Well I have long been a 'euro-Cassandra' and guess what's happening? I have used only public sources and articles as reference but as David Cameron says it's 'make or break' time for the euro; the public articles pretty much reflect the private opinion of not only HMG but also other European Governments.
Well it has been confirmed now that Greece will have another election on June 17th (the 10th was ruled out due to school exams and schools are used as polling stations). Not unexpected; as DE kindly pointed out I predicted as much on May 12 (http://www.worldaffairsboard.com/int...lection-2.html). Currently the Party poised to benefit most from this is Syria who recent polls suggest will get between 20-25% of the vote. See; Greece's anti-bailout SYRIZA leftists lead in poll | Reuters
The Political Side
This leads to a minor problem in Greek law. In Greece the largest Party gets a bonus of another 50 'free' votes/MPs. This is done (ironicaly) to promote stability. The problem is that Syriza is not a party as such but a coalition of Parties; Coalition of the Radical Left - Wikipedia, the free encyclopedia They do not as such qualify for the extra 50 'free' seats. The leader of the Coalition, Alexis Tsipras, has already mentioned that the law is unbalanced against coalitions but he would not have enough MPs to change it. There are alternative solutions - dissolve the 'coalition' and make a Party but this would take a Conference and there is not enough time to do this before June 17th. So the first problem is that in order to form a coalition Government the 'anti memorandum' Parties (excluding the 'neofascist' Golden Dawn who nobody will touch) need very close to 50% or more of the vote, which in effect means Syriza needs 28-30%. This they are unlikely to get.
Having said that Syriza have to stood gain most from the second election which naturaly has proved an obstacle in forming a Government this time around; basicly Mr Tsipiras and Syriza blocked any attempt to form a Government as they know they will benefit from another election - a dangerous game. This will NOT be the case after June 17th and Syriza's attitude will be more conciliatory as a third election would almost certainly turn against them. So around June 19th expect to see Syriza lead Government formed in Greece who's first moves will be toward changing the law so that Syriza may benefit from the extra 50 seats/MPs.
When Mr Tsipiras eventualy forms a Government he will claim, as he did on 10th May, that "The vote of the the Greek people on Sunday May 6th, (June 17th) delegitimizes politically the Memorandum of Understanding / Memorandum of Economic and Financial Policy...". HISTOLOGION: SYRIZA leader's second letter to Barroso et al. I did warn about this some time ago when the 'troika' first started talking about agreeing to the bailout memorandum before the elections; http://www.worldaffairsboard.com/int...-solved-2.html Presumably some form of renegotiation may be possible but the time for this would be limited as Greece will effectively run out of money in July. Also it is not at all clear that Syriza or IMF/EU/ECB will alow a softening of the targets. Greece is due to get another 30bn euro of bailout money in June but before this is payed they must make an additional 11.5bn euros of cuts... Impasse. Before the elections Syriza MP Theodoros Dritsas said "If we achieve a Left-dominated government, we will politely tell the Troika to leave the country, and we may need to discuss an orderly return to the Drachma".
Economic Aspects
Firstly Greece is now is a legal difficulty. During the talks about the second bailout in March one of the conditions for additional troika loans was that private investors take a 'haircut' amounting to a write off about 70% of their investments. Most investors accepted as they were told that this was the only option. Some however did not accept the 'haircut'. Some of these 'non haircut' investors were due a payment of 413m euros on May 15. Well of course Greece had no Government at the time but this bond was payed in full (aprox 450m with interest). This of course raises the question of whether the haircut was the 'only option' as the 'haircut investors' were informed. Legal cases are pending and interestingly the 'haircut bonds' were reconstituted in English law. Some rich lawyers in London soon. :bang:
Due to the French, German, British and everyone else's banks basicly getting their money out of Greece over the last year should Greece refuse the terms of the bailout and further troika funding be witheld leading to a second Greek default (and return to drachma) the face value of the losses would be relatively small. If the new Greek drachma devalued 50% against the euro the ECB/IMF/EU troika would be the biggest losers as the loans already made would, on the face it, devalue 50%. Realisticly they would have to be written off. When you hear that it would cost "the French taxpayer up to 66.4 billion euros and saddle the country's banking system with 20 billion euros in lost loans" (Cost to France of Greek euro exit 80 bn euro: Study - Economic Times) THIS is what they are talking about - the direct losses. Evidently such losses would depend on the value of a new drachma; should it devalue 75% the losses are greater.
There is another part to these calculations though that is unquantifyable and these losses are what might be called 'known unknowns'. The problem is that the euro is 'irreverseable'. There is not even a clause in any of the Treaties that covers leaving the euro; it is "uncharted territory" as David Cameron calls it. All we can say legaly speaking is that leaving the euro means leaving the EU under the Lisbon Treaty Article 50 (Article 50). This is first 'known unknown'.
The second is far more serious and this is 'contagion'. IF Greece does the impossible and leaves the euro then it is evidently NOT 'impossible' and may happen again elsewhere. Many investors believed the 'impossible' line and when this is this proved false they may very well look for safer places to invest than in Spain and Italy. Evidently we cannot know how many people will react in this way but we can be sure that some will. The result of this would be that Spain, Italy etc will find it increasingly expensive to borrow. Todays Spanish bond sale was successful but not sustainable long term. (Bonds due in January 2015 carried an average yield of 4.375pc, up massively from the last comparable auction in April, which saw an average of 2.89pc.Bonds due in July 2015 were even higher, at 4.876pc, compared with 4.037pc at an auction in May. Bonds due in April 2016 reached 5.106pc). Spanish 10yr bonds stand at 6.3 - 6.5%. If Greece leaves the euro in June/July the dam may well burst leaving Spain and others unable to borrow. When you hear estimates of 1 trillion euros as the cost of a Greece exist like "Euroland's €1 trillion question: after Greece goes, can Spain stay in?" Euroland's €1 trillion question: after Greece goes, can Spain stay in? - Telegraph etc will find it increasingly expensive to borrow. Todays Spanish bond sale was successful but not sustainable long term. (Bonds due in January 2015 carried an average yield of 4.375pc, up massively from the last comparable auction in April, which saw an average of 2.89pc.Bonds due in July 2015 were even higher, at 4.876pc, compared with 4.037pc at an auction in May. Bonds due in April 2016 reached 5.106pc). Spanish 10yr bonds stand at 6.3 - 6.5%. If Greece leaves the euro in June/July the dam may well burst leaving Spain and others unable to borrow. When you hear estimates of 1 trillion euros as the cost of a Greece exist like "Euroland's €1 trillion question: after Greece goes, can Spain stay in?" Euroland's €1 trillion question: after Greece goes, can Spain stay in? - Telegraph they are estimating the costs of 'contagion'. These estimates are unquantifyable; we cannot know how many investors will run in advance.
Against this the 'contagion' threat the EU/IMF/ECB has aprox 1.25 trillion euro to shore up any leaks. This 'contagion fund' is made up from 445bn euros set aside for EFSF/ESM use - that is european money for european bailout use. They can probably get the 'La Francaise' at the IMF to stump up another 250-300bn euros so say the IMF pay 300bn we have aprox 3/4trn euros to work with so far. They can also ask the ECB to intervene directly in the markets but only to lend to banks so add another 500bn and we have grand total of aprox 1.25trn euros to deal with 'contagion'. The IMF generaly will add 1 euro for every 2 that the EU can raise based on previous bailouts. Will this cover Spain and Italy? Certainly not; it would cover Spain just about fully or Spain a little and Italy a little - to buy time for more LTRO (ECB loans to banks) but a massive flight of capital at once it could not support. Of course we do not KNOW what the 'contagion cost' will be. This is gamble in 'Grexit'.
An additional problem that is 'built into' the euro system is what is known as 'Target 2 payments' (see TARGET2 - Wikipedia, the free encyclopedia). Here's the problem described by the BBC; "Here is a slightly simplified account of how this works: when someone takes 100 euros from a Greek bank and transfers it to the perceived safety of a German bank (which has been happening quite a lot), that Greek bank gets the 100 euros from the Greek central bank, which in turn borrows the money from the Bundesbank.Here is the thing. As of March of this year, the German central bank had 644bn euros of claims on other central banks, equivalent to a quarter of German GDP. These are euros owed to the Bundesbank by the central banks of the economies where there has been the greatest capital flight, names those of Greece, Italy and Spain.So if all of a sudden, Greece and Italy and Spain decided to revert to their national currencies, it is an interesting question how much (if any) of the 644bn euros the Bundesbank could get back." BBC News - Could the euro survive a Greek exit?
Now suppose 'Grexit' causes 'contagion' the flight of capital, be it large or small, heads north. The UK can already borrow more cheaply than at any time in history but is not bound by Target2 (it applies only within the Eurozone), German borrowing rate continues to decline both which indicate that capital flight to the north is under way. Likewise the euro has fallen against the $ and Ģ (which is not good for the UK). The worry is that Target2 payments may well collapse the system if Greece leaves the euro and a large 'contagion' occur. Essentialy the 'contagion fund' would be swallowed up correcting the capital flight in Target2 payments. Again this is part of the 'Grexit' gamble.
There are clear signs that this flight of capital has already begun; not only from the bond rates but on what amounts to a 'run on the banks' in Greece and Spain. Greek bank deposits "already down from €244bn (Ģ195bn) at December 2009 to €171bn at the end of March, are now being withdrawn at the rate of around €3bn a week." Euroland's €1 trillion question: after Greece goes, can Spain stay in? - Telegraph This is an estimate and others estimate both lower and higher, all we can say is that people are taking money out of the banks.
The same is happening in Spain; "Spain denied a report in the El Mundo newspaper that customers had taken more than 1bn euros ($1.3bn; Ģ800m) out of the bank, which is set to be part-nationalised, over the past week." BBC News - Bankia shares plunge again on worries over finances Of course if wasn't true when it was reported it probably is now and Bankia shares, a bank was that only last week part nationalised are down meaning losses for the Spanish Government. Alberto Gallo, head of credit research at Royal Bank of Scotland, told the BBC: "The problem is Spanish banks are too large for the government to bear all of their weight. You [the Spanish government] need to make a choice and just protect stronger banks, otherwise Spain will go the way of Ireland - having to do a lot of austerity and potentially incurring losses for bank bondholders." BBC News - Bankia shares plunge again on worries over finances Of course the more Spanish absorbs of the Spanish banks bad debts the greater the strain on the Governments borrowing... nor is Bankia the only Spanish bank with bad debt. Spain is having it's own 'sub prime' bubble burst and France will follow: "However rougher weather lies ahead: nationally French property prices could drop by 5% to 6% in 2012, forecasts Credit Agricole, which also predicts an 8% decline in sales. The pace of house price rises softened in the latest quarter." House Prices in France | French Real Estate Prices
To say that the future is uncertain would be an understatement. One estimate that has been leaked from the UK Government is for -5% growth in the event of euro breakup, it will be worse inside the eurozone. If this were true for all of the EU countries world trade and bank 'contagion' is inevitable.
For what it's worth I believe 'Grexit' in now inevitable, even if the terms of the bailout are relaxed you cannot get blood from a stone. We must then await the 'contagion' and pray that these foolish dreamers in Brussels who have lead us to this point divert all their resources not to saving their euro dream world but to decoupling the euro nations who they have undemocraticaly, unwisely and at times illegaly lead to this point. Sadly there is little hope of that.
Sorry it's so long...
Well it has been confirmed now that Greece will have another election on June 17th (the 10th was ruled out due to school exams and schools are used as polling stations). Not unexpected; as DE kindly pointed out I predicted as much on May 12 (http://www.worldaffairsboard.com/int...lection-2.html). Currently the Party poised to benefit most from this is Syria who recent polls suggest will get between 20-25% of the vote. See; Greece's anti-bailout SYRIZA leftists lead in poll | Reuters
The Political Side
This leads to a minor problem in Greek law. In Greece the largest Party gets a bonus of another 50 'free' votes/MPs. This is done (ironicaly) to promote stability. The problem is that Syriza is not a party as such but a coalition of Parties; Coalition of the Radical Left - Wikipedia, the free encyclopedia They do not as such qualify for the extra 50 'free' seats. The leader of the Coalition, Alexis Tsipras, has already mentioned that the law is unbalanced against coalitions but he would not have enough MPs to change it. There are alternative solutions - dissolve the 'coalition' and make a Party but this would take a Conference and there is not enough time to do this before June 17th. So the first problem is that in order to form a coalition Government the 'anti memorandum' Parties (excluding the 'neofascist' Golden Dawn who nobody will touch) need very close to 50% or more of the vote, which in effect means Syriza needs 28-30%. This they are unlikely to get.
Having said that Syriza have to stood gain most from the second election which naturaly has proved an obstacle in forming a Government this time around; basicly Mr Tsipiras and Syriza blocked any attempt to form a Government as they know they will benefit from another election - a dangerous game. This will NOT be the case after June 17th and Syriza's attitude will be more conciliatory as a third election would almost certainly turn against them. So around June 19th expect to see Syriza lead Government formed in Greece who's first moves will be toward changing the law so that Syriza may benefit from the extra 50 seats/MPs.
When Mr Tsipiras eventualy forms a Government he will claim, as he did on 10th May, that "The vote of the the Greek people on Sunday May 6th, (June 17th) delegitimizes politically the Memorandum of Understanding / Memorandum of Economic and Financial Policy...". HISTOLOGION: SYRIZA leader's second letter to Barroso et al. I did warn about this some time ago when the 'troika' first started talking about agreeing to the bailout memorandum before the elections; http://www.worldaffairsboard.com/int...-solved-2.html Presumably some form of renegotiation may be possible but the time for this would be limited as Greece will effectively run out of money in July. Also it is not at all clear that Syriza or IMF/EU/ECB will alow a softening of the targets. Greece is due to get another 30bn euro of bailout money in June but before this is payed they must make an additional 11.5bn euros of cuts... Impasse. Before the elections Syriza MP Theodoros Dritsas said "If we achieve a Left-dominated government, we will politely tell the Troika to leave the country, and we may need to discuss an orderly return to the Drachma".
Economic Aspects
Firstly Greece is now is a legal difficulty. During the talks about the second bailout in March one of the conditions for additional troika loans was that private investors take a 'haircut' amounting to a write off about 70% of their investments. Most investors accepted as they were told that this was the only option. Some however did not accept the 'haircut'. Some of these 'non haircut' investors were due a payment of 413m euros on May 15. Well of course Greece had no Government at the time but this bond was payed in full (aprox 450m with interest). This of course raises the question of whether the haircut was the 'only option' as the 'haircut investors' were informed. Legal cases are pending and interestingly the 'haircut bonds' were reconstituted in English law. Some rich lawyers in London soon. :bang:
Due to the French, German, British and everyone else's banks basicly getting their money out of Greece over the last year should Greece refuse the terms of the bailout and further troika funding be witheld leading to a second Greek default (and return to drachma) the face value of the losses would be relatively small. If the new Greek drachma devalued 50% against the euro the ECB/IMF/EU troika would be the biggest losers as the loans already made would, on the face it, devalue 50%. Realisticly they would have to be written off. When you hear that it would cost "the French taxpayer up to 66.4 billion euros and saddle the country's banking system with 20 billion euros in lost loans" (Cost to France of Greek euro exit 80 bn euro: Study - Economic Times) THIS is what they are talking about - the direct losses. Evidently such losses would depend on the value of a new drachma; should it devalue 75% the losses are greater.
There is another part to these calculations though that is unquantifyable and these losses are what might be called 'known unknowns'. The problem is that the euro is 'irreverseable'. There is not even a clause in any of the Treaties that covers leaving the euro; it is "uncharted territory" as David Cameron calls it. All we can say legaly speaking is that leaving the euro means leaving the EU under the Lisbon Treaty Article 50 (Article 50). This is first 'known unknown'.
The second is far more serious and this is 'contagion'. IF Greece does the impossible and leaves the euro then it is evidently NOT 'impossible' and may happen again elsewhere. Many investors believed the 'impossible' line and when this is this proved false they may very well look for safer places to invest than in Spain and Italy. Evidently we cannot know how many people will react in this way but we can be sure that some will. The result of this would be that Spain, Italy etc will find it increasingly expensive to borrow. Todays Spanish bond sale was successful but not sustainable long term. (Bonds due in January 2015 carried an average yield of 4.375pc, up massively from the last comparable auction in April, which saw an average of 2.89pc.Bonds due in July 2015 were even higher, at 4.876pc, compared with 4.037pc at an auction in May. Bonds due in April 2016 reached 5.106pc). Spanish 10yr bonds stand at 6.3 - 6.5%. If Greece leaves the euro in June/July the dam may well burst leaving Spain and others unable to borrow. When you hear estimates of 1 trillion euros as the cost of a Greece exist like "Euroland's €1 trillion question: after Greece goes, can Spain stay in?" Euroland's €1 trillion question: after Greece goes, can Spain stay in? - Telegraph etc will find it increasingly expensive to borrow. Todays Spanish bond sale was successful but not sustainable long term. (Bonds due in January 2015 carried an average yield of 4.375pc, up massively from the last comparable auction in April, which saw an average of 2.89pc.Bonds due in July 2015 were even higher, at 4.876pc, compared with 4.037pc at an auction in May. Bonds due in April 2016 reached 5.106pc). Spanish 10yr bonds stand at 6.3 - 6.5%. If Greece leaves the euro in June/July the dam may well burst leaving Spain and others unable to borrow. When you hear estimates of 1 trillion euros as the cost of a Greece exist like "Euroland's €1 trillion question: after Greece goes, can Spain stay in?" Euroland's €1 trillion question: after Greece goes, can Spain stay in? - Telegraph they are estimating the costs of 'contagion'. These estimates are unquantifyable; we cannot know how many investors will run in advance.
Against this the 'contagion' threat the EU/IMF/ECB has aprox 1.25 trillion euro to shore up any leaks. This 'contagion fund' is made up from 445bn euros set aside for EFSF/ESM use - that is european money for european bailout use. They can probably get the 'La Francaise' at the IMF to stump up another 250-300bn euros so say the IMF pay 300bn we have aprox 3/4trn euros to work with so far. They can also ask the ECB to intervene directly in the markets but only to lend to banks so add another 500bn and we have grand total of aprox 1.25trn euros to deal with 'contagion'. The IMF generaly will add 1 euro for every 2 that the EU can raise based on previous bailouts. Will this cover Spain and Italy? Certainly not; it would cover Spain just about fully or Spain a little and Italy a little - to buy time for more LTRO (ECB loans to banks) but a massive flight of capital at once it could not support. Of course we do not KNOW what the 'contagion cost' will be. This is gamble in 'Grexit'.
An additional problem that is 'built into' the euro system is what is known as 'Target 2 payments' (see TARGET2 - Wikipedia, the free encyclopedia). Here's the problem described by the BBC; "Here is a slightly simplified account of how this works: when someone takes 100 euros from a Greek bank and transfers it to the perceived safety of a German bank (which has been happening quite a lot), that Greek bank gets the 100 euros from the Greek central bank, which in turn borrows the money from the Bundesbank.Here is the thing. As of March of this year, the German central bank had 644bn euros of claims on other central banks, equivalent to a quarter of German GDP. These are euros owed to the Bundesbank by the central banks of the economies where there has been the greatest capital flight, names those of Greece, Italy and Spain.So if all of a sudden, Greece and Italy and Spain decided to revert to their national currencies, it is an interesting question how much (if any) of the 644bn euros the Bundesbank could get back." BBC News - Could the euro survive a Greek exit?
Now suppose 'Grexit' causes 'contagion' the flight of capital, be it large or small, heads north. The UK can already borrow more cheaply than at any time in history but is not bound by Target2 (it applies only within the Eurozone), German borrowing rate continues to decline both which indicate that capital flight to the north is under way. Likewise the euro has fallen against the $ and Ģ (which is not good for the UK). The worry is that Target2 payments may well collapse the system if Greece leaves the euro and a large 'contagion' occur. Essentialy the 'contagion fund' would be swallowed up correcting the capital flight in Target2 payments. Again this is part of the 'Grexit' gamble.
There are clear signs that this flight of capital has already begun; not only from the bond rates but on what amounts to a 'run on the banks' in Greece and Spain. Greek bank deposits "already down from €244bn (Ģ195bn) at December 2009 to €171bn at the end of March, are now being withdrawn at the rate of around €3bn a week." Euroland's €1 trillion question: after Greece goes, can Spain stay in? - Telegraph This is an estimate and others estimate both lower and higher, all we can say is that people are taking money out of the banks.
The same is happening in Spain; "Spain denied a report in the El Mundo newspaper that customers had taken more than 1bn euros ($1.3bn; Ģ800m) out of the bank, which is set to be part-nationalised, over the past week." BBC News - Bankia shares plunge again on worries over finances Of course if wasn't true when it was reported it probably is now and Bankia shares, a bank was that only last week part nationalised are down meaning losses for the Spanish Government. Alberto Gallo, head of credit research at Royal Bank of Scotland, told the BBC: "The problem is Spanish banks are too large for the government to bear all of their weight. You [the Spanish government] need to make a choice and just protect stronger banks, otherwise Spain will go the way of Ireland - having to do a lot of austerity and potentially incurring losses for bank bondholders." BBC News - Bankia shares plunge again on worries over finances Of course the more Spanish absorbs of the Spanish banks bad debts the greater the strain on the Governments borrowing... nor is Bankia the only Spanish bank with bad debt. Spain is having it's own 'sub prime' bubble burst and France will follow: "However rougher weather lies ahead: nationally French property prices could drop by 5% to 6% in 2012, forecasts Credit Agricole, which also predicts an 8% decline in sales. The pace of house price rises softened in the latest quarter." House Prices in France | French Real Estate Prices
To say that the future is uncertain would be an understatement. One estimate that has been leaked from the UK Government is for -5% growth in the event of euro breakup, it will be worse inside the eurozone. If this were true for all of the EU countries world trade and bank 'contagion' is inevitable.
For what it's worth I believe 'Grexit' in now inevitable, even if the terms of the bailout are relaxed you cannot get blood from a stone. We must then await the 'contagion' and pray that these foolish dreamers in Brussels who have lead us to this point divert all their resources not to saving their euro dream world but to decoupling the euro nations who they have undemocraticaly, unwisely and at times illegaly lead to this point. Sadly there is little hope of that.
Sorry it's so long...
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