Kaiser’s not one to hold back (he comes in about 3:20):
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Best line in here is when he asks those Greek economists who favor higher taxes, “Why are you selling your countrymen down the road?”
“Get rid of the financial terrorists from your country.”
He could have done a better job here by keeping his cool and more clearly advocating repudiation, but maybe his approach is better suited for the state of Greek temperment at the moment.
So we finally know the structure of the Greek bailout. 16 EU nations pledged to throw good money after bad and extend taxpayer-financed loans to Greece when the country starts to default. From Bloomberg:
March 16 (Bloomberg) — European finance ministers laid the groundwork for a financial lifeline to debt-stricken Greece, breaking a taboo against aid to cash-strapped governments in order to avert a crisis for the euro.
Officials from the 16 countries using the currency worked out a strategy for emergency loans in case Greece’s plan for 4.8 billion euros ($6.6 billion) in tax increases and wage cuts fails to stave off fiscal disaster.
“We clarified the technical arrangements that would enable us to take coordinated action which could be swiftly put into place in the event it is necessary,” Luxembourg Prime Minister Jean-Claude Juncker told reporters late yesterday after leading a meeting of euro-area finance officials in Brussels.
With the euro undergoing the harshest test in its 11-year history, the unprecedented pledge reflected concern that Greece’s budget woes could spread, poisoning investor confidence and aggravating the currency’s 10 percent decline against the dollar since November…
…“The objective would not be to provide financing at average euro-zone interest rates, but to safeguard financial stability in the euro area as a whole,” the ministers said in a statement.
Of course almost everyone has it wrong about the implications for the euro. Sovereign defaults would be good for the euro, even if those nations end up leaving the monetary union for their drachmae, lire and pesos. Defaults are by definition deflationary, since they reduce the amount of outstanding credit balances, thereby increasing the value of the remaining euros. If everyone but Germany defaulted and left the EMU, the euro would be stong and they’d call it the Deutschemark again.
This is the dynamic that has propped up the strong Yen for 20 years even as the government has run up huge debts, and it is the same reason the dollar finds a bid whenever panic enters the financial markets. In a credit crisis, the very condition of having piles of debt denominated in a currency creates demand for that currency by both debtors and creditors.
What these bailouts are going to do is reduce the relative demand for euros and likely result in an accommodative ECB printing up hundreds of billions more. The politicians are lying or ignorant or both when they say that their goal is to save the euro — this is nonsense. Their goal of course is to save the bankers who own them.
The Greek taxpayers of course, if they have half a brain and some guts, should refuse to service this debt and simply force an honest default. All of Europe is conspiring to make them debt slaves forever, and the only Greeks who benefit are the political gangsters and government unions.
There is a meme going around that because some financial players own CDS on Greek debt and the prices on those swaps have increased, that the actual risk of default is now higher as a result of the price increases. See this article in the New York Times, which is dependably ignorant of and hostile towards markets:
Bets by some of the same banks that helped Greece shroud its mounting debts may actually now be pushing the nation closer to the brink of financial ruin.
Echoing the kind of trades that nearly toppled the American International Group, the increasingly popular insurance against the risk of a Greek default is making it harder for Athens to raise the money it needs to pay its bills, according to traders and money managers.
This is akin to saying that when the price of a weather derivative on say a cold Florida winter increases, the actual chance of frost on the orange trees is higher, simply because some traders have a vested interest in that outcome.
Actually, if anything, the availability of swaps on credit cheapens the cost of that credit, benefiting the borrower, since lenders are able to shift some or much of the risk to third parties. The fact that some buyers of CDS do not own the underlying bonds only serves to add liquidity to the market and even further reduce the cost of insurance.
I suspect that when players like Angela Merkel blame swaps for Greece’s situation, they are being disingenuous and simply trying to extort hedge funds and other players in the market and win points with the public. In the case of Greek politicians, it is a very convenient way to shift blame.
Of course this man doesn’t care a whit for the truth, so he is either an economic ignoramous (quite probable for a French lawyer and politician) or just plain lying when he makes statements like the following:
“If we created the euro, we cannot let a country fall that is in the eurozone,” said Sarkozy yesterday before a meeting with Papandreou in Paris today. “Otherwise there was no point in creating the euro. We must support Greece because they are making an effort.”
EU leaders have so far refused to give financial aid to Greece and have ordered the government to cut its budget deficit, the EU’s highest, on its own. While Papandreou says steps taken this past week to slash the shortfall warrant more help from the EU, German Foreign Minister Guido Westerwelle said yesterday that his country is “not going to write a blank check.”
Of course, a Greek default would strengthen the euro, since billions in balances would go poof, thus increasing the worth of the remainder. A bailout here will lead to bailouts in every Mediteranean country, quite possibly including his own. Pray tell, how will creating hundreds of billions more euros firm up their value? On the other hand, if every nation in the eurozone but Germany defaulted and then quit the euro for their old pesos, lire, francs and drachmae, it would be very strong and the Germans would just rename it Deutschemark.
Papandreou is visiting Berlin, Paris and Washington after his government passed a 4.8 billion euro ($6.5 billion) austerity package on March 5. A poll published in To Vima newspaper today showed 51.9 percent of voters support him even after the cuts, compared with 47.5 percent who don’t.
Sarkozy, who didn’t say financial support would be forthcoming, will meet Papandreou in the Elysee Palace around 6 p.m. local time. They will brief reporters afterwards.
Watch out, Americans. You don’t suppose that this American-born, Harvard-groomed oligarch is trying to take your money to prop up his racket, do you?
Final Resort?
Papandreou is indicating that Greece may still need financial support and is prepared to turn to the IMF if necessary, calling it a “final resort” on March 3.
That prompted a rebuff from European Central Bank President Jean-Claude Trichet a day later because finance officials fret such a move would signal the EU isn’t capable of solving its own problems. Italian Finance Minister Giulio Tremonti is nevertheless refusing to rule out a role for the IMF in any aid package.
“The IMF should act as a bank” in any rescue, he told reporters in Venice yesterday. “We finance the IMF so it can use the funds around the world. Why not use that capital with the IMF acting as a bank with its know-how?”
Tremonti also said that the EU could issue “eurobonds” or coordinate the sale of euro-denominated government bonds to better counter “financial speculation.”
Sounds like a bit of a turf war there between the IMF and the ECB, each vying with the other to administer the bailout and control the situation for their respective backers. The IMF gets much of its funding from the US, so let’s root for the Frenchman here.
As Greece calls for more help, Merkel on March 5 turned her focus to restricting the use of derivatives to halt “speculators” from exploiting countries’ budget deficits. Greece has done its work and Europe and the U.S. must now ensure that financial-market speculators aren’t allowed to inflict further damage on Greece or on other countries, she said.
Merkel shows she’s not above the dishonest game of shifting blame to the markets for having the gall to recognise that Greece’s credit risk might a tad bit elevated.
From Bloomberg:
Striking Greek workers shut down transport and tried to storm parliament as lawmakers passed 4.8 billion euros ($6.5 billion) in budget cuts, including wage reductions, needed to trim the region’s biggest budget deficit.
Police with riot shields fired tear gas at demonstrators outside parliament in Athens today as lawmakers approved the measures, which Finance Minister George Papaconstantinou said will show European Union allies and investors that Greece is making good on its deficit pledges. Socialist Prime Minister George Papandreou has a 10-seat majority in the legislature.
“We didn’t create this crisis but now we have to pay for it,” said Manthos Adamakis, who was protesting with other catering workers outside the five-star Grande Bretagne Hotel on Syntagma Square in downtown Athens.
Tram, rail, subway and bus services shut in Athens and other cities as employees rallied against cuts to bonuses and holiday payments. A walk out by air-traffic controllers forced the cancellation of all 58 flights to and from Athens International Airport between midday and 4 p.m. and the rescheduling of another 135, according to a spokeswoman.
“We didn’t create this crisis but now we have to pay for it,” the union member says! Of course they created it, by striking and threatening strikes to demand raise after raise with ever greater benefits. Unions are paying for none of it — their fellow citizens are. And how screwy is the Greek economy that the government sets the wages of hotel caterers, if that is indeed the case?
Most Greeks oppose plans to cut wages and increase value- added tax, according to the first opinion poll published since the austerity moves were announced on March 3.
Seventy-two percent of 530 people surveyed by Public Issue for Skai Television said they disagreed with a drop in bonus- vacation payments, while 68 percent opposed a value-added tax increase. Sixty-two percent said Greece will see social unrest in the next year, according to the poll broadcast yesterday.
The additional budget cuts aim to save 1.7 billion euros through a 30 percent reduction to three bonus-salary payments to civil servants, a 7 percent overall decrease in wages at wider public-sector companies and a pension freeze. The reductions are accompanied by an increase to 21 percent from 19 percent in the main VAT tax as well as in alcohol and tobacco duties.
Further Strikes
Teachers are also striking, closing some schools, and workers at the Public Power Corp SA, the country’s biggest electricity company and controlled by the state, have also called a 24-hour strike today.
ADEDY, which has already held two 24-hour strikes this year after the government backtracked on pledges to grant civil servants a wage increase, is considering holding another 24-hour strike next week.
It seems like everyone in Greece is on the dole, but I believe only 20% of employment is government work.
Where are the taxpayer protests telling these extortionists to go to hell and demanding that parliament repudiate the debt? Majority or minority, the victims in this racket sure are silent. It’s as if they think the money grows on trees (or as if Greece still can print Drachmas!).
The “austerity measures” and tax hikes are sure to fail. The debt is simply unpayable, so default is the only option if Germany is not willing to bail out Greece, Italy, Spain, Portugal, Ireland and maybe even France. What are the odds of that? What happens in those volitile, socialist, economically ignorant countries if the government gravy train dries up? We haven’t seen anything yet.
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This from CNBC.
Greece should consider selling some of its islands as one option to reduce debt, two members of the German parliament in Chancellor Angela Merkel’s centre-right coalition said.
Josef Schlarmann, a senior member of Merkel’s Christian Democrats, and Frank Schaeffler, a finance policy expert in the Free Democrats, were quoted on Thursday as saying that selling islands and other assets could help Greece out of its crisis.
“Those in insolvency have to sell everything they have to pay their creditors,” Schlarmann told Bild newspaper. “Greece owns buildings, companies and uninhabited islands, which could all be used for debt redemption.” …
… “The chancellor cannot promise Greece any help,” Schaeffler told Bild in a story under the headline: “Sell your islands, you bankrupt Greeks! And sell the Acropolis too!”
I suggest the Greeks reply by saying, “yeah, we’re sorry we owe you money, but that’s your problem now.” In a word, default.
It’s the ethical thing to do, and entirely precidented in history. Just get it over with and clean the slate. Why stay debt slaves to the Germans (who invaded Greece during the war, as I’m sure most Greeks do not forget), so that some overpaid union workers can stay fat and happy?
Another day, another (barely) new low in the Euro:
Prophet.net
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I still think there are good odds for a surprise rally here. We certainly have the set-up: oversold RSI and a positive MACD cross on the daily bar, very low but leveling trader sentiment, and a widely-followed news event to draw in the retail players (the very guys who were so sure of a dollar crash back in the fall).
Take a look and compare the current conditions to September 2008: the patterns are very similar. A break of the line that has contained the decline since mid-January could be the trigger for a short squeeze.
For the really big picture, here’s the whole history of the shaky script. I bet it ends up back to where it started:
Yahoo! Finance
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It just occurred to me that the Euro is the only major currency that has never had any specie backing. It has always been purely the creation of technocrats and bankers. Poor thing never had a chance.
For most of the last couple of years, the non-dollar, non-yen currencies have moved with a remarkable degree of correlation. Priced in US dollars, over a multi-month time frame (and usually even minute-by-minute) there has been little difference between the Euro, the Canadian dollar, the Australian dollar and the British Pound. The correlations are not perfect, and they break apart from time to time (as when the pound had a relatively crappy summer and fall last year). The last couple of days have been terrible for the Euro (white) and its ever so slightly “harder” twin, the Swiss Franc (purple):
Interactive Brokers
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What to make of this? Well, I have no reason to think that the gap won’t be closed before long. Sentiment on the Euro is so negative that I still think a violent short squeeze is possible, especially if there is continued strength in the equity, commodity and other currency markets.
Another possibility is weakness or sideways behavior in the general risk trade, with the Euro holding a bit firmer than the rest. It is so oversold that something eventually has to give. Of course, as we saw with the dollar from August through November, oversold can become more oversold, but that was a decline of a different nature: a lower slope, with a stair-step pattern. The Euro has basically crashed straight down over the last two months. That pace won’t be sustained for very long without relief rallies like what we’re seeing this week in the other currencies.
As I write, there is some support on of their charts. We’ll see if they bounce or cut through — the latter would be all around bearish and may portend a little panic in stocks, etc.
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Oh — and how about that Euro/Swiss relationship? How do you explain the Swissie’s moves by the Greece situation? The Swiss National Bank won’t be printing anything to bail out Greece, and in fact might be expected to print less, given their talk of intervening to attempt (foolishly and with no lasting effect) to weaken the CHF vs. their biggest trading partners’ script.
My how the times change. Seems only yesterday everyone was expecting the dollar to collapse, when it already had! Now it’s time to fret about its opposite, the euro. I am a major dollar bull for 2010-2011, but when everyone is one one side of a trade that has gone a long way in a short time, you have to consider the odds of a correction. In the highly levered currency markets, these can be lightening fast.
Here’s the last 3 years of the ETF FXE (1 share = 100 Euros priced in dollars):
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Take a look at the 10 cent rally over a few days in September 2008 (and the remarkable similarities in price and RSI between the weeks prior to that move and the action since December). If the analogue plays out, we’ll get a quick spike to shake off the shorts and keep people guessing, followed by an even deeper decline. The catalyst in ’08 was the shorting ban. Maybe now a Greek bailout provides the nudge that sends shorts scrambling.
Bear in mind that if this scenario plays out, all of the other risk assets are likely to follow suit: this means a general drop in the dollar and yen, and spikes in stocks and commodities. I have to admit, a correction would fit just fine in all of these markets.
Aside from the charting similarities, what gives me an inkling that something like this could be in the works is the prevalence of chatter about how a Greek bailout is going to weaken the currency or even lead to the breakup of the eurozone. I happen to agree, but I don’t like having this much company.
One person who’s company I don’t mind sharing in the markets (short-term trades notwithstanding) is Hugh Hendry, who is the lone voice of reason at the table with a Spanish politician and the esteemed ignoramous Joseph Stiglitz. Other than for clues on public sentiment, he’s the only reason to watch this little TV production on the Euro’s troubles (he speaks in part 2):
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Stiglitz is being disingenous or is just a plain fool; a bailout is exactly what people are talking about (that’s what he means by “if they stand behind it”). The idea seems to be for Germany and the EU (including possibly even the UK) to gaurantee Greece’s debt, in the way that the US taxpayers were forced to back up Fannie and Freddie’s debt.
Hendry is right — the debt is unpayable, and default is the only option, even with refinancing at lower rates. Greece should just get it over with and repudiate the debt. It is by far the best option for the nation, though the worst for Greece’s politicians and the cronies and unions who benefit from government spending.
Stiglitz doesn’t understand markets. He seems to think the debt crisis is the result of “market mistakes.” This is utter nonsense — without the moral hazards created by deposit insurance, GSEs (Fannie, Freddie, FHA, etc), and the promise of central bank bailouts, financial institutions would have had an incentives for prudence. In our system today, they have none, since losses are simply shifted to the public. It is the greatest financial scam the world has ever seen, but certified “economists” like Stiglitz are steeped in central banking propaganda and incapable or unwilling to see what is right in front of their noses.
All government debt is a racket, and should be repudiated.
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Widely read investment advisor John Mauldin favors the continued enslavement of the Greek public to corrupt politicians, greedy unions, and German banks. He had this to say today in his email publication:
…if Greece defaults it does not necessarily mean they have to leave the EU, any more than if Illinois defaulted they would have to leave the United States. Greece could still use the euro and life could go on. EXCEPT. The markets would no longer lend the Greek government money at anything close to a livable rate. Greece would be forced to balance its budget. Since they are part of the euro, devaluing the currency is not an option. The results of controlling their fiscal deficit would not initially be pretty and would almost insure a serious prolonged recession or depression in the Greek area, with fall out in the region. It would be a sad decade for Greece. But in the long run, it is a better option than default.
Further, and more important to the rest of Europe and the world, the results of a Greek default would be financial turmoil. 250 billion euros (and maybe 300!) of Greek debt is in international bond funds, pension and insurance companies, and above all at banks. Think German banks. Already undercapitalized banks. Also, think of all the investment banks who have been selling relatively cheap (given the apparent risk) credit default swaps on Greece, in an unregulated market, exposing their balance sheets. What should be a simple, if sad, matter for the Greeks, becomes a problem for the world, just as subprime debt in the US caused a world credit crisis. And the risk of contagion from Portugal, Spain, et al is serious. 2 trillion euros of debt could get downgraded by the bond market in very short order. It could be a replay of the last credit crisis, just with new actors as the prime problem.
Bailing out Greece without serious and credible deficit reductions by their government over the next few years would simply delay the problem, and it is not altogether clear the bond markets would go along for very long. At the end of the day, it may be the bond market which forces the Greek government and its people to take some very bitter medicine. Stay tuned. This is just the beginning of what will be a series of sovereign debt crises over the coming decade. It is important for the world that we get this one solved right, or the consequences will be quite severe.
I respectfully disagree with Mr. Mauldin. I believe that default would be the best outcome for the Greek people and the rest of Europe, as well as the financial system. It is ironic that Mauldin does not support this outcome himself, since he claims to be a fan of von Mises, Hayek and Rothbard, all of whom would be appalled at the prospect of perpetuating the racket in Athens. Rothbard specifically advocated the repudiation of government debt, since it serves only the interest of politicians and special interests at the great expense of the society at large:
In the famous words of the left-Keynesian apostle of “functional finance,” Professor Abba Lernr, there is nothing wrong with the public debt because “we owe it to ourselves.” In those days, at least, conservatives were astute enough to realize that it made an enormous amount of difference whether—slicing through the obfuscatory collective nouns—one is a member of the “we” (the burdened taxpayer) or of the “ourselves” (those living off the proceeds of taxation)…
If sanctity of contracts should rule in the world of private debt, shouldn’t they be equally as sacrosanct in public debt? Shouldn’t public debt be governed by the same principles as private? The answer is no, even though such an answer may shock the sensibilities of most people. The reason is that the two forms of debt-transaction are totally different. If I borrow money from a mortgage bank, I have made a contract to transfer my money to a creditor at a future date; in a deep sense, he is the true owner of the money at that point, and if I don’t pay I am robbing him of his just property. But when government borrows money, it does not pledge its own money; its own resources are not liable. Government commits not its own life, fortune, and sacred honor to repay the debt, but ours. This is a horse, and a transaction, of a very different color.
For unlike the rest of us, government sells no productive good or service and therefore earns nothing. It can only get money by looting our resources through taxes, or through the hidden tax of legalized counterfeiting known as “inflation.” …
The public debt transaction, then, is very different from private debt. Instead of a low-time preference creditor exchanging money for an IOU from a high-time preference debtor, the government now receives money from creditors, both parties realizing that the money will be paid back not out of the pockets or the hides of the politicians and bureaucrats, but out of the looted wallets and purses of the hapless taxpayers, the subjects of the state. The government gets the money by tax-coercion; and the public creditors, far from being innocents, know full well that their proceeds will come out of that selfsame coercion. In short, public creditors are willing to hand over money to the government now in order to receive a share of tax loot in the future. This is the opposite of a free market, or a genuinely voluntary transaction. Both parties are immorally contracting to participate in the violation of the property rights of citizens in the future. Both parties, therefore, are making agreements about other people’s property, and both deserve the back of our hand. The public credit transaction is not a genuine contract that need be considered sacrosanct, any more than robbers parceling out their shares of loot in advance should be treated as some sort of sanctified contract.
I highly recommend reading the whole Rothbard essay on Mises.org, since the ideas therein have never been more timely for the US, among a great number of other countries.
It is almost always in citizens’ best interest for their government to repudiate the debt it has accumulated in their names. Politicians take out debt to spend more than is prudent or ethical, in order to buy votes, very often union votes. This is the case in Greece, where repeated strikes by teachers, dockworkers, farmers and others have been met with greater and greater pay and benefits. This system is a racket that rips off the silent majority of taxpayers.
Why should generations have their earnings stolen (make no mistake, taxation is theft, the involuntary taking of property under threat of force) to continue to support politicians, bankers and union thugs?
A default would indeed cripple the government’s ability to borrow, and would thereby end the racket. Politicians would no longer be able to offer something for what seemed like nothing: if they wanted to raise union pay, they would have to raise taxes at the same time, not at some future date beyond the next election.
Yes, a default would hurt bondholders. Duh. That’s perfectly just, since Greek (and Italian, Portugese, Spanish and Irish — GIPSI) bonds pay higher yields than those of Germany or Switzerland. These investors took a gamble, as did those who wrote default swaps on such debt. They deserve to lose money, and frankly, the astute buyers of default swaps deserve it more than they. Besides, as Rothbard makes clear, the creditors are a party to theft, guilty of receiving stolen goods.
I am tired of this nonsense that somehow banks and investors losing money means the end of the world. That is a fiction fed to a credible and ignorant public in order to justify the transfer of their assets to the most powerful banks. What is the end of the world? War: the uniquely governmental institution of cities and industry bombed to rubble, crops burned, and whole generations enslaved, blown up, starved and displaced. A banking crisis? My god, that’s nothing, unless the government turns it into prolonged stagnation through theivery (and even worse if they take advantage of the resulting conditions to agitate for war). Factories, roads, bridges, and offices still stand; and human beings still have their lives, talents and freedom to use them. Assets change hands, that’s all. Nobody needs to starve, and unemployment only needs to be brief, unless of course the government prevents the defaults necessary to transfer assets to productive ownership by shifting the losses to the public. In that case, capital is wasted, assets stay idle and jobs disappear.
The Greek public should send a message to their politicians: “We won’t pay. Default away.” If unions can stike, why can’t taxpayers? The fact is, the debt is unpayable anyway, because the taxes necessary to service it would cripple what’s left of enterprise in that socialist economy. Just get it over with and don’t sign up for the lost decade(s) club.
