Mish's Global Economic Trend Analysis |
- ECB Revokes Greek Bonds as Collateral; ECB vs. Novices; Brass Knuckles
- Germany's "Time Pressure" Thesis; Noose Tightens on Europe
- Voter Sentiment in Spain Shifts Towards Podemos in Growing Numbers
- Nestles Has First Ever Negative Interest Corporate Bond; Privilege of Lending Gone Mad
| ECB Revokes Greek Bonds as Collateral; ECB vs. Novices; Brass Knuckles Posted: 04 Feb 2015 04:54 PM PST It's difficult keeping up with the news. As soon as I finished Germany's "Time Pressure" Thesis; Noose Tightens on Europe, significant news on the debt standoff hit the press. ECB Cancels Acceptance of Greek Bonds as Collateral An ECB press release today discusses Eligibility of Greek bonds used as collateral in Eurosystem monetary policy operations. In a nutshell, the ECB unexpectedly and suddenly canceled acceptance of Greek bonds as collateral for liquidity funding unless Greece honors the existing deal. Until that happens, the Greek central bank, not the ECB, will have to take care of liquidity needs related to runs on Greek banks. The ECB press release states the situation with little fanfare as follows: "The Governing Council decision is based on the fact that it is currently not possible to assume a successful conclusion of the programme review and is in line with existing Eurosystem rules." Brass Knuckles Reuters reports ECB Cancels Soft Treatment of Greek Debt in Warning to Athens. The title is silly. When did the ECB ever provide Greece with a "Soft Treatment"? As I have pointed out, the much abused word "solidarity" has come to mean "Do what we say, or else!" ECB vs. Novices Prior to starting this post, I added an addendum to Germany's "Time Pressure" Thesis; Noose Tightens on Europe. Addendum:Who is the Novice? One way or another, there is going to be a major haircut. Here are the choices.
Like it or not, there are no other choices. Normally, one would expect option number 2. That is what bureaucrats most often do. However, it's increasingly likely that both Syriza and Germany have both had enough. German citizens support the "no-haircut thesis" by a 68%-28% margin. Admission of Obvious Truth Meanwhile, in a interview today on Zeit Online, Greek finance minister Yanis Varoufakis accepts the obvious truth: "I'm the Finance Minister of a Bankrupt Country" Please read the interview. Also read Alexis Tsipras "Open Letter" to German Citizens Regarding Extend-and-Pretend Unserviceable Debt. Varoufakis and Tsipras are political novices, but both seem to be masters of game theory, and both know full well (and are willing to admit) Greece is bankrupt. The honest admission, "Greece is bankrupt" should take them down the correct path, that extend-and-pretend is precisely the wrong thing to do. Spreading the Pain It's painful for any politician to say "we are bankrupt". Yet that admission paves the way for other things. For the sake of Greece, I actually hope Syriza keep its pledge to negotiate a debt reduction. Then, if the ECB and Germany do not bend, history will eventually show them to be the novices, not Greece. Exit Math I wrote about exit math twice recently.
If Germany and the eurozone do not bend significantly, Greece may very well come to the conclusion it has little to lose and everything to gain in the long haul by telling the Troika to go to hell. One Step Closer to Solution My math says Grexit will be painful for Greece, but it will be far more painful for Germany. There is much merit regarding a global debt solution in proving that statement, even if Greece does not properly take advantage of the opportunities Grexit would provide. Meanwhile, I repeat my January 9 warning once again: Another Run on Greek Banks Begins; Get Out While You Still Can; Buy Gold Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Germany's "Time Pressure" Thesis; Noose Tightens on Europe Posted: 04 Feb 2015 12:51 PM PST No Bad Compromises Says Germany Today German Chancellor Angela Merkel proclaimed Greek Diplomatic Offensive Is Failing. Merkel's Christian Democratic-led bloc in parliament has agreed not to give in to any "bad compromise that "defacto adds up to a debt writedown," Hans-Peter Friedrich, a deputy leader of the caucus, said in an interview today. "Greece, not Germany, is under time pressure," Friedrich said, citing the Greek government's cash requirements following the end of the current round of bailout funding at the end of the month. Tsipras and Varoufakis "aren't in a position to make demands, let alone try blackmailing tactics," he said. Noose Tightens on Greece (and Europe) France is the only country that had shown any sympathy towards restructuring Greek debt. However, Greek hopes for France hit the hard rocks of reality today when French President Francois Hollande warned Greek Prime Minister Alexis Tsipras that "respecting the rules is necessary for all, for France too, and it's not always easy." Southern Solidarity? Think Spain is sympathetic to Greece? Think again. The Financial Times reports Spain Keeps Hawkish Eye on Greece as Southern Solidarity Crumbles. There never was any "Southern Solidarity" on this issue (except with Germany). I explain why in Voter Sentiment in Spain Shifts Towards Podemos in Growing Numbers. Podemos and Syriza are philosophically aligned, and the leaders of both parties communicate with each other. Meaning of Solidarity Merkel has repeatedly pledged "solidarity" with Greece. Her curious definition is along these lines: "Do exactly what we tell you, or suffer the consequences". Meaning of Generosity German finance minister Wolfgang Schäuble said "Europe had already pushed its generosity to Greece to the absolute limit. We need solidarity in Europe, and besides we cannot be blackmailed." Schäuble's definition of "generosity" is to load Greece up with €250 billion in debt that cannot possibly be paid back, then demand repayment. Alexis Tsipras politely blasted the alleged German "generosity" in a letter to the German newspaper Handelsblatt. (See Alexis Tsipras "Open Letter" to German Citizens Regarding Extend-and-Pretend Unserviceable Debt). I happen to agree with that letter in entirety, even though I strong disagree with other Syriza positions. Please read the letter if you haven't yet done so. It makes a mockery of the alleged "generosity". Smart Debt Engineering Yesterday the stock, bond, and commodity markets went absolutely giddy over a Smart Debt Engineering proposal by Greek finance minister, Yanis Varoufakis. Varoufakis said the government would no longer call for a headline write-off of Greece's €315bn foreign debt. To avoid the term debt "haircut", Varoufakis instead proposed a "menu of debt swaps" and "perpetual bonds". I commented "Perpetual bonds: clearly never meant to be paid back. Gotta love the honesty of the idea." No Foot Kissing In spite of the fact that Greece had done nothing but ask for a "haircut" disguised by the term "perpetual bond", the markets acted as if Alexis Tsipras kissed Angela Merkel's foot. Today, oil reversed again, giving up all of yesterday's gains and then some. It's down 8% on the day. Equity markets held yesterday's gains, sticky as usual. "Time Pressure" Thesis Let's return to a statement made by Hans-Peter Friedrich, a deputy leader of Merkel's caucus: "Greece, not Germany, is under time pressure." Friedrich's statement is one of the following.
I often wonder, "Do these guys really believe what they say? Can they be that ignorant?" As a big fan of Occam's Razor (the simplest explanation with the least assumptions is most likely the correct one), the answer to both questions would tend to be yes. Why? Because "game playing bluffery" assumes they are telling a lie, doing so on purpose, in belief the other guy will not see the bluff, whereas "blatant ignorance" is a simple assumption. However, we also have the popular thesis eloquently stated by Jean-Claude Juncker, former Luxembourg PM and former Head Euro-Zone Finance Minister "When it becomes serious, you have to lie". Thus, one has to carefully balance these two ideas
From that aspect, it's very hard to tell exactly what's going on. Time Pressure on Both Sides Unless there is an agreement (someone gives in big time), Europe is headed for a massive blow-up. I believe Germany has far more to lose than Greece should an exit occur. German responsibility for its share of the debt would be close to €73 billion, Italy €48 billion, Spain €32 billion. Anyone who does not think that would cause instant devastating contagion is crazy. That begs the question: Does Merkel really believe Greece does not matter from a contagion aspect, or is that a ridiculous bluff? For a country-by-country analysis of contagion math, please see Revised Greek Default Scenario: Liabilities Shifted to German and French Taxpayers; Bluff of the Day Revisited. Game Theory Math Revisited It still appears as if neither side will back down. Let's recap my post from January 30: Greece Will Not Accept Bailout Extension or Deal With Troika; Mish's Game Theory Math "We're prepared for any discussions at any time but the basis can't be changed" sets the tone for Germany. I wonder if the Greek position is on purpose. Tsipras' claim that he wants Greece to stay on the euro. That helped get him elected. Is that how he really feels? If not, then unless he gets nearly everything he wants, Grexit is all but assured. And if no agreement is reached, Tsipras has an easy fallback plan: Blame it on Germany and the much hated Troika. Mish's Game Theory Math
Exit Math I wrote about exit math twice recently.
If Germany and the eurozone does not bend significantly, Greece may very well come to the conclusion it has little to lose and everything to gain in the long haul by telling the Troika to go to hell. And that is a position I endorse even though I disagree with many of the overall policies of SYRIZA. In the end, my analysis says the eurozone has far more to lose than Greece if a Grexit occurs. However, I highly doubt Germany realizes that. Even if Germany does, it takes unanimous agreement from all 19 eurozone countries to revise the agreement. That's part of the math. Place your bets. Time on My Side As a tribute to the silliness of Germany's "Time Pressure" Thesis, I offer this musical tribute. Link if video does not play: Rolling Stones Time is on my side (1964). That's a very enjoyable live Ed Sullivan Show video, well worth a flashback memory play. Time on No One's Side Time is not on anyone's side here. Especially Germany's. Both sides are under pressure. When Friedrich says "Greece, not Germany, is under time pressure," he is either engaged in a dangerous bluff, or he displays blatant economic ignorance. The same applies to Chancellor Merkel when she claims the eurozone is prepared for a Greek exit. Addendum: A Bloomberg View on "Greece's Hidden Haircut Proposal" just came my way: "By the time the EU is done with the Syriza novices, Greece's debt may be a little lower, but the government's radicalism will be a tattered banner," says author Leonid Bershidsky. Bershidsky is another in a long line of persons who do not understand simple math. Time will tell who is waving the "tattered banner" over what can and cannot be paid back. My bet, one way or another, is on the alleged "novices". Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Voter Sentiment in Spain Shifts Towards Podemos in Growing Numbers Posted: 04 Feb 2015 11:38 AM PST Not only does Germany and the Troika have its hands full with Greece, Podemos Cements Position in Spanish Polls. Spanish voters are shifting their support towards Podemos in growing numbers, according to a poll that provides fresh encouragement to the far-left anti-establishment party as it prepares for a series of tricky electoral contests over the next few months.Poll Trends  Dissatisfaction In spite of the alleged recovery in Spain voters are disastified. Why? Unemployment is still near 24% and youth unemployment is still over 50%. Recall that Podemos "Economic Manifesto" Calls for Debt Restructuring, Spain to Abandon the "Euro Trap". "Spaniards should be aware that it is physically impossible that they can pursue policies that meet the national interest, within the euro as it is designed. The euro was conceived as a real trap, but nowhere is it written that people have to accept it ." said Iglesias. Also consider Incredible Populist Positions in Podemos' "Economic Manifesto". Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
| Nestles Has First Ever Negative Interest Corporate Bond; Privilege of Lending Gone Mad Posted: 04 Feb 2015 09:25 AM PST Economic madness continues nonstop. In the race for safe havens Nestle Bond Yield Falls Below Zero Nestle's short-term euro-denominated bond yield has fallen into negative territory, possibly marking the first time in history that a corporate bond maturing in more than a year has had a negative yield.  Privilege of Lending Gone Mad Yes indeed folks, you can can now pay Nestles for the privilege of lending it money. In honor of this historic event, I offer this 1950s historical tribute. Link if video does not play: 1950's Nestle's Quik w/Jimmy Nelson, Danny 'O Day, and Farfel TV commercial snippet Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
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