Mish's Global Economic Trend Analysis

Greek Stock Market Reopens (sort of); Math Perspective on the "Bailout"
Rabbit-Hole Math: Chicago Proposes Bonds that Make No Periodic Payments; When Does Stupidity Stop?
IMF Reiterates Greece Disqualified for Bailout, Participation Depends on Debt Relief and Reforms

Greek Stock Market Reopens (sort of); Math Perspective on the "Bailout"

Posted: 31 Jul 2015 01:53 PM PDT

The Greek news of the day is Greek Stock Market to Reopen, With Restrictions.

Restrictions

People cannot draw on their Greek bank accounts to buy shares
People can only buy shares with existing brokerage account cash

I supposed people could transfer cash from elsewhere into stocks but no one in their right mind would do such a thing.

And what about taking cash out of brokerage accounts, wiring it elsewhere? The article did not say, but I suspect that has capital restrictions as well.

Will the market really reopen Monday?

I suggest not.

Reader "Bailout" Perspective

Reader "AC" occasionally pings me with some interesting comments and perspectives. Here's another one.

Ciao Mish,

I wanted just to share some elements to put in perspective things about Greek bailout.

Greece is a small country with small GDP, but please consider the ratio of the bailout and guarantee vs GDP.

Greek GDP is around $238 billion in 2014 (€216 billion).

The new bailout is €86 billion. That is 40% of GDP! Should people put the same percentage to the size of the state they live in, they would understand much better what this bailout means.

Schauble asked for €50 billion guarantee. In effect, Schauble seeks a Greek guarantee 1/4 of the country's GDP. Is this reasonably possible?

People involved in the matter have simply lost the sense of proportions and contact with reality.

Best Regards,

AC

Additional Math

To further add to AC's perspective, the existing bailouts equal €240 billion. The total bailout will be €326 billion (not counting additional money needed to stabilize the banks, and not counting Target2 imbalances of about €120 billion and growing).

€326 billion exceeds 150% of GDP.

Germany wants Greece to have a current account surplus of 3% of GDP.
3% of €216 billion (2014 GDP) is €6.48 billion.

At zero percent interest, assuming a 3% surplus every year, and also assuming every penny of the surplus goes to creditors, it will take Greece 50 years to pay back €326 billion.

Of course, Greek GDP is expected to rise. Then again, I assumed 0% interest, and I also assumed a 3% current account surplus from now until seemingly ever. The math gets much more cumbersome at interest rates that exceed a mere 1%.

Pardon me for asking, but ...

Who is it that's really being "bailed out"?
How the hell can this proposal possibly work?

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

Rabbit-Hole Math: Chicago Proposes Bonds that Make No Periodic Payments; When Does Stupidity Stop?

Posted: 31 Jul 2015 11:43 AM PDT

Chicago Eyes Bonds that Delay Repayments

Chicago Mayor Rahm Emanuel has his eyes on raising money via Capital Appreciation Bonds.

CABs saddle taxpayers with higher costs because they delay interest and principle payments until a final lump-sum payment at the end.

CABs have fallen out of favor because of risk. Some cities and states have outlawed them.

Nonetheless, Chicago Mulls Borrowing That Puerto Rico Rejected as Too Risky.

Mayor Rahm Emanuel proposed issuing $500 million of bonds this week in an ordinance that would permit the use of capital appreciation bonds, where borrowers postpone interest and principal payments into one big sum at the end of the term.

Chicago is struggling to plug its deficit and $20 billion of unfunded pension liabilities. Emanuel's move would give the third-most-populous city a means of borrowing without having to face the costs right away.

Texas restricted the use of CABs in June and California has limited them since 2013. The Puerto Rico Electric Power Authority dismissed a bondholder plan last week to restructure its debt using capital appreciation bonds, citing the disproportionate risks.

Former California Treasurer William Lockyer called the debt "abusive" because it passes on large payments to future generations.

"They increase the total cost and lower flexibility going into the future," said Steve Murray, a senior director at Fitch Ratings. "They can limit future borrowing ability."

Emanuel also proposed selling $125 million of wastewater revenue bonds to fund swap termination payments, Poppe said. A separate ordinance would authorize $2 billion in bonds for O'Hare International Airport, including $1.7 billion of refunding for savings, and about $300 million of new money for capital projects and interest, according to Poppe.

Rabbit-Hole Math

Given Chicago's junk bond rating, no investor in their right mind would purchase Chicago CABs. Default risk is enormous.

Also note that Emanuel needs to sell bonds to "fund swap termination payments". Those termination fees came into play because Chicago issued taxpayer-risky bonds that required repayment if the bonds dropped into junk territory.

Those bond are now junk, so Chicago has to borrow money to get out of swaps it never should have gotten into in the first place.

And $1.7 billion in bonds for "refunding savings". Say what? Borrowing to refund savings?

That statement caught my eye, but a vice president of US bank pinged me with this explanation:

"In muni land, refunding is another word for refinancing. So when the City of Chicago is talking about 'refunding for savings' they are referring to refinancing for interest savings. Not sure where the term originated, but that's what we call it."

Desperation Tactics

These are the tactics of a city that is clearly in serious trouble. Is there no end to stupidity?

Here's the deal.

Chicago pension promises cannot be met.
The Chicago Board of Education is bankrupt.
The City itself is bankrupt as well (but no one can really say that, especially when they cannot admit points one and two).

Until there is an honest discussion about the above three points, Emanuel has proven he is willing to go further down the rabbit hole in search of solutions that cannot possibly work in the real world.

Emanuel Needs Another Choice

The Illinois legislature contributes to the problem. Chicago needs choices. One of those choices is to declare bankruptcy.

Because bankruptcy is different for municipalities than corporations, Chicago itself cannot declare bankruptcy now. But the school system can and should.

Unfortunately, Illinois municipalities cannot declare bankruptcy until the state allows it. The legislature needs to give Chicago that choice.

Perhaps that choice would wake up the mayor. Perhaps not.

Question of Mushrooms

Did Emanuel eat too may funny mushrooms in his travels in Wonderland to understand a good option when he sees it?

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

IMF Reiterates Greece Disqualified for Bailout, Participation Depends on Debt Relief and Reforms

Posted: 31 Jul 2015 02:21 AM PDT

Once again the IMF is back in the news in regards to Greece.

The IMF staff told the board of directors Greece Disqualified from New IMF Program.

Yet, Germany insists IMF be a part of the program. The reason for the latter is Germany will have to pony up lots more money if the IMF is not involved. The staff presented this message to the board this week, along with the message eurozone bailout lenders first need to agree on "debt relief".

From the above link (Financial Times) ...

The International Monetary Fund's board has been told Athens' high debt levels and poor record of implementing reforms disqualify Greece from a third IMF bailout of the country, raising new questions over whether the fund will join the EU's latest financial rescue.

The determination, presented by IMF staff at a two-hour board meeting on Wednesday, means that while IMF staff will participate in bailout negotiations currently under way in Athens, the fund will not decide whether to agree a new programme for months — potentially into next year.

The IMF's assessment adds another source of complexity, just as Athens and its bailout monitors begin discussions to try to conclude a deal before a tight August 20 deadline.

According to a four-page "strictly confidential" summary of Wednesday's board meeting, IMF negotiators will take part in policy discussions to ensure the eurozone's new bailout "is consistent with what the fund has in mind".

But they "cannot reach staff-level agreement at this stage". The fund will decide whether to take part only after Greece has "agreed on a comprehensive set of reforms" and, crucially, after eurozone bailout lenders have "agreed on debt relief".

[Germany] now faces the prospect of trying to move an €86bn bailout through a sceptical Bundestag in a matter of weeks, without the IMF's imprimatur.

Some Greek officials suspect the IMF and Wolfgang Schäuble, the hardline German finance minister, are determined to scupper a Greek rescue, despite the July agreement to move forward with a third bailout.

In a private teleconference made public this week, Yanis Varoufakis, the former Greek finance minister, said he feared that his government would pass new rounds of economic reforms only for the IMF to pull the plug on the programme later this year.

"According to its own rules, the IMF cannot participate in any new bailout. I mean, they've already violated their rules twice to do so, but I don't think they will do it a third time," said Mr Varoufakis. "Dr Schäuble and the IMF have a common interest: they don't want this deal to go ahead."

Senior EU officials have insisted that Christine Lagarde, the IMF managing director, signalled her willingness to participate in a new bailout at the high-stakes summit that agreed the new rescue earlier in July.

But Greece has become a growing source of rancour within the fund and among its shareholders. People who have spoken with senior IMF officials say Ms Lagarde is facing a unified staff view that the fund's reputation is on the line and that it cannot agree to a new programme without significant changes.

According to the board minutes, several non-European board members — including from Asia, Brazil and Canada — gave warning over the need to "protect the reputation of the fund", and the document says Ms Lagarde acknowledged their concerns.

"[Ms Lagarde] stressed that in their engagement they have to be mindful about the reputation of the fund," the summary says.

According to the summary, IMF staff concluded that Greece no longer cleared two of the four requirements in the IMF's "exceptional access criteria" — the fund framework that allows it to grant bailouts of larger-than-normal size.

Same Old Same Old?

This is essentially the same story we heard two weeks ago in another "confidential" leak.

Nathan Tankus writing on Naked Capitalism presented this view on July 16: Lagarde Distances the IMF From Implications of Leaked Debt Sustainability Report.

In general, when discussing large complicated institutions distinctions must be made between parts of this institution. The mainstream press is particularly bad at that kind of nuance because these organizations are already complicated: making further distinctions between IMF managing directors, IMF staff and the IMF executive board gets needlessly obscurant in their view. However, these distinctions are important. The report that was leaked two weeks ago and the latest update to that report was written by IMF staff and specifically "neither discussed with nor approved by the IMF's Executive Board". Additionally, Christine Lagarde or her title "managing director" appear nowhere in this document. Thus to say that the "IMF" is saying anything in this report is deeply misleading.

The reporting of this latest update was even more muddled because it was combined with an anonymous statement from a "senior IMF official" by the Financial Times.

In my mind this anonymous official's statements only make sense in three situations:

Christine Lagarde is both unwilling to sign on to a deal the Eurogroup would currently agree to and unwilling to overtly and strongly pressure them to create a "better" deal they could sign. Thus she is aiming for a Grexit and no deal.
Christine Lagarde is willing to sign on to whatever deal the Eurogroup would currently agree to but wants to covertly pressure them to offer more debt restructuring. In other words it's a point of contention but not a dealbreaker.
Many on the IMF staff don't want Lagarde to sign whatever deal the Eurogroup is currently considering and specifically want much more debt restructuring. They have and are willing to leak things to the media to attempt to create this outcome whether by embarrassing their own Managing Director or putting indirect pressure on the Eurogroup.

To me option three seems like the most plausible. The same FT reporters (Peter Spiegel in Brussels and Shawn Donnan in Washington) reported over three weeks ago that a "senior [IMF] official" says many staff at the IMF "would rather cut off their little finger" than continue being involved in Greek bailouts. The use of similar descriptions ("senior official" and "IMF senior officials") implies that the same sources at the IMF that said this over three weeks ago have been leaking the Debt Sustainability analysis and interpreted them for the press. This suggests a revolt among the rank and file of the IMF that doesn't extend to the people who will ultimately make the decision.

Options Four, Five, Six

The above analysis seemed plausible at the time. It doesn't anymore. For starters, the report has now been presented to the executive board.

And a four-page "strictly confidential" summary appears to be in the Financial Time's hands.

We need to now consider options four, Five, and Six.

IMF executive board no longer want to be part of this mess. They cannot directly say so because it implies that Varoufakis was correct in his assertion. Rather than a staff revolt, the staff may have been authorized to leak its findings in advance
The IMF executive board is willing to be part of this mess, but only if Germany goes first. The risk here is the deal blows up entirely, but Germany would likely get the brunt of blame. Again, the staff may have been authorized to leak its findings in advance.
The IMF executive board is internally fighting, not just the staff. Many may be ganging up on Lagarde.

Option six is not incompatible with either 4 or 5. The staff revolt and the leak may not have been authorized by Lagarde herself, but by others on the executive board.

This brings us back to "Senior EU officials have insisted that Christine Lagarde, the IMF managing director, signalled her willingness to participate in a new bailout at the high-stakes summit that agreed the new rescue earlier in July."

It's possible EU "senior officials" are mincing words, not Lagarde. Willingness to participate does not imply "on German terms". Certainly, senior EU officials have lied before.

It still may very well be that Nathan Tankus is correct, but more options are clearly in play. I suspect option six coupled with either four or five, perhaps over the wishes of Lagarde herself.

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

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