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Commentary on The Capital Markets- Category [International]

The latest from the ECB suggests that they have raised the ELA "haircuts" on collateral tendered by Greek banks to 45%.

That's obscene -- unless the so-called "assets" are in fact worth nothing.

So let's take the two possibilities:

  • The assets are good.  The Greek banks should take them back from the ECB and sell them into the market to repay the ECB, keeping the rest of the funds from the sale.  With a 45% haircut currently being applied if the prices the banks are holding them at are not frauds then they can easily do this and pay the depositors who wish to withdraw funds while having plenty left over.  The amount of collateral (bonds) involved is relatively small compared against the totality of the EU debt marketplace; there would be zero (or nearly so) move in price caused by such a sale.  Doing this would shrink the size of the banks involved (perhaps to extinction), but so what?  No depositor would lose a nickel and there might be created new business opportunities for new bankers to spring up to fill consumer and business demand.

  • The assets are worthless, or at least worth far less than claimed -- and most-importantly, worth less than the haircut marks!  If this is the case then the Greek banks have been and are today committing fraud.  In this case every one of their executives and managers should be arrested, tried and publicly executed.  Yes, in this case the depositor money has been impaired and some will be lost but the people responsible will be properly punished for what they have done, deterring a future similar event.

So which is it?

Either the ECB has no bullets in this gun with their "haircut expansion" because the assets can be easily taken back and sold for more than the haircut value and this is what any rational business person would do or the assets are either worth far less than the haircut value or worse, entirely worthless.

AGAIN: Is this entire charade smoke and mirrors or is the Greek banking system a fraud-laced enterprise that needs to have virtually all of its participants face the harshest possible sanction?

One of these two must be true.

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Now that Greece has effectively spoken the real fun begins.

I'm wondering if there's a prosecutor with a set of gonads over in Greece that will issue indictments aimed at the ECB, particularly if they try to "now" apply a haircut to the ELA, or simply aim at Merkel due to what she apparently knew and believed at the time of the first bailout.

Never mind the myriad threats aimed at Greece's population by various officials, all intended to swing a vote that they have no right to interfere in.

You could start right here:

"I hope people say 'yes,'" European Parliament President Martin Schulz told German public radio. "If after the referendum, the majority is a 'no,' they will have to introduce another currency because the euro will no longer be available for a means of payment."

That's blatantly untrue; who's going to make the Euro "unavailable" as a means of payment?  You, Herr Schulz?  If so under what authority?  None, unless you intend to violate sovereignty further, perhaps with a few tanks!

Those who run this sort of crap ought to face sanction for their attempted interference, and a nice indictment or three would be right up the correct pipe in my view.

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Oh boy.

If this isn't enough to hand up an indictment and put Merkel in prison for the rest of her natural life, what would be?

Merkel's fear was that Athens would be unable to overcome its problems even with an additional haircut, since it would not be able to handle the remaining debt.

In other words Merkel knew at the time of the original bailout that the terms were not sustainable.  That is, Greece, even with the original haircut that was put in the debt and the bailout loans they would not be able to pay.

But she pushed for it anyway and to this day has not admitted this.

What is knowingly handing someone a noose, claiming that it's a rope to climb out of a hole with?  What is it when the leader of a nation does that intentionally to the people of another nation?

It gets better.  The IMF, which at that time wasn't sure whether Greece could make it work or not, now is of the same opinion.

Coming on top of the very high existing debt, these new financing needs render the debt dynamics unsustainable. This conclusion holds whether one examines the stock of debt under the November 2012 framework or switches the focus to debt servicing or gross financing needs. To ensure that debt is sustainable with high probability, Greek policies will need to come back on track but also, at a minimum, the maturities of existing European loans will need to be extended significantly while new European financing to meet financing needs over the coming years will need to be provided on similar concessional terms. But if the package of reforms under consideration is weakened further—in particular, through a further lowering of primary surplus targets and even weaker structural reforms—haircuts on debt will become necessary

In other words the existing "bailout terms" will not suffice.

Further, this was known in 2014 to be under extremely high risk and the proceeds from privatization efforts, much of which were supposed to come from state holdings in the banking sector, have been derailed due to non-performing loans -- loans that were on the books before the bailout and thus, had they been examined with any sort of dispassionate analysis.... (in other words this was known to be true as well and intentionally ignored.)

What's worse is that even if there is a "third" program of concessionary loans extreme vulnerability to shocks (say, a recession?) will remain.

Assuming official (concessional) financing through end–2018, the debt-to-GDP ratio is projected at about 150 percent in 2020, and close to 140 percent in 2022 (see Figure 4ii). Using the thresholds agreed in November 2012, a haircut that yields a reduction in debt of over 30 percent of GDP would be required to meet the November 2012 debt targets. With debt remaining very high, any further deterioration in growth rates or in the mediumterm primary surplus relative to the revised baseline scenario discussed here would result in significant increases in debt and gross financing needs (see robustness tests in the next section below). This points to the high vulnerability of the debt dynamics.

To be blunt: About €100 billion of the 300 outstanding has to be flushed down the drain.

Guess what?  That's a problem because the ECB has most of it at this point and less than a tenth of that in actual capital, which means that doing so would require direct payments for recapitalization purposes from the remaining EU members to the ECB!


Now take all this together and tell me why the Greeks should vote to continue under the present program.  There is utterly no upside for them to do so; the present program that is in place cannot succeed according to the analysis, which means that a YES vote is a vote for economic suicide with certainty.

This does not mean that a "NO" vote guarantees success, but voting for something certain to fail, overseen by someone who appears to have known it would fail four years agois asinine.

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Folks, go back and read this again:

Note that when you start spending in deficit there's a little "belly" between GDP and debt which appears to hold up for the first 20 or so years.  This is why people do it; it feels like you're getting ahead.

But you're not -- just a few years later debt is accelerating away from GDP and it's not that long before it's more than three times your economic output.  Long before it gets there you wind up with negative "growth" because the expense of financing that debt exceeds your economic surplus and you inevitably go bankrupt.

This is math, not politics and it happens every single time.

The IMF just came out and said that Greece has a €50 billion cash deficit from October through 2018.

This means that even if they just try to run on their revenue they're spending more than they're taking in and need to "finance" their operating costs.

This cannot work.

It cannot work there, it cannot work here, it cannot work anywhere.  The only means by which Greece can return to reasonable fiscal health is to default (that is, erase) a large part of the debt they have.  


There is no -- zero -- justification for "markets" to be anywhere near where they are given that the entire operational structure of virtually all western governments is reliant on continued borrowing of more and more money.  This is not confined to Greece!

The act of ever borrowing more money on an indefinite basis inevitably must eventually collapse all of the parties that do this.


Why would anyone try to "participate" in a scheme that is guaranteed to fail and blow up in your face?  Do you really think you'll be better and faster than everyone else and will get out in time while everyone else will not?


If the governments involved stop that then what is a realistic value for the markets without all of this phony-baloney nonsense?

And if the governments do not then I'm back to my first question: Do you really think you're smarter than everyone else?

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Well well what do we have here?

Yanis Varoufakis said Greece won’t “extend and pretend” that it can pay its debts, vowing to quit as finance minister if voters don’t support him in Sunday’s referendum.

With banks shuttered and Greece’s economy hobbled by capital controls, Varoufakis said in a Bloomberg Television interview in Athens that he would “rather cut my arm off” than sign a deal that fails to restructure Greece’s debt. The 54-year-old economics professor said he “will not” continue in his post if Greece endorses austerity in the plebiscite.

He's right.

There is no way forward for any of these nations, Greece included, that is both sustainable and does not remove much of the debt allegedly taken on.

The debt in question was contracted by fraud and force on both sides; it is void.  Further, it's mathematically impossible to pay it on the original terms or even on any sort of reasonable renegotiated terms.

But far more important than the debt itself is that the structural changes in the government necessary to prevent accumulating more debt in the future, including a hard bar on refusing to spend more than it can tax, has to take place.  This Varoufakis has not said -- but he must.

This weekend is going to be interesting, but unless reality comes to the table the premise that there will be no more "extending and pretending" (which is just a polite way of saying lying) is just another in a long line of false claims.

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