposits from Greek banks hasn't yet turned into a full-blown bank run, and the European Central Bank has nearly limitless capacity to provide banks with additional liquidity. But economists have long warned that a run on banks could develop if the population fears Greece's departure from the euro is imminent and that their savings would evaporate. A bank run could trigger the euro exit if it reaches a scale that forces Greek authorities to freeze bank accounts and print their own currency to keep the financial system alive.

What is more, if Greece fails to comply with the conditions of its bailouts, the ECB would likely cut off the liquidity support for its banks, a move that could cause the banking system's collapse.

It is simply unbelievable that at this point in history, more than 100 years after Bagehot's Lomberd Street, that we could consider that the European Central Bank will not only fail in its role as lender of last resort for the fiscal authority, but also fail in its role as lender of last resort to the banking system.  Yet here we are.

Failure to Communicate: Yet another amazing quote from the same Wall Street Journal article:

Greece's renewed turmoil is putting Europe's leaders in a difficult position. Many hoped that the Greek election would result in a national consensus to push forward with the deep spending cuts Greece's previous governments committed to as a condition of the rescues. Instead, voters used the ballot to express deep dissatisfaction with the measures.

Really?  Did European policymakers really believe that the Greek people would never grow tired of the endless austerity?  If so, this is simply sad, because virtually everyone else in the rest of world saw that the Greek people were being pushed over the edge.  

Questionable Assumptions: From the Financial Times:

Ms Merkel defended her belief that the common currency was "not just a monetary project, but a political project". It meant that the member states of the eurozone shared a common responsibility. "People who have a common currency will never fight a war against each other," she said.

Isn't this just plain wrong?  When people with a common currency fight a war, we call it a civil war.  Not exactly without historical precedent.

    Posted by on Wednesday, May 16, 2012 at 12:33 AM Permalink  Comments (23)


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