For Many Greeks, Taxes have been seen as Theft…

…and thus massive tax avoidance and the huge informal economy.

The Wall Street Journal explains: (bold mine)

Of all the challenges Greece has faced in recent years, prodding its citizens to pay their taxes has been one of the most difficult.

At the end of 2014, Greeks owed their government about €76 billion ($86 billion) in unpaid taxes accrued over decades, though mostly since 2009. The government says most of that has been lost to insolvency and only €9 billion can be recovered.

Billions more in taxes are owed on never-reported revenue from Greece’s vast underground economy, which was estimated before the crisis to equal more than a quarter of the country’s gross domestic product.

The International Monetary Fund and Greece’s other creditors have argued for years that the country’s debt crisis could be largely resolved if the government just cracked down on tax evasion. Tax debts in Greece equal about 90% of annual tax revenue, the highest shortfall among industrialized nations, according to the Organization for Economic Cooperation and Development.

Greece’s new government, scrambling to secure more short-term funding, agreed on Tuesday to make tax collection a top priority on a long list of measures. Yet previous governments have made similar promises, only to fall short.

Tax rates in Greece are broadly in line with those elsewhere in Europe. But Greeks have a widespread aversion to paying what they owe the state, an attitude often blamed on cultural and historical forces.

During the country’s centuries long occupation by the Ottomans, avoiding taxes was a sign of patriotism. Today, that distrust is focused on the government, which many Greeks see as corrupt, inefficient and unreliable.

“Greeks consider taxes as theft,” said Aristides Hatzis, an associate professor of law and economics at the University of Athens. “Normally taxes are considered the price you have to pay for a just state, but this is not accepted by the Greek mentality.”

The above article manifests of rich political economic insights.

 

One, the typical approach by political agents in addressing economic disorders has mainly been to focus on superficiality or the immediacy—in particular “could be largely resolved if the government just cracked down on tax evasion”. 

Political solutions that fail to understand the incentives guiding the average Greeks has been the reason why tax policies continue to falter.

Two, just to be sure that non-payment of taxes hasn’t been the reason why Greeks have been struggling…

Nominal government spending based on tradingeconomics.com and Eurostat data

The above represents Greek’s government spending relative to GDP

Greece’s government debt relative to GDP (tradingeconomics and Eurostat)

Greece and Europe’s welfare state in % of GDP based on OECD data

As one can see in the above, the controversial “austerity” exists only in the mindset of the statist occult. The Greek government continues to spend at a rate more than the statistical economy and thus the ballooning debt which consequently translates to heightened economic burden on the Greek society.

Three, Greece’s (and the Eurozone’s) boom bust cycle have only exposed on the chink in the armor of Greece’s big government.

The dilemma facing Greece today exemplifies the paragon of radical changes in fiscal conditions when the bust phase of the boom cycle emerges.

This can be seen from the article: (bold mine) 

The reason isn’t just political, but economic. The country’s depression has already pushed many small businesses to the brink of collapse. Forcing them to pay more in taxes would put even more out of business—and more Greeks out of work.

“The Greek economy would collapse if the government were to force these people to pay taxes,” one senior government official said.

So the above data shows why many Greeks see their government as “corrupt, inefficient and unreliable” for them to “consider taxes as theft”

It doesn’t require a libertarian of the Rothbardian persuasion to see how taxes are theft. 

All it takes is for one to see with two eyes the real nature of how governments operates. This has been best described in the article as “corrupt, inefficient and unreliable”. 

Nonetheless here is the dean of Austrian Economics, the great Murray N. Rothbard on taxes. (For A New Liberty, The Libertarian Manifesto, p.30 )

Take, for example, the institution of taxation, which statists have claimed is in some sense really “voluntary.” Anyone who truly believes in the “voluntary” nature of taxation is invited to refuse to pay taxes and to see what then happens to him. If we analyze taxation, we find that, among all the persons and institutions in society, only the government acquires its revenues through coercive violence. Everyone else in society acquires income either through voluntary gift (lodge, charitable society, chess club) or through the sale of goods or services voluntarily purchased by consumers. If anyone but the government proceeded to “tax,” this would clearly be considered coercion and thinly disguised banditry. Yet the mystical trappings of “sovereignty” have so veiled the process that only libertarians are prepared to call taxation what it is: legalized and organized theft on a grand scale.

For the Greeks, the logical solution would seem as to dramatically pare down government spending and taxes or real austerity. These should ease tax burdens on the entrepreneurs or the productive agents that would allow them to channel resources to productive means. This should entail real economic growth.

In doing so, the informal economy should flourish and grow for the latter to integrate with the formal economy voluntarily.

But it’s not just taxes, there is the exigency to incentivize entrepreneurial activities via liberalization from excessive politicization of economic activities, specifically regulations, mandates, controls and all other politically erected anti-competition obstacles favoring entrenched interests. 

Importantly, the Greeks should embrace sound money by preventing the government from tinkering with interest rates, and the currency via the central bank and allow real competition in both the currency and the banking system.

Of course, given the size of the debt burden, debt that had benefited politicians and cronies of the past, such debt has to be defaulted on. Creditors who took the risk in financing the previous government excesses should pay their dues.

But of course, parasites would not want to end their privileges so this will hardly be the route taken. 

Politicians will continue to sell free lunch politics in order to get elected and stay the course. 

So after winning on such populist platform, the Tsipras government’s sellout to the Troika and the Eurogroup reinforces this dynamic

But since Greek’s problem has been about economics, the solution will always be about economics. Yet political solutions that fails to address the real (and not statistical) economic issues will have inevitable economic consequences.

I am reminded by this gem from author and professor Thomas Sowell:

The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.

Yet my ideal solution is the Rothbard solution; end organized theft.

Grexit Drama: Greek Government Capitulates to Germans, Gets 4 Month Bailout Extension

Last December I wrote that the populist political group which eventually took over the helm of the Greece government made empty promises which will not be fulfilled: 

The anti-bailout leftist group the Syriza which has been said to “promise everything to everyone” by reneging on deals for bailout, halting austerity, restoring social spending, continue to receive subsidies from the Eurozone, IMF and labor protection reportedly leads in the opinion polls. In short, the popular leftist group wants a bankrupt nation to revive free lunch policies and expect to get a free pass on the economy.

So in the recent “game of chicken” in terms of the negotiation for a bailout, the “chicken” appears to be the new Greek government who just folded to the Germans. 

From the Independent: (bold mine)

Germany and Greece agreed a breakthrough deal last night to extend the stricken Mediterranean country’s rescue loans package and stave off the immediate prospect of it crashing out of the eurozone.

The package was presented as a deal done by the eurozone countries together, but there has been little doubt throughout the tense and at times angry negotiations that it was Germany which pulled the strings.

Having refused to grant Greece’s request of six months’ grace on its loans and a rapid rolling back of austerity measures, Germany eventually accepted the belated compromise of a four-month extension.

That means Greece will now not run out of money next month and allows the new government in Athens space to continue negotiating with its creditors for a relaxation of the terms of its debt.

However, while the extension will get Greece through its spring loan repayments to the International Monetary Fund, it is not long enough to last through the €7bn of loans due to be repaid to the European Central Bank in July and August.

The U-Turn

In an indication of how ill-tempered the talks were between Germany’s hardline austerity proponent Wolfgang Schäuble and his opposite number from Greece, the finance minister Yanis Varoufakis, Mr Schäuble hinted that he had scored a great victory.

“The Greeks certainly will have a difficult time to explain the deal to their voters,” he declared.

Several analysts agreed that the result of the talks amounted to a humiliating defeat for Greece.

Essentially, Greece has performed a U-turn on Prime Minister Alexis Tsipras’s declaration that the previous bailout was “dead”, along with the control of the so-called Troika of the EU, IMF and ECB. Under the deal, the current bailout continues under the auspices of the same international creditor groups.

PM Alex Tsipras even wrote an op ed recently supposedly to reach out to the Germans but avowed their firm commitment to ‘end the extend and pretend logic’.

Apparently the Tsipras government has chosen “convenience” over their demagogic “principle” of overturning the current relationship between Greece and the EU as well as with the other creditors.

So essentially the sellout means current ‘extend and pretend’ arrangements will be maintained to the benefit of the status quo (the despised bankers and the oligarchs). This also means Greek voters have been left to hang out dry.

It’s a great example of the Public Choice theory—politicians act based on  self interest—or in the present case of how politicians use the populace to get into power and eventually turn their backs on them.

But it’s not over though. The German led Eurogroup-Greek deal has just been a temporary financing agreement with more negotiations to come. Perhaps this could just be an opening  act. We’ll see.

The details of the Tsipras sellout from Open Europe (hat tip Zero Hedge)[ italics mine, bold original]

What points has Greece capitulated on?

Completion of the current review – Greece has basically agreed to conclude the current bailout. Any funding is conditional on such a process:

Only approval of the conclusion of the review of the extended arrangement by the institutions in turn will allow for any disbursement of the outstanding tranche of the current EFSF programme and the transfer of the 2014 SMP profits. Both are again subject to approval by the Eurogroup.

This is a clear capitulation for Greek Prime Minister Alexis Tsipras, who said the previous bailout was “dead” and the EU/IMF/ECB Troika is “over”.

Remaining bank recapitalisation funds – Greece wanted this money to be held by the Hellenic Financial Stabilisation Fund (HFSF) over the extension period, and possibly be open for use outside the banking sector. However, this has been denied and the bonds will return to the EFSF, although they will remain available for any bank recapitalisation needs.

Role of the IMF – The Eurogroup statement says, “We also agreed that the IMF would continue to play its role”. Again, Greece has given in on this point and the Troika continues to exist and be strongly involved in all but name.

No unilateral action – According to the statement,

The Greek authorities commit to refrain from any rollback of measures and unilateral changes to the policies and structural reforms that would negatively impact fiscal targets, economic recovery or financial stability, as assessed by the institutions.

In light of this, a large number of promises that SYRIZA made in its election campaign will now be hard to fulfil. In the press conference given by Eurogroup Chairman Jeroen Dijsselbloem and EU Economics Commissioner Pierre Moscovici, it was suggested that this pledge also applied to the measures which were announced by Tsipras in his speech to the Greek parliament earlier this week – when he announced plans to roll back some labour market reforms passed by the previous Greek government.

Four months rather than six months – Greece requested a six-month extension, but the Eurogroup only agreed to four months. This is a crucial point: it means the extension expires at the end of June. As the graph below shows, Greece faces two crucial bond repayments to the ECB in July and August which total €6.7bn. This is a very tough hard deadline. There is limited time for the longer term negotiations which will take place – provided that a final agreement on the extension is reached. It is very likely we will be back in a similar situation at the end of June.

Has Greece secured any wins?

Greece has received a couple of small fillips in the wording:

The institutions will, for the 2015 primary surplus target, take the economic circumstances in 2015 into account.

This suggests that Greece may, during this year and the extension in particular, get more fiscal leeway. As we predicted many times, this would manifest itself as a lower primary surplus target. A small victory which may provide a bit of temporary breathing space for the government. In practice, though, it was already looking difficult for Greece to meet its target this year given significant shortfalls in tax revenue.

Greece also managed to get the word “bridge” into the statement, and a specific promise to discuss a fresh programme and approach:

This extension would also bridge the time for discussions on a possible follow-up arrangement between the Eurogroup, the institutions and Greece.

What happens now?

As was stressed in the press conference, Greece will on Monday “present a first list of reform measures, based on the current arrangement”. Moving forward from this agreement, which is still largely in principle, will be conditional on these measures being judged as sufficient by the EU/IMF/ECB as a step towards completing the current bailout.

Once that is confirmed work will begin on getting the “national procedures” in place, so that all the necessary parliaments (such as Germany and Finland) have approved the extension by the end of next week.

In the not too distant future, discussions will begin on the “possible follow-up arrangement”. As we outlined in extensive detail here, there are a huge amount of differences which need to be resolved. The crucial ones being labour market and pension reforms, as well as debt relief. Chances of an agreement remain unclear, but we would expect Greece to struggle once again to get what it wants.

So record stocks have all been about anticipation of a nonevent.

Grexit Drama: ECB Suspends Greece Bonds as Bank Collateral

The Grexit drama appears to be crescendoing.

In a move to forcefully address the stalemate between the new government of Greece and the EU, the ECB has partly withdrawn funding of the Greece financial system by suspending Greek bonds as bank collateral

The ECB’s official statement here.

Marketwatch.com explains the ECB action: (bold mine) 

What did the ECB just do? 

The ECB’s Governing Council suspended a waiver that had allowed Greek banks to use the country’s junk-rated government bonds as collateral for central bank loans. 

Why did the ECB do it? 

Greek bonds are junk rated, thus the waiver was needed to allow the banks to post collateral that could be used for cheap funding from the ECB. One of the prerequisites for the waiver was that Greece remain in compliance with a bailout program.

In its decision, the ECB said it pulled the plug on the waiver because it can’t be sure that Greece’s attempts to secure a new program will be successful.

Beyond the official reasons, the move is seen as a definitive warning that, like Germany, the ECB is in no mood to give in to Athens’s request for a debt swap. News reports also indicated the ECB isn’t open to requests to allow Greece to raise short-term cash by issuing additional Treasury bills in an effort to keep the government funded as it attempts to reach a new deal with its creditors. 

Where does that leave Greek banks? 

It’s not a welcome development. Greek banks have suffered significant deposit withdrawals before and after the January election that brought the antiausterity government, led by Syriza’s Alexis Tsipras, to power.

“This news will likely scare depositors and result in further bank runs,” said Peter Boockvar, chief market analyst at the Lindsey Group in Fairfax, Va.

“This all said, if Greece can come to an agreement with the troika[ i.e., the International Monetary Fund, the European Commission and the ECB], I’m sure the ECB will reinstate the waiver,” Boockvar added.

While the kneejerk reaction in markets has been negative, analysts note that junk-rated Greek sovereign debt made up a relatively small portion of the collateral used by Greek banks in funding operations as of the end of last year. Karl Whelan, economics professor at University College Dublin, recently estimated that Greek banks were using a maximum of €8 billion in Greek government debt as collateral for loans from the Eurosystem as of December versus total loans of €56 billion.

Meanwhile, the ECB said Greek banks will be able to tap funds through a program known as emergency liquidity assistance, or ELA. Under the program, the loans are more expensive and remain on the books of Greece’s central bank rather than the ECB.

The BBC diagram above shows of the share distribution of Greek creditors via holdings of Greek Bonds

The BBC says that : Greece has about €20bn (£15bn; $22.5bn) to repay this year, according to the Greek finance ministry. Economists estimate that Greece needs to raise about €4.3bn in the first quarter.

By withdrawing ECB guarantee, it’s not just about withdrawing liquidity but likewise to implicitly exacerbate the downgrade of what has been already rated as “junk”.

In addition, the remaining lifeline for Greek banks would be the ELA. The ECB’s bailout program is due to expire in February 28, which if not renewed would mean Greece will be on its own. 

So the showdown between the ECB and Greece has become a “game of chicken”. And the “game of chicken” will have consequences. One of them is likely the intensification of “significant deposit withdrawals” which is a euphemism for “bank run”…a systemic Greece bank run. Yet if a run materializes, where will the money go...Germany, Swiss, US or Asia or under the household pillow mattress?

It’s true that since official institutions have become the biggest creditors to Greece, there has been less exposure by the private sector which is probably why the reactions of the financial markets to the ECB hardline stance has hardly been violent…yet. But this lack of drama doesn’t imply that current reactions will project to the future. Or said differently, since sentiments have always been fickle, should a radical shift occur, then the momentum of the ballgame may reflect on such a shift.

And official exposure on high risk junk Greek debt doesn’t extrapolate to free lunch too.

If the Greek government defaults, whether the governments of the Eurozone, IMF or the ECB, someone would have to pay for those losses and that someone, the forgotten man, would be the taxpayers.

As the Zero Hedge points out: (bold original)

yet Bloomberg does bring up a relevant point: "The nominal amounts at stake do illustrate the motives for German resistance to restructuring. Yet a more relevant measure would adjust for a country's ability to absorb those losses. The picture radically changes when that exposure is expressed as a share of 2013 nominal GDP. On this ranking, Germany falls to No. 9 with an exposure amounting to 2.2 percent of its economy's size. France falls to No. 8 (2.2 percent) and Italy to No. 7 (2.5 percent). Portugal (3.2 percent), Cyprus (2.8 percent) and Slovenia (2.6 percent) top the ranking, meaning these countries have the most to lose if Greece decides to write down its public debt."

Should the EU-Greece game of chicken lead to a Grexit, there will be pain for these debt holders. The degree pain will not  be the same, but again there will be pain. The subsequent question is what will be the indirect (non-linear) ramifications?

Of course, in a world where governments have been hocked to the eyeballs with debt, and where central banks have provided the band-aid or patchwork for all the accruing imbalances via the extinguishment of risk conditions through financial asset pump, a Grexit may change the complexion of risk. Risk, like the mythical Phoenix, may resurrect or may be reborn.

Remember all it takes is for a Bear Stearns to lead to a Lehman moment. Could Grexit be the modern day version of Bear Stearns or the Great Depression's Creditanstalt?

Will record high stocks be immune to this? 

Very interesting.

Greece’s Alex Tsipras to Germans: Greece will End the Brussels Extend and Pretend Policies

In desperation, the average Greeks has turned to the radical left party Syriza for economic salvation. The Syriza handily won almost a majority of the parliamentary seat in the recently concluded elections.

As I have noted here: The anti-bailout leftist group the Syriza which has been said to “promise everything to everyone” by reneging on deals for bailout, halting austerity, restoring social spending, continue to receive subsidies from the Eurozone, IMF and labor protection reportedly leads in the opinion polls. In short, the popular leftist group wants a bankrupt nation to revive free lunch policies and expect to get a free pass on the economy.

Syriza’s, whose party represents a coalition of “just one step away from full communism” rode on coattail to electoral victory via this message: “Screw Germany” according to Jared Dillian of the 10th Man

 

Well party’s designated leader Alex Tsipiras, the new Prime Minister, writes to “reach out” on the Germans

From the Syriza (ht: Stockman’s contra corner/bold mine)

Alexis Tsipras' "open letter" to German citizens published on Jan.13 in Handelsblatt, a leading German language business newspaper

Most of you, dear Handesblatt readers, will have formed a preconception of what this article is about before you actually read it. I am imploring you not to succumb to such preconceptions. Prejudice was never a good guide, especially during periods when an economic crisis reinforces stereotypes and breeds biggotry, nationalism, even violence

In 2010, the Greek state ceased to be able to service its debt. Unfortunately, European officials decided to pretend that this problem could be overcome by means of the largest loan in history on condition of fiscal austerity that would, with mathematical precision, shrink the national income from which both new and old loans must be paid. An insolvency problem was thus dealt with as if it were a case of illiquidity.

In other words, Europe adopted the tactics of the least reputable bankers who refuse to acknowledge bad loans, preferring to grant new ones to the insolvent entity so as to pretend that the original loan is performing while extending the bankruptcy into the future. Nothing more than common sense was required to see that the application of the 'extend and pretend' tactic would lead my country to a tragic state. That instead of Greece's stabilization, Europe was creating the circumstances for a self-reinforcing crisis that undermines the foundations of Europe itself.

My party, and I personally, disagreed fiercely with the May 2010 loan agreement not because you, the citizens of Germany, did not give us enough money but because you gave us much, much more than you should have and our government accepted far, far more than it had a right to. Money that would, in any case, neither help the people of Greece (as it was being thrown into the black hole of an unsustainable debt) nor prevent the ballooning of Greek government debt, at great expense to the Greek and German taxpayer.

Indeed, even before a full year had gone by, from 2011 onwards, our predictions were confirmed. The combination of gigantic new loans and stringent government spending cuts that depressed incomes not only failed to rein the debt in but, also, punished the weakest of citizens turning people who had hitherto been living a measured, modest life into paupers and beggars, denying them above all else their dignity. The collapse of incomes pushed thousands of firms into bankruptcy boosting the oligopolistic power of surviving large firms. Thus, prices have been falling but more slowly than wages and salaries, pushing down overall demand for goods and services and crushing nominal incomes while debts continue their inexorable rise. In this setting, the deficit of hope accelerated uncontrollably and, before we knew it, the 'serpent's egg' hatched – the result being neo-Nazis patrolling our neighbourhoods, spreading their message of hatred.

Despite the evident failure of the 'extend and pretend' logic, it is still being implemented to this day. The second Greek 'bailout', enacted in the Spring of 2012, added another huge loan on the weakened shoulders of the Greek taxpayers, "haircut" our social security funds, and financed a ruthless new cleptocracy.

Respected commentators have been referring of recent to Greece's stabilization, even of signs of growth. Alas, 'Greek-covery' is but a mirage which we must put to rest as soon as possible. The recent modest rise of real GDP, to the tune of 0.7%, signals not the end of recession (as has been proclaimed) but, rather, its continuation. Think about it: The same official sources report, for the same quarter, an inflation rate of -1.80%, i.e. deflation. Which means that the 0.7% rise in real GDP was due to a negative growth rate of nominal GDP! In other words, all that happened is that prices declined faster than nominal national income. Not exactly a cause for proclaiming the end of six years of recession!

Allow me to submit to you that this sorry attempt to recruit a new version of 'Greek statistics', in order to declare the ongoing Greek crisis over, is an insult to all Europeans who, at long last, deserve the truth about Greece and about Europe. So, let me be frank: Greece's debt is currently unsustainable and will never be serviced, especially while Greece is being subjected to continuous fiscal waterboarding. The insistence in these dead-end policies, and in the denial of simple arithmetic, costs the German taxpayer dearly while, at once, condemning to a proud European nation to permanent indignity. What is even worse: In this manner, before long the Germans turn against the Greeks, the Greeks against the Germans and, unsurprisingly, the European Ideal suffers catastrophic losses.

Germany, and in particular the hard-working German workers, have nothing to fear from a SYRIZA victory. The opposite holds. Our task is not to confront our partners. It is not to secure larger loans or, equivalently, the right to higher deficits. Our target is, rather, the country's stabilization, balanced budgets and, of course, the end of the grand squeeze of the weaker Greek taxpayers in the context of a loan agreement that is simply unenforceable. We are committed to end 'extend and pretend' logic not against German citizens but with a view to the mutual advantages for all Europeans.

Dear readers, I understand that, behind your 'demand' that our government fulfills all of its 'contractual obligations' hides the fear that, if you let us Greeks some breathing space, we shall return to our bad, old ways. I acknowledge this anxiety. However, let me say that it was not SYRIZA that incubated the cleptocracy which today pretends to strive for 'reforms', as long as these 'reforms' do not affect their ill-gotten privileges. We are ready and willing to introduce major reforms for which we are now seeking a mandate to implement from the Greek electorate, naturally in collaboration with our European partners.

Our task is to bring about a European New Deal within which our people can breathe, create and live in dignity.

A great opportunity for Europe is about to be born in Greece on 25th January. An opportunity Europe can ill afford to miss.

Well given the socialist backdrop of the new government, if pushed through, Greece’s great opportunity seems one of the path to a debt default which risks unraveling the EU. Measures to rollback “anti-austerity” have been announced.

In addition, political extremism has been surging in the Eurozone.

As Austrian economist Frank Hollenbeck recently wrote:

Europe saved Greece to bail out its bankers. Without the bailout, Greece would have defaulted and returned to the drachma. It would have been forced to drastically slash government salaries and payrolls. It would have had to cut the wage increases that got it into debt trouble in the first place. Instead, the bankers walked away, with private debt replaced by public debt. Now, Greece could sink all of Europe, with the European taxpayer and citizen unaware of the hardship he will shortly endure: all of this to transfer wealth from the have-nots to the haves.

Unfortunately, the economic platform of the left-leaning Syriza will make the economic situation much worse. You cannot repeal the law of scarcity. The same is true of the economic platforms of Podemos in Spain and the National Front in France. Hold on to your hats since we are in for a turbulent future in Europe. It did not have to be this way.

Greece’s equity benchmark crashed right after the election but rallied yesterday as measured by the ATG (stockcharts.com)

Greece’s 5 year bond yield spirals…

…as well as Greece’s 3 year bond yields (note of the inversion or higher yields of the 3 year vis-à-vis the 5 year)

Will Draghi's QE offset political developments in the Eurozone?

 

Bloody Tuesday: GCC, European Stocks Battered; Greek Stocks Collapse 13%!

Add to the carnage in China’s stock markets, it has been a largely bloody Tuesday for global risk assets.

The 4% crash in Europe’s crude oil, the Brent (as of Monday December 8), sent stock markets of major oil producers the Gulf Cooperation Council (GCC) plunging, again

table from ASMA

US oil WTIC rallied mildly today.

Risk OFF Tuesday hit European stocks pretty hard (from Bloomberg)

Since October, crashes have become real time. Greece’s financial markets cratered!

The Athens General index lost 12.78% in a single day (stockcharts.com) 

Today’s meltdown signifies the single biggest crash since 1987. Notes the Zero Hedge: (bold original)

Greek stocks are now down 13% - the biggest single-day drop since (drum roll please) the crash of 1987... led by total carnage in Greek banks (down 15-25% on the day). Greek bond yields exploded, 3YR +183bps to a new post-bailout high at 8.32% (and inverted to 10Y).

Greek bond yields also soared.

The Greek president called for a snap election on December 17 which reportedly may spark “political turmoil”.

The anti-bailout leftist group the Syriza which has been said to “promise everything to everyone” by reneging on deals for bailout, halting austerity, restoring social spending, continue to receive subsidies from the Eurozone, IMF and labor protection reportedly leads in the opinion polls. In short, the popular leftist group wants a bankrupt nation to revive free lunch policies and expect to get a free pass on the economy. So market’s response has been rational.

Interesting to see how a revival of the Greek crisis will impact a vulnerable Europe, in the face of a Japanese recession, a highly fragile Chinese economy and a slowdown in Emerging markets, aside from heightened geopolitical tensions.

Nonetheless US markets bounced backed from the depths of the selling pressure from a recovering USD-yen, buoyant small cap and technology stocks.

European Recovery? Greece Reservist Calls for Coup

Mainstream pundits keep saying that Europe has been on the mend mostly relying on surveys to backup such calls. They suggest that a European economic recovery will ripple and support economic conditions of Emerging markets amidst the Fed Taper-Untaper conundrum.

Yet recent real events such as industrial production and car sales have defied such promising outlook. 

In fact, just yesterday loans to the private sector in the EU reportedly contracted again in August led by Germany. German's private sector loans dropped nearly 4% (month-on-month) and 4.7% (year on year)

We have been told too that the crisis shattered Greece economy has shown signs of recovery. This has been supported by buoyant financial markets.

The Greek equity bellwether the Athens index has been ascendant… 

…as Greek government bonds have been rallying (falling yields), whose late rally has coincided by the Fed’s UN-taper

Since economics drives politics, a call for a putsch by reservists of the Greek army hardly evinces signs of ‘recovery’, despite the above.

From the Guardian

No country has displayed more of a "backslide in democracy" than Greece, the British thinktank Demos has said in a study highlighting the crisis-plagued country's slide into economic, social and political disarray.

Released on the same day that judicial authorities ordered an investigation into a blog posting by a group of reservists in the elite special forces calling for a coup d'etat, the study singled out Greece and Hungary for being "the most significant democratic backsliders" in the EU.

"Researchers found Greece overwhelmed by high unemployment, social unrest, endemic corruption and a severe disillusionment with the political establishment," it said. The report, commissioned by the European parliament, noted that Greece was the most corrupt state in the 28-nation bloc and voiced fears over the rise of far-right extremism in the country.

The report was released as the fragile two-party coalition of the prime minister, Antonis Samaras, admitted it was worried by a call for a military coup posted overnight on Wednesday on the website of the Special Forces Reserve Union. "It must worry us," said a government spokesman, Simos Kedikoglou. "The overwhelming majority in the armed forces are devoted to our democracy," he said. "The few who are not will face the consequences."

Today the yield chasing mania, where falsehoods have been interpreted as truths, has made the markets anesthetized to risk. In other words, central bank induced parallel universes or divergent real events vis-à-vis financial markets, have become ubiquitous.

In Greece, Sales of Select Expired Goods Now Legal

In Greece, food shortages signified by food price escalation has prompted authorities to allow the sale of select “expired” foods.

From Voz Populi (translated via Google, hat tip zero hedge)

Greece will allow the sale of expired food at a price lower than the original, in a move that the government has not been able to justify but consumer groups have interpreted as evidence of their inability to stop the escalating cost of commodities. A ministerial decree just reviving an old regulation that authorizes supermarkets and grocery stores to sell food once the expiration date, Efe reported. "This regulation has existed for many years. And it is something that is allowed in the rest Europe. All I did was point out that these products must be sold at low prices. do not understand what is causing so much noise, "said Yorgos Moraitakis Efe, advisor to the Ministry of Development, Competition and Merchant Marine. The regulations exclude meat and dairy from the list of perishables that can be sold and sets a ceiling dates you can continue marketing.Thus, foods in which the expiration date is indicated by the day and the month, may continue on the shelf for another week. In the event that the "best before" only month and year point, the sale may be extended for one month, and in the event that the date indicated year alone, the sale date may be extended by one quarter.Though Moraitakis Efe declined to specify the reasons for this decision and merely noted that the legislation already existed, consumer groups and even government agencies have criticized the measure. "Virtually admit their inability to control prices," Efe reported Tsiafutis Victor Consumers Association 'Quality of Life', one of the oldest in Greece. 

Food Inflation 

In the Greece of the crisis, the wage and pension cuts and rising unemployment, food prices and commodities has not stopped rising.Between August 2011 and August 2012, the price of sugar shot up 15%, the eggs, 6.8% for butter by 3.2% and that of coffee, 5.9%, according to data from the Statistics Authority. "It is an immoral act," criticized Tsiafutis. "Instead of taking initiatives to control prices, allow the sale of food past the expiration date." Moreover, from the National Food Agency gets even concerned that the measure serves to something. "It is doubtful that these foods are to be sold at low prices, because the price control mechanisms have failed," said Yannis Mijas, president of this organization linked to the government. Indeed, the measure of how much states must be the initial price reduction, which is at the discretion of the merchant.To Mijas, selling expired food is also a moral dilemma, to divide consumers into two groups: those who can afford basic food and those who, because of poverty, "are forced to resort to dubious quality food."

Two observations from the above,

One, current events in Greece shows not of deflation but of stagflation.

Two, the result of inflationism has been bring about lower quality and or a deflation in value of goods and services that puts the consumers to higher risks. The above is an example of one of the immoral outcomes of inflationism

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.

Taxing Greeks: Separating Reality from Fiction

This terse article gives us a glimpse of the mechanics of how wealthy Greeks has successfully been able to avoid paying taxes

From the Wall Street Journal Blog,

That Greeks have a penchant for evading taxes isn’t exactly news — when tax collectors started comparing swimming-pool ownership with incomes, wealthy Greeks camouflaged their pools. And because hidden income is hidden, figuring the size of the tax dodge is difficult.

Armed with data from one of Greece’s ten largest banks, economists Nikolaos Artavanis, Adair Morse and Margarita Tsoutsoura recently set themselves to the task. The banks, with tens of thousands of customers across the country, provided loan and credit-card application and performance data. That not only gave the economists access to self-reported incomes, but also allowed them to infer the banks’ estimates of true incomes — which are likely closer to the mark.

The economists’ conservatively estimate that in 2009 some €28 billion in income went unreported. Taxed at 40%, that equates to €11.2 billion — nearly a third of Greece’s budget deficit.

Why hasn’t Greece done more to stop tax evasion? The economists were also able to identify the top tax-evading occupations — doctors and engineers ranked highest — and found they were heavily represented in Parliament.

It’s always easy to portray the solution to fiscal problems, through statistical estimates, as merely one of enforcement procedures of tax policies.

Unfortunately, such simple minded approach escapes the premises of people’s reactions to repressive social policies and to the parasitical relationships which underpins their political institutions.

As for some of the professional Greek elites, as noted above, their tax shields may have been derived through their participation in the political hierarchy.

Mainstream economists seem to forget that they are dealing with real people, who by nature will look after their interests by adapting to the realities of the evolving political economic environment.

And it is for this reason why top-down or centralized policies inherently fails.

Cartoon of the Day: Greece’s Pro-Euro Victory

This cartoon by Robert Ariail depicting the recently concluded Greece elections gave me a good laugh.

It’s hilarious but that’s the way the Euro crisis operates.

Thanks to Cato’s Dan Mitchell