Quote of the Day: David Stockman: Good on you, Alexis Tsipras

Needless to say, repeated and predictable bailouts create enormous moral hazard and extirpate all remnants of financial discipline in financial markets and legislative chambers alike. Since 2010, the Greeks have done little more than pretend to restructure their state finances and private economy, and the Italians, Portuguese, Spanish and Irish have done virtually nothing at all. The modest uptick in the reported GDP of the latter two hopeless debt serfs are just unsustainable rounding errors—–flattered by the phony speculative boom in their debt securities that was temporarily fueled by Draghi’s money printing ukase that is presently in drastic retreat.

So this Monday morning push has come to shove; Angela Merkel and her posse of politicians and policy apparatchiks were not able to kick the can one more time after all.

Instead, the troika’s authoritarian bailout regime has stimulated political revolt throughout the continent. Tsipras’ defiance is only the leading indicator and initial actualization–the match that is lighting the fire of revolt..

But what it means is that there is now doubt, confusion and fear in the gambling halls. The punters who have grown rich on the one-way trades enabled by the money printing central banks and their fiscal bailout adjutants are being suddenly struck by the realization that the game might not be rigged after all.

So let the price discovery begin. In the days ahead, we will catalogue the desperate efforts of the regime to reassert its authority and control and to stabilize the suddenly turbulent casino.

In riding the central bank bubbles to unconscionable riches the big axes in the casino have falsely claimed to be doing “gods work”.

As they are now being forced to liquidate these inflated assets, they actually are.

Last fall one of the most detestable members of the regime, Jean-Claude Juncker, arrogantly issued the following boast.

“I say to all those who bet against Greece and against Europe: You lost and Greece won. You lost and Europe won.”

This morning that smug proclamation is in complete tatters. Good on you, Alexis Tsipras.

This is from financial analyst and U.S. politician who served as a Republican U.S. Representative from the state of Michigan and as the Director of the Office of Management and Budget under President Ronald Reagan David Stockman on the the heightened risks of Grexit, published at this website: the Contra Corner

It's interesting to see what seems as the unfolding cocktail of significant risks factors: the GREXIT and China's crashing stock markets. 

China's stocks as of yesterday confirmed its entry to the bear zone.  Also yesterday's slump makes it appear that Chinese central bank's recent rate cuts failed to do its supposed wonders. 

Of course, add to this the demand by local authorities of US commonwealth Puerto Rico to restructure public debts because of 'insolvency' (Reuters).

And as for latest call for FINANCIAL INCLUSION, Greece capital controls exposes (for instance bank holiday, limit on ATM withdrawals and the prospective deposit haircuts) why this looks great in theory (used as selling point to the public) but hardly what it seems in practice (because of the real intents of governments--which is to capture the public's resources via government controlled banks).

Behind Grexit: Multilateral Agency Politics, US Sphere of Influence and Debt Trap

At the Cato Institute economist Steve Hanke explains why the IMF has been playing hardball with Greece: (bold mine)

Under normal conditions, the IMF is supposed to be limited to lending up to 200% of a country’s quota (each country’s capital contribution made to the IMF) in a single year and 600% in cumulative total. However, under the IMF’s “exceptional access” policy there are, in principle, virtually no limits on lending. The exceptional access policy, which was introduced in 2003, opened the door for Greece to talk its way into IMF credits worth an astounding 1,860% of Greece’s quota – a number worthy of an entry in the Guinness Book of World Records.

The IMF’s over-the-top largesse towards Greece explains why the IMF has been forced to play hardball with Greece’s left-wing Syriza government. The IMF’s imprudent over-commitment of funds to Greece leaves it no choice but to pull the plug on Athens. That is why the IMF’s negotiators packed their bags last week and returned to Washington, and that is why it will probably remain uncharacteristically immovable.

Wow. This serves as a shocking revelation of how the politics of multilateral agencies work. Internal rules will be broken to accommodate politically privileged sector/s.

And there's more. But some background required.

This chart from Fathom Consulting/Reuter’s Alpha now reveals of the astounding shift in the Greece debt composition from private sector to the public sector.

In short, political agencies as the IMF, ECB and European governments bailed out previous private sector creditors.

And this pie chart of Greek debt from Der Spiegel exhibits the current distribution of creditors.

This shows that  reason for the “IMF’s “exceptional access” policy” where “there are, in principle, virtually no limits on lending” has been because the IMF and various governments have been deeply hocked into Greek debt.

In short, the troika (IMF, EC, ECB) has been doubling down to provide financing to Greece because they hold most of it. Talk about Ponzi financing.

Now the IMF’s resources may have been stretched to the limits for them to play “hardball” with the former!

As a side note, I recently pointed out that of the 13% of the estimated $29 trillion bailout funds provided by the US Federal Reserve during the last 2008 crisis have mostly channeled been to European banks. So such rescue measures may have helped in the transfer of Greek debt exposure from private hands to public coffers.

Yet the IMF has been funded by taxpayers from around the world through a quota system. The allocated quota determines both the financing contribution and the voting power of member nations. Since US holds the biggest quota this means that the US has largest influence on how IMF distributes its tax funded resources. 

I would add that aside from possible IMF financing constrains, the Greek government’s overture to the Russian government where the latter could turn out as a 'white knight' or lender of last resort, could also play a factor for IMF-Greece government impasse.

For instance this recent development from the CNN:

Greek Prime Minister Alexis Tsipras is reported to have scheduled a meeting with Russian President Vladimir Putin in St. Petersburg on Friday.

Meanwhile, in Moscow, another deadline is fast approaching. Next week, the European Union must decide whether or not to renew sanctions on Russia.

In other words, much of European politics have been anchored on US influences whether seen from the prism of previous bailouts or recent sanctions on Russia or on Greek financing negotiations. 

All seems connected.

And this is the reason why the Chinese government has launched a counterweight to US sphere of influence through the Asian Infrastructure Investment Bank

And more importantly, many have come to believe that in the case of a default, the public sector’s exposure to Greek debt will limit contagion on marketplace. Some expect ECB’s action to provide enough firewall to contain the crisis.

Well debt is debt. The transfer to a claim on resources from private to public will also have repercussions.

The influential think tank the Council on Foreign Relations (CFR) via Benn Steil and Dinah Walker warns of complacency from the risks of a Grexit: (May 7, 2015)

The IMF has turned up the heat on Greece’s Eurozone neighbors, calling on them to write off “significant amounts” of Greek sovereign debt.  Writing off debt, however, doesn’t make the pain disappear—it transfers it to the creditors.

No doubt, Greece’s sovereign creditors, which now own 2/3 of Greece’s €324 billion debt, are in a much stronger position to bear that pain than Greece is.  Nevertheless, we are talking real money here—2% of GDP for these creditors.

Germany, naturally, would bear the largest potential loss—€58 billion, or 1.9% of GDP.  But as a percentage of GDP, little Slovenia has the most at risk—2.6%.

The most worrying case among the creditors, though, is heavily indebted Italy, which would bear up to €39 billion in losses, or 2.4% of GDP.  Italy’s debt dynamics are ugly as is—the FT’s Wolfgang Münchau called them “unsustainable” last September, and not much has improved since then.  The IMF expects only 0.5% growth in Italy this year.

As shown in the bottom figure above, Italy’s IMF-projected new net debt for this year would more than double, from €35 billion to €74 billion, on a full Greek default—its highest annual net-debt increase since 2009.  With a Greek exit from the Eurozone, Italy will have the currency union’s second highest net debt to GDP ratio, at 114%—just behind Portugal’s 119%.

With the Bank of Italy buying up Italian debt under the ECB’s new quantitative easing program, the markets may decide to accept this with equanimity.  Yet assuming that a Greek default is accompanied by Grexit, this can’t be taken for granted.  Risk-shifting only works as long as the shiftees have the ability and willingness to bear it, and a Greek default will, around the Eurozone, undermine both.

The reemergence of market volatility has partly been due to the risks of Grexit. (Reuters Alpha Now June 12, 2015)

Finally, all these cumulative attempts to bridge finance debt strained nations reveals of the current heightened state of fragility from an event risk pillared on the global debt trap.

And if such event risk materializes that would have massive consequences then all the recent funneling of resources to Greece by the IMF, as I previously wrote, would pose as a constraint to future bailouts.

US Companies Prepare for Greece Exit

More evidence of the financial market-real world detachment.

Seen from the financial markets, Euro’s problems seem headed for a silver lining. But from the ground, events seems turning for the worst.

US companies are reportedly preparing for a “Greece exit”

From the New York Times,

Even as Greece desperately tries to avoid defaulting on its debt, American companies are preparing for what was once unthinkable: that Greece could soon be forced to leave the euro zone.

Bank of America Merrill Lynch has looked into filling trucks with cash and sending them over the Greek border so clients can continue to pay local employees and suppliers in the event money is unavailable. Ford has configured its computer systems so they will be able to immediately handle a new Greek currency.

No one knows just how broad the shock waves from a Greek exit would be, but big American banks and consulting firms have also been doing a brisk business advising their corporate clients on how to prepare for a splintering of the euro zone.

That is a striking contrast to the assurances from European politicians that the crisis is manageable and that the currency union can be held together. On Thursday, the European Central Bank will consider measures that would ease pressure on Europe’s cash-starved countries.

Public’s opinion has been shifting rapidly. Again from the same article… (bold emphasis mine)

In a survey this summer, the firm found that 80 percent of clients polled expected Greece to leave the euro zone, and a fifth of those expected more countries to follow.

“Fifteen months ago when we started looking at this, we said it was unthinkable,” said Heiner Leisten, a partner with the Boston Consulting Group in Cologne, Germany, who heads up its global insurance practice. “It’s not impossible or unthinkable now.”

Mr. Leisten’s firm, as well as PricewaterhouseCoopers, has already considered the timing of a Greek withdrawal — for example, the news might hit on a Friday night, when global markets are closed.

A bank holiday could quickly follow, with the stock market and most local financial institutions shutting down, while new capital controls make it hard to move money in and out of the country.

“We’ve had conversations with several dozen companies and we’re doing work for a number of these,” said Peter Frank, who advises corporate treasurers as a principal at Pricewaterhouse. “Almost all of that has come in over the transom in the last 90 days.”

From the hindsight everything looks easy to explain, but as I have been saying events can be so fluid, where moves can be swift and dramatic.

I’d say that an exit will mark the climax of the bear market of Greece equity markets.

The Athens General Exchange index has fallen by nearly 90% since 2007. (chart from Bloomberg)

Greece will likely devalue (inflate) intensively. These should put a floor and perhaps reverse the bear market trend. But rising stocks doesn’t necessarily translate to an economic recovery, instead they can be symptoms of severe inflation or even hyperinflation.