Mish's Global Economic Trend Analysis

Obama's Time Machine: Can He Really Turn Back the Clock?
Drachma Sightings Appear on Hotel Bill
Ready to Compromise?
Greece Connects with Russia, Unveils €2 Billion Gas Deal; Germans in Rift with Eurozone; Did France Save Europe?
German Finance Minister Proposes Greece for Puerto Rico Trade: Should US Accept the Offer?
Absurd IMF Warning on US Rate Hikes

Obama's Time Machine: Can He Really Turn Back the Clock?

Posted: 09 Jul 2015 05:49 PM PDT

Time Machines Appear in Brussels

Via the magic of time machines, it appears that midnight three weeks ago has still not arrived.

I say that because the midnight hour for a Greek deal came and went weeks ago. Yet, this evening, the New York Times says Greece Submits 11th-Hour Bailout Proposal to Creditors.

Only a day after grim predictions of financial and social collapse in Greece, a scramble appeared underway to work out the details of a new bailout package to bring the country back from the brink.

Germany's truculent finance minister, Wolfgang Schäuble, finally gave a little on debt relief for Greece, admitting Thursday that "debt sustainability is not feasible without a haircut," or writedown of debt.

Donald Tusk, the prime minister of Poland and the president of the European Council, said on Twitter that any "realistic proposal from Athens needs to be matched by realistic proposal from creditors on debt sustainability to create win-win situation."

What was breathtaking, however, was how in a matter of hours the entire dynamic in the Greek crisis seemed to shift, from apocalyptic warnings of a Zimbabwe in the Balkans, to a fresh optimism that the basics of a deal could be worked out.

The question now is whether that apparent change of heart reflected a new political determination to cut a deal that keeps Greece in the eurozone.

Breathtaking About Face! Forward March!

Tspiras can likely force anything through Greek parliament following the massive "No" campaign.

But how does one explain the sudden "about face" by Wolfgang Schäuble?

The New York Times offers this explanation: "There is a group of people who have been sent to help the Greeks, to try to transform words into action," said a French government official with knowledge of the effort.

Group of People?

Hmm. Who can that "group of people" be at this hour (whatever hour it may be) other than the US?

It would not surprise me in the least if the US guaranteed Greek debt.

"France refuses that Greece leaves the eurozone in the name of our position and our commitments," he [French prime minister Manuel Valls] told lawmakers in the National Assembly on Wednesday in a speech that was broadcast live on Greek television.

Valls also suggested that Mr. Tsipras's most pivotal request — a program to make Greece's mountainous debt more sustainable — be taken seriously by other European countries as part of any deal. Until recently, that has been nearly a taboo idea in Europe's halls of power, since European taxpayers are currently on the hook if Greece defaults on its debts.

"There can be no taboos. It is essential to establish a sustainable trajectory for Greek debt in the coming years," Mr. Valls said.

Even German Vice Chancellor Sigmar Gabriel, is in on the about-face act. Yesterday the Financial Times reported Alexis Tsipras loses Sigmar Gabriel, his last best hope in Germany.

"Alexis Tsipras had pulled down the last bridges over which Europe and Greece could have moved to a compromise."

Today Gabriel says "It's not a case of bringing Alexis Tsipras to his knees, but it is certainly not that Europe should be brought to its knees."

Obama Calls

"In a flurry of recent phone calls with the French, German and Greek leaders, President Obama and Treasury Secretary Jack Lew have pressed all sides to come to a deal that would avoid a breakup of the eurozone."

The US concern clearly is NATO and Russia. The US does not want Greece to fall into Russian hands.

If there is a deal, the US is behind it.

Deal or no deal, what the hell did Obama promise or threaten to cause this miraculous reversal by Schäuble, Tusk, Gabriel and others?

That's what I want to know.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Drachma Sightings Appear on Hotel Bill

Posted: 09 Jul 2015 04:48 PM PDT

Credit card processors have been planning, and are prepared for a return to the drachma.

Bloomberg reports Long-Feared Currency Makes Fleeting Appearance on Reporter's Bill.

Between June 28 and July 4 at a Hilton hotel in Athens, transactions on a Bloomberg reporter's Visa credit card issued by Citigroup Inc. were posted as being carried out in "Drachma EQ."

When Bloomberg sought information, the bill was magically changed.

Citigroup and Visa Inc. declined to comment. A Hilton Worldwide Holdings Inc. spokeswoman said that the Athens hotel had billed the customer in euros, not drachmas.

Bloomberg notes "Each time a consumer swipes a card, information passes between four parties: a merchant, the merchant's bank, a network like Visa or MasterCard Inc. and the consumer's bank."

Since Hilton declined to provide the name of its acquirer, we do not know precisely who is testing what.

Regardless, we do know major credit card companies are prepared for Grexit.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Ready to Compromise?

Posted: 09 Jul 2015 02:11 PM PDT

The Greece cabinet is ready compromise on tax hikes and pensions. But what does "compromise" really mean? Will Germany go along?

The devil is in the details and we have no details.

But we do have this headline Tsipras Seeks to Rush Austerity Package Through Greek Parliament.

The Greek government is preparing to rush a package of economic reforms and austerity measures through parliament as early as Friday in a bid to convince its eurozone creditors it is committed to striking a deal for a third bailout that would save it from crashing out of the euro.

Greece's cabinet approved the plan, which includes increases in value added tax and savings from public pensions demanded by creditors, on Thursday evening before sending it to eurozone authorities.

"We are ready to compromise," Greek prime minister Alexis Tsipras told his cabinet colleagues, Greek media reported.

But Mr Tsipras could see his anti-austerity Syriza party split over the promised reforms. Greek media reported that Panagiotis Lafazanis, energy minister and leader of the hard-left faction, told his cabinet colleagues he could not support the plan. Syriza is to hold a meeting of its MPs early on Friday morning.

Creditors are waiting for detailed reform proposals from Athens before deciding whether the Syriza-led government has given enough ground to restart bailout talks. If eurozone finance ministers meeting on Saturday conclude that Athens has not gone far enough, European leaders will gather the next day to make preparations for its exit from the euro.

Donald Tusk, the European Council president who has been among the toughest critics of Athens' prevarication in recent weeks, said he had spoken to Mr Tsipras on Thursday and agreed any bailout deal should include debt relief for Greece.

"I hope that today we will receive concrete and realistic proposals of reforms from Athens," Mr Tusk said. "The realistic proposal from Greece will have to be matched by an equally realistic proposal on debt sustainability from the creditors. Only then will we have a win-win situation."

Valdis Dombrovskis, the European Commission vice-president overseeing its response to the Greek crisis, said "there is some willingness to look at this issue" in the bloc. Debt relief was unlikely to come in the form of a "haircut", however, and more likely via an extension of the timeframe in which Greece would have to repay its debts to fellow eurozone members.

But Mr Schäuble said the leeway for further debt relief for Greece — after a restructuring in 2012 — was "very low".

Michel Sapin, France's finance minister, urged his eurozone counterparts not to underestimate the costs of Grexit.

"What's costlier? That Greece exits the eurozone and defaults on all its debt? Asking the question is answering it," Mr Sapin told Radio Classique on Thursday. "A deal is the best solution for Greece and Europe."

Clearly some ministers are ready to compromise, others much less so. But we do not have specific proposals and Greece needs another 60 billion euros or so according to the IMF.

Is Germany ready for compromise? The Greek parliament? The eurozone finance ministers?

If the answer to all three is yes, then we have a deal, and likely a better one for Greece than it had two weeks ago.

But will it be a good deal?

I suggest no. Greece is better off doing needed reforms and simply declaring all of the debt fostered on it as "odious".

If another deal is signed, Greece will remain a hostage, with terms yet to be seen.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Greece Connects with Russia, Unveils €2 Billion Gas Deal; Germans in Rift with Eurozone; Did France Save Europe?

Posted: 09 Jul 2015 11:45 AM PDT

Yesterday, US treasury Secretary Jack Lew and International Monetary Fund managing director Christine Lagarde Pressured Eurozone Ministers to Grant Debt Relief to Greece.

Today, the Telegraph reports Germans in Rift with the Rest of Europe Over Debt Relief as Greek Reforms Ready 'Within Hours'.

Did France Save Europe?

The Telegraph has no details, just a catchy headline. The subtitle is interesting though.

The day France saved Europe?

Today has been a day for the French. In fact, most of this week has seen the French make concerted diplomatic efforts to ensure Greece gets a deal to stay in the eurozone. PM Valls, economy minister Macron, finance minister Sapin, and former finance minister Moscovici have all pitched in to various degrees to pull the European project back from the brink.

IMF Won't Give Debt Relief

I am curious as to how France could save anything by itself. Here are a couple more snips:

IMF's chief economist, Olivier Blanchard, delivered his final press conference at the head of the Fund's reseach department earlier today.

Mr Blanchard, who has advocated for debt relief for Greece, is pressed on why the IMF is not willing to take a haircut on the €22bn they have loaned to Greece, despite urging the rest of Europe to do so.

"The IMF has rules and in general we should question rules, but the rules are good ones," said the Frenchman.

Merkel Moves

Is Merkel making a move on Greek debt?<

Angela Merkel has been in Kosovo today. She said that a classic "haircut" on loans to Greece was out of the question. Ms Merkel faces a fight to pass through a new bail-out for Greece through her parliament, which as the ESM's largest creditor, holds a blocking minority vote.

But, Ms Merkel today did not take as hard a stance as we've heard from her finance ministry. She said:

"In 2012 we dealt with the issue of debt sustainability. We stretched out the maturities, we pushed back the repayment requirement for EFSF loans out to 2020. So we are not dealing with debt sustainability for the first time," Merkel said when asked about differences with the International Monetary Fund (IMF) over a debt writedown for Greece, report Reuters.

"I have said that a classic haircut is out of the question for me and that hasn't changed between yesterday and today."

The reference to a "classic" haircut suggests Berlin will not mandate any debt forgiveness which would immediately write-off a portion of Greece's €330bn debt mountain. But, her comments on extending maturities - or "reprofiling" in the jargon - are softer. As she says, the Germans have been here before and signed up to such relief measures only three years ago...

Rumor Mill

I am unconvinced of anything above. All I see is rumors and fear.

If there is "debt relief", loan extensions, and another bailout, then Germany will have to sign off on it.

Recall that another €60 billion or so is needed. Will the German parliament approve?

And if Greece gets relief, Portugal and Ireland will want a better deal too.

Russia the Concern

If there is a deal, it will be for one reason only: Fear of driving Greece into the hands of Russia.

Just today, Greek Energy Minister Unveils Plan for €2bn Gas Deal with Russia.

Greece has mapped out details of a planned landmark €2bn gas project with Russia in a move that could stir tensions with Brussels just as Athens is seeking a third bailout.

Panayotis Lafazanis, the firebrand leftist energy minister, presented preliminary plans for the project to Greek energy executives in Athens on Thursday in a defiant speech, vowing the government would not be pushed around by EU institutions.

The promised deal with Russia is a sharp rebuke to Brussels, which wants to reduce EU dependence on Gazprom and argues that southeastern Europe should diversify its supply by prioritising gas from Azerbaijan.

Opening his remarks with pugnacious references to the eurozone crisis, Mr Lafazanis said Greece was aiming to secure a deal with Brussels as quickly as possible. But he warned EU institutions that Athens was not about to roll over.

"Greece is no one's hostage," he said. "The Greek people's No vote, and I am referring to all of the people, is not going to become a humiliating Yes. Greece is not, under threat of execution, ready to accept any fait accompli."

No One's Hostage

If another deal is signed, Greece will remain a hostage. It's as clear as that.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

German Finance Minister Proposes Greece for Puerto Rico Trade: Should US Accept the Offer?

Posted: 09 Jul 2015 10:36 AM PDT

German finance minister Wolfgang Schäuble has a sense of humor. Today he said to U.S. Treasury Secretary Jacob Lew: I'll Trade You Greece for Puerto Rico.

Who knew Wolfgang Schäuble, Germany's prickly finance minister, had a sense of humor?

At a news conference on Thursday, Schäuble chided U.S. policy makers, who have been urging Greece and its creditors to agree on a new bailout, saying they didn't understand why a ban on bailouts is vital for the functionality of a currency union.

Schäuble then shared a proposition he had made to U.S. Treasury Secretary Jacob Lew: The eurozone would take in Puerto Rico, if the U.S. would allow Greece to adopt the U.S. dollar. Dow Jones Newswires reported on the news conference.

Assume for a second the offer is legitimate. Should the US accept it?

MarketWatch Answer

The Puerto Rican government's debt-to-GDP ratio is about 60%. But if you include the island's unfunded pension liabilities and the debt of its public enterprises, that figure rises to about 150%, according to data provided by Goldman Sachs.

Greece owes 315.5 billion euros in sovereign debt, which equals 177% of its 2014 GDP, according to Eurostat data.

So judging by the figures alone, the trade would be a winner for the eurozone.

MarketWatch Blew It

Actually, the trade would be a good deal for the US. The key is in the wording of the proposal.

The Eurozone would be stuck with all of Puerto Rico's debt while Greece "adopted" the US dollar.

Technically speaking, Greece could "adopt" the US dollar today.

Schäuble never said that the US would have to bail out Greece, Nor did he say Greeks would have the ability to print US dollars.

So how would it work then?

The answer is the same way it does in Zimbabwe. Recall that Zimbabwe phased out local currency at 35 quadrillion to US$1.

Zimbabwe has started retiring its almost worthless local currency in favor of the US dollar. Today, 35 quadrillion Zimbabwean dollars are equal to US $1, as a result of hyperinflation which hit the country in 2009.

The demonetization process of the Zimbabwe dollar started on Monday and will run till September 30.

People with accounts of up to 175 quadrillion (175,000,000,000,000,000) Zimbabwean dollars will be paid $5. Those who preserved bills at home will receive a rate of 250 trillion to $1 for their 2008-issued notes and 250 to $1 for their 2009-issued notes.

Zimbabwe has been using the US dollar since 2009 when the use of the Zimbabwean dollar was abandoned. A multi-currency system has been in operation for the last six years, with the South African rand and US dollar in use since 2009 and the Chinese yuan, Australian dollar, Japanese yen and the Indian rupee joining the list of accepted currencies in 2014. Formally, the national currency was also in circulation although Zimbabwean dollars were marginally used, mostly as souvenirs for their gargantuan denominations.

Zimbawbe Adoption

Zimbabwe "adopted" the US dollar in 2009. Technically, nothing stops Greece from doing the same today. Practically speaking, Greece would run out of dollars just as it ran out of euros, but that would not be our problem.

So here is the bottom line: In return for absolutely nothing, Schäuble proposed the "eurozone would take in Puerto Rico".

Economically speaking, we should accept the offer as proposed.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Absurd IMF Warning on US Rate Hikes

Posted: 09 Jul 2015 12:59 AM PDT

The IMF has only one legitimate purpose that I can figure out: To continually write position papers and articles silly enough to keep bloggers loaded with material for rebuttal.

The Wall Street Journal provides a case in point with IMF: U.S. Economy at Risk of Stalling Next Year if Fed Raises Rates Prematurely.

"The Federal Reserve risks stalling the U.S. economy by raising interest rates too early, the International Monetary Fund warned Tuesday as it detailed its call for the central bank to delay a move until 2016."

The idea that a single rate hike or two would sink the economy now but not in 2016 is of course ridiculous.

The IMF's primary concern is the rising US dollar.

If investors continue to plow into dollar assets, particularly given weaknesses in Europe, China and other emerging markets, "growth could be significantly debilitated," the fund warned. The IMF estimates each 5% appreciation of the dollar could cut a half-percentage point off U.S. growth.

The IMF wants a weaker dollar for the US and a weaker euro for Europe. How's that supposed to happen?

The IMF is also worried about China. Does it want a weaker yuan too?

Obvious Problem

The problem should be obvious, but obviously it isn't, so I will spell it out: It's mathematically impossible for every currency to depreciate against each other simultaneously.

Credibility

The IMF is worried about the loss of credibility if the Fed hikes now and has to reverse later.

"Both the European Central Bank and Sweden's Riksbank were forced into rate reversals in 2011, and the Bank of Japan seesawed through rate moves in the 1990s and 2000, fund economists noted. Such an about-face puts the Fed's all-important credibility at stake, the IMF said."

In reality, there is not a central bank on the planet that has any credibility. Bubble after bubble is the norm. The Fed failed to predict the dotcom bust, the housing boom, the housing bust, or the great recession.

The Fed has no credibility to lose. But the Fed does have good company. The credibility of the IMF is nonexistent as well.

The number of global GDP downgrades by the IMF is staggering. Heck, for years on end the IMF could not even get Greece correct. Greece missed countless IMF GDP estimates.

IMF Admits Greece Needs Debt Restructuring

At long last, the IMF admits what any person with half a brain knew half a decade ago: Greece Will Need Debt Restructuring.

"Greece is in a situation of acute crisis, which needs to be addressed seriously and promptly," Ms Lagarde said. Getting out of that crisis would take both reforms by Athens and a "debt restructuring", she said.

That's actually the first solid statement by Lagarde in years that I agree with. The irony is the eurozone ministers, Germany, and the creditors don't want to go along with it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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9.7.15

Mish's Global Economic Trend Analysis

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