12.7.15

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

Critics Flock to Site "ThisIsACoup"; Killing the European Project; Illusions; Who's Going to Pay?

Posted: 12 Jul 2015 10:58 PM PDT

CNN Money reports the top trending twitter hash site in Greece, Germany, the UK, and Ireland this evening is #ThisIsACoup.
As European leaders tried to hammer out a last minute deal that would keep Greece in the euro, a large group of critics -- including many Greeks - slammed the proposed terms of a new bailout, using the #ThisIsACoup hashtag to voice their displeasure.

"I can't believe what's going on in Brussels," one user said. "These demands are insane. #ThisIsACoup"

"This Eurogroup list of demands is madness," the economist Paul Krugman wrote on his blog. "The trending hashtag ThisIsACoup is exactly right. This goes beyond harsh into pure vindictiveness, complete destruction of national sovereignty, and no hope of relief."
Killing the European Project

Let's delve further into Krugman's rant, Killing the European Project, in which he mentioned #ThisIsACoup.
Suppose you consider Tsipras an incompetent twerp. Suppose you dearly want to see Syriza out of power. Suppose, even, that you welcome the prospect of pushing those annoying Greeks out of the euro.

Even if all of that is true, this Eurogroup list of demands is madness. The trending hashtag ThisIsACoup is exactly right. This goes beyond harsh into pure vindictiveness, complete destruction of national sovereignty, and no hope of relief. It is, presumably, meant to be an offer Greece can't accept; but even so, it's a grotesque betrayal of everything the European project was supposed to stand for.

Can anything pull Europe back from the brink? Word is that Mario Draghi is trying to reintroduce some sanity, that Hollande is finally showing a bit of the pushback against German morality-play economics that he so signally failed to supply in the past. But much of the damage has already been done. Who will ever trust Germany's good intentions after this?

Can Greece pull off a successful exit? Will Germany try to block a recovery? (Sorry, but that's the kind of thing we must now ask.)

The European project — a project I have always praised and supported — has just been dealt a terrible, perhaps fatal blow. And whatever you think of Syriza, or Greece, it wasn't the Greeks who did it.
Grotesque Demands

For a list of the grotesque demands that Krugman refers to (and I agree with him on that score), please see Tsipras' Choice: Total Capitulation or Grexit; Text of 4-Page Eurozone Demands.

Fatal Flaws

"It wasn't the Greeks who did it," says Krugman. He is correct as written.

However, it appears to me that Krugman is blaming Germany.

If so, he is mistaken. If the eurozone project ends in failure, blame the initial architects for numerous fatal flaws.

Fatal Flaws

  • No currency union without a fiscal union has ever survived, but the arrogant founders thought they could force fiscal and social convergence without letting the citizens even vote on such matters.
  • The Target2 implementation was a disaster.
  • The "one size fits Germany" interest rate policy of the ECB promoted fiscal insanity in club-med countries.
  • The treaty requires unanimous consent on rule changes. This led to constant bickering between countries. And the more countries that joined, the more bickering there was.
  • Fiscally and socially speaking, there is a world of difference between the socialists in France and the conservatives in Germany. Irreconcilable differences? It seems that way.
  • Pensions, work rule , and retirement age differences make some countries vastly more productive than others.
  • There are no enforcement rules on budget overloads.

Illusions

The founders thought differences would work themselves out over time. For a while, it appeared as if that could happen.

However, it was all an illusion as the great recession showed.

Unlike Krugman, I was never a supporter of the Eurozone "project" because it had too many fatal flaws to work.

And worse yet, arrogant politicians tried to force their views down constituents throats, even if they had to install puppet governments in Italy and Greece to do just that.

This "grotesque betrayal" is precisely what some of us have long predicted, and it started long ago, with the imposition of puppet governments in Greece and Italy, if not long before that.

Speece Revisited

I have written about the illusion of German virtues and Greek and Spanish vices on numerous occasions. "Speece" is my term for Greece, Spain, Portugal, and all the club-med states in trouble.

As sides form again, each pointing the finger at the other, and especially if you think one side or the other is mostly to blame, please consider From ZIRP to NIRP: Virtues of Germany vs. the Vices of Greece; What About "Speece" and Gold?

In that link I discuss the rise of extreme parties and debunk flawed notions of "risk sharing".

Risk-sharing makes Spain partially responsible for Greece and vice-versa. That may sound good, but in bad times (now), no one wants to do what it takes.

A fundamental issue is that regardless of who is to blame, bad debts do not go away.

Importantly, the Maastricht Treaty under which the eurozone was formed does not even allow risk-sharing or bailouts.

So here we are, with the conversations getting more and more heated, and the rifts wider every day.

Critical Question

In my post I ask a critical question: "Is the euro so fundamentally flawed, and tensions so high that the euro cannot possibly be saved at all?"

Critical Answer

If the answer is no, then someone needs to explains what it will take to get Germany to forgive enough debt to allow "Speece" to grow without perpetually high unemployment rates.

I believe the answer to that question is yes, as I stated on numerous occasions over the years. And if it is yes, I commented "discussion better begin soon on how to exit from this mess".

Well, it's plain to see that such discussion never started. And because of political arrogance such discussion won't start until it clear to everyone the whole mess is about to implode.

Solution

My recommended best solution is for Germany to exit the eurozone, and let the countries that want eurocrats and fiscal sharing, have eurocrats and fiscal sharing.

Who's Going to Pay?

One way or another, Germany is going to pay (by bailout, by default, or by destructive breakup). For now, Germany, the creditors, and the top politicians all refuse to admit that 100% guaranteed outcome.

Political arrogance and denial makes the destructive breakup all the more likely.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Tsipras' Choice: Total Capitulation or Grexit; Text of 4-Page Eurozone Demands

Posted: 12 Jul 2015 03:31 PM PDT

We now have "THE Final Offer Before Grexit" (I think). Of course, more offers will come after Grexit.

The Financial Times has the Four-Page Text of the Eurozone Demands on Greece.

The document is not in a form that can easily be copied. There is a line break of some sort after every character, that even my line break removal tool does not fix.

I retyped most of the document, sometimes shortening sentences or paragraphs, the essential ideas below.

Greece has Three Days to "Rebuild Trust" and Do the Following

  • Streamline VAT and broaden tax base to increase revenue.
  • Upfront comprehensive pension reform
  • Adopt Civil Procedure Code with major overhaul of civil justice system
  • Safeguard full legal independence of ELSTAT
  • Fully implement Treaty on Stability, make Fiscal Council operational before finalizing Memorandum of Understanding (MoU)
  • Introduce quasi-automatic spending cuts in case of deviation from targets after seeking advice from Fiscal Council and subject to the approval of the institutions
  • Transpose the BRRD within a week with support from European Commission

MoU Highlights

  • Carry out ambitious reforms to fully compensate for the fiscal impact of the Constitutional Court ruling on 2012 pension clause
  • Implement a zero deficit clause or mutually agreeable measures by October 2015
  • Adopt more ambitious market reforms with a clear timetable for implementation of all OECD toolkit recommendations including Sunday trade, sales periods, pharmacy ownership, milk, bakeries, ferries, etc., etc.
  • Privatize electricity network
  • Undertake rigorous reviews of collective bargaining, industrial action, and collective dismissals
  • Modernize framework for collective dismissals
  • Strengthen financial sector including decisive action on non-performing loans
  • Eliminate political interference in appointment process and governance of HFSF

On Top of That (Mish note: those were the exact words)

  • Develop a significantly scaled up privatization program with improve governance
  • Invite an independent body to assess price of assets sold with involvement of the Commission OR transfer 50 billion to an existing external and independent fund like the Institution for Growth in Luxembourg to be privatized over time to reduce debt.
  • Modernize and significantly strengthen Greek administration and put in place a program under the auspices of the European Commission, a capacity-building and de-politicization of the Greek administration. The first proposal needs to be provided by July 20.
  • To fully normalize working methods with the institutions, the government needs to consult and agree with the institutions on all draft legislation before submitting to parliament or the public. The Eurogroup stresses implementation is the key and welcomes Greek authorities to request by July 20 support for technical assistance.
  • Amend or compensate for "roll-back" legislation adopted during 2015 that is counter to the framework of the February 20, 2015 Eurogroup statement.

Minimum Requirements

The above-listed commitments are minimum requirements to start the negotiations with the Greek authorities. However, the Eurogroup made it clear that the start of negotiations does not preclude any final possible agreement on a new ESM programme, which will have to be based on a decision on the whole package (including financing needs, debt sustainability and possible bridge financing).

Mish comment: the above sentence was retyped exactly as written.

Additional Financing Needs

The Eurogroup takes note of the possible financing needs of between €82 billion and €86 billion. The Eurogroup notes the urgent financing needs of Greece and the need for very swift progress in reaching a decision on a new MoU: Estimated amounts are €7 billion by July 20, and an additional €5 billion by mid-August.

Additional Bank Recapitalization Buffer

Given the accute challenges of the Greek financial sector, a new ESM would have to include a buffer of €10 billion to €25 billion for bank recapitalization, of which €10 billion would immediately be available in a segregated account at the ESM.

No Haircuts

  • The Eurogroup stresses that nominal haircuts on debt cannot be undertaken.
  • The Greek authorities reiterate their unequivocal commitment to honour their financial obligations to all their creditors fully and timely.
  • Provided all the necessary conditions contained in this document are fulfilled, the Eurogroup and ESM board of directors may mandate the institutions to negotiate a new ESM programme.

Capitulation or Grexit

In case no agreement could be reached, Greece should be offered swift negotiations on a time-out from the euro area, with possible debt restructuring.

End of Document

Bloomberg sums it up this way: EU Demand Complete Capitulation From Tsipras.

German chancellor Angela Merkel had her choice, and she made it.

Merkel's Choice

  1. Pony up another €80+ billion to Greece and offer debt relief on top of it, even though a majority of German voters would rather see Greece out of the eurozone.
  2. Push Greece out of the eurozone.

Merkel selected option number 2. This pushed the ball in Tsipras' court.

Tsipras' Choice

  1. Go back against everything he vowed to do and completely give in to Germany, accepting a far worse offer than he had weeks ago
  2. Grexit

Mish Analysis

This proposal is in ways a step in the right direction. Indeed France would benefit greatly if it had to adopt the best of the ideas: loosen work rules, make it easier for businesses to fire employees, reduce state spending, increase retirement age, undertake rigorous reviews of collective bargaining, and fully implement the treaty on stability.

Ironically, not even Germany fully implements the treaty on stability. Instead, the previous two bailout agreements relied on massive VAT hikes with no real reforms.

Greece imploded.

Note that even if Greece does everything asked, the agreement above does not lead to a guaranteed ESM restructuring.

Here is the exact sentence (emphasis in italics mine): "Provided all the necessary conditions contained in this document are fulfilled, the Eurogroup and ESM board of directors may in accordance with article 13.2 of the ESM Treaty, mandate the institutions to negotiate a new ESM programme, if the preconditions of Aricle 13 of the ESM treaty are met on the basis of the assessment referred to in Article 13.1"

Lovely!

If Greece meets the all Eurogroup demands (and the document allows more to come), then if the preconditions in article 13 are met,  then the ESM committee may (or may not), tap the ESM.

Meanwhile, Greece is told that no nominal haircuts are coming.

Tsipras' Clear Choice

The wording of this document makes it clear Germany wants to push Greece out of the eurozone.

Please review the final sentence of the proposal. Here it is again: "In case no agreement could be reached, Greece should be offered swift negotiations on a time-out from the euro area, with possible debt restructuring."

If Greece turns down the offer, it gets "swift" negotiations on a "temporary time out", including the possibility of restructuring.

In contrast Greece has no chance of restructuring if it accepts all of the above demands.

Tsipras would be a fool to accept this proposal.

As I have said all along, Greece's best chance is to default, not pay back a cent, and initiate the reforms it needs to grow over the long haul. 

Greece does not need the euro. No country does.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Greece Offered "Temporary" Grexit in 4-Page Proposal; Merkel's Choice: "No Deal at Any Cost"; Waterboarding the Ward of the Eurozone

Posted: 12 Jul 2015 12:15 PM PDT

There was no agreement on Saturday or so far today. And the rift between France and Germany has widened. Yesterday I outlined Merkel's Choice.

Merkel's Choice

  1. Pony up another €80+ billion to Greece and offer debt relief on top of it, even though a majority of German voters would rather see Greece out of the eurozone.
  2. Push Greece out of the eurozone.

"No Deal at Any Cost"

Today Merkel appears to have taken choice number 2. She says "No deal at any cost". Hardliners in Germany, Finland and other places have dug in their heels too as the Rift Between German and France Widens.
Fraught negotiations in Brussels over a €86bn bailout package at the weekend created fresh uncertainty for Greece's future in Europe's monetary union after finance ministers failed to agree a way out of the biggest crisis to face Europe since 2012.

French president François Hollande pledged to get an agreement and warned that at stake was not just whether Greece stayed in Europe but "our conception of Europe".

But a grim Ms Merkel said: "There's not going to be an agreement at any cost." Eurozone leaders, she added, were considering "nothing more and nothing less" than the preconditions for a Greece rescue by Europe's bailout fund — a stance that appeared to cast doubt on whether a full accord could soon be reached.

Highlighting the drama, Luxembourg has warned Germany that pressing for Grexit would bring "a profound conflict" with France and "catastrophe for Europe". Jean Asselborn, foreign minister, told the Süddeutsche newspaper that it would be "fatal for Germany's reputation in the EU and the world" if Berlin did not seize the chance offered by the Greek reform promises.
  
Germany exerted maximum pressure, with the finance ministry raising the possibility of a five-year timeout from the eurozone for Greece, and transferring €50bn of assets to an "external fund" for privatisation to help fund debt repayment. Among Germany's staunchest allies is Finland, where the populist Finns party threatened to resign from the two-month-old coalition government if a Greek bailout went ahead.
Athens Offered "Temporary Grexit"

Moments ago, the Guardian reported Athens Offered 'Temporary Grexit' If No Deal. Here are some Guardian Snips.

Waterboarding the Ward of the Eurozone
Alexis Tsipras was given a very rough ride in his meeting with Tusk, Merkel and Hollande, our Europe editor Ian Traynor reports.

Tsipras was told that Greece will either become an effective "ward" of the eurozone, by agreeing to immediately implement swift reforms this week.

Or, it leaves the euro area and watches its banks collapse.

One official dubbed it "extensive mental waterboarding", in an attempt to make the Greek PM fall into line.

Nine Countries Open to Grexit


Economics professor Karl Whelan, of University College Dublin, believes the proposal for 'temporary Grexit' shows that Germany is determined to get Greece out of the eurozone.

Proposal: Greece to be offered euro time-out if no deal

The four-page proposal on the table tonight is now circulating in Brussels.

It confirms that Greece could indeed be offered a 'temporary' exit from the eurozone if it doesn't agree a deal with its creditors tonight.

Sky's Ed Conway has helpfully uploaded all four pages. @EdConwaySky: Here's the full 4pg eurogroup document on #Greece, inc "time-out", total amt needed (€82-6bn) & reform proposals.
Unfortunately the pages are totally illegible. So other than knowing there are four pages regarding a "temporary" Grexit, we have little else.

I will post a link to the proposal as soon as I find one. Meanwhile, it is crystal clear that Germany has sponsored policies hoping to bring down Tsipras' government in Athens.

He has decided he wants a deal after all, a very poor decision, in my opinion, especially after the resounding "no" he campaigned for.

One of the demands Germany has placed for a deal is Greece put up €50 billion collateral for further loans, no doubt islands and state-owned enterprises at bargain-basement prices.

Greek citizens are upset, and riot police have been called out, but so far the situation is calm. It won't be if Greece agrees to this deal.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.
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