Monday, July 6, 2015

Grexit update

I was wrong (most likely)! We're not muddling through at all, it appears. With the "no" vote by Greece on the mostly-defunct terms of a potential bailout deal, it looks like we're headed for... something bad? Definitely bad for anyone who's a Greek citizen and has a lot of money in Greek banks? I'm no expert.

Bold prediction (a.k.a CJ doubling down): France convinces Merkel/Germany to extend Greece another (not-very-helpful) lifeline, kicking the can down the road by one month. Also, commenters to tell CJ where he's wrong. 

26 comments:

  1. This is my bet as well. Unfortunately, neither an extension nor immediate Grexit would do any good for the Greeks. Maybe the bailout would be a bit worse because after it runs out Grexit is inevitable anyway. The Greeks will be just more financially exhausted before that fight.

    The Greek debt cannot be collected on. The sooner France and Germany make their peace with that the better for everyone. When is the next election in Germany, anyway?

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    1. Probably too soon for Angela's taste.

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  2. I think it's early days yet to say definitively that your "muddling through" prediction is entirely out. Give it a few weeks.

    Overall, though, it's looking grim now. The steady-state situation has yet to become manifest, and hopefully won't be quite as bad.

    Also, I think SJ is right re: the fact that the Greek debt cannot be collected on, which militates in favor of Grexit at some point.

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    1. The Grexit would be in short term favor of the lenders because they can stick the Greek post-exit misery under the nose of other hopeless cases with "See what a mess we can make of your home?". But this is it, all the banks can do is to make a mess without ever recovering any money. Forcing Greece to exit is just exacting revenge. In banking you don't play revenge, you make money.

      Long term this is a loss. Commercial banks profit consistently during long stretches of growth. Inter/Government banks like ECB are not chartered strictly with running a profit, but get into real trouble in times of economic contraction. Outside of Greece the post-exit turmoil can bury any hopes for growth for a long time.

      Of course "banks" don't make any decisions. People who run banks do. In the end some will make lots of money and a few will lose pensions. Not that it helps the Greeks.

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    2. The American debt can't be collected on either (too great) , and we have a far less sleazy gov't then the greeks.

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    3. No, the Greeks are just more transparent about it. Our government is plenty sleazy, the press is mostly complicit and the stakes are a lot higher.

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    4. "Forcing Greece to exit is just exacting revenge. In banking you don't play revenge, you make money." Au contraire, forcing Greece to exit prevents spending even more money maintaining the status quo. Keeping Greece in, even temporarily, is not a no-cost option.

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    5. There is no "no-cost" option. I may as well like the one that does less damage to the people. The banks will be fine.

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    6. "The banks will be fine" right up until they aren't.

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    7. In the groove of personal responsibility: Read the docs, check your data, tell your politicians to shut up, and don't mess up the bank you work for.

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  3. I've read that the IMF, in Washington, has pegged the real Greek debit at much, much greater than €1.6 billion - closer to €323bn. This morning, NPR had an interview with a minister in the Finnish government. He pointed out that on three separate occasions, his own country had repaid substantial national debits - and then he reached a logical conclusion about Greece. A BBC reporter also bluntly asked how the voters of other European countries would view their politicians throwing yet more money at Greece.

    Greeks are nice people. But they don't have an economy and lifestyle like that of the major European powerhouses. Is there some way for the EU to put them on "probation", i.e. have some sort of budgetary oversight, but yet not insult them?

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    1. You are right about the likely real quantity of Greek debt being closer to €323 billion. €1.6 billion is just the repayment schedule amount.

      It's hard to say exactly what the EU will do. I suspect either way it's a losing proposition for the EU. I do opine, however, that less harm to the EU's internal stability is incurred by forcing Grexit - not that I support the EU, but the public perception fallout if Brussels bails Greece out yet again would likely force some of the most stable and productive EU economies (e.g. Germany) out entirely.

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  4. Meanwhile, it could very well be that an even more impressive story of financial collapse is playing out in the People's Republic of China...

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    1. Man, that is absolutely the weirdest story, especially the suspension of some short-selling accounts? I don't get what's going on there.

      (The stories I hear seem to indicate to me that there's a lot of speculating going on?)

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    2. I'm not sure what started the ball rolling. Reporting on the matter indicates that a large number of relatively unsophisticated first-time investors, operating on margin, might have caused the initial event to snowball ("panic selling"). Also unsure what impact the PRC government reaction had - probably split between those who saw the intervention as unqualified support for the market and those who thought the sky was falling in. They're not wrong. ;)

      It's possible the economic impact will be far less than the Greek drama playing out now, although the losses already far outweigh what may happen with Greece, and overall the PRC market events have far more potential to destabilize the global economy.

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    3. I love this quote from Forbes: http://www.forbes.com/sites/oliverbarron/2015/07/05/did-chinas-stock-market-crash-just-end-economic-reform/

      [...]said Yao, 35. “China’s stock market is really different from other countries. The government surely has some measures to control the movement.”

      The statement may be true and the PRC government will control the stock market in which case every non-ultra-speculative penny should run as fast as it can. Or (more likely) the statement is nuts and the bears are just settling down, in which case most pennies are lost anyway.

      It seems that much of the selling was the effect of runaway margin calls. I don't have exact numbers (need to do some digging) but here is the rough comparison: on June 18 the margin debt was $370 billion or 8.5% of tradable shares. Bloomberg reports that there is more money out on margins from unofficial accounts. By the end of Friday the shares (all) lost $3.2 trillion from the June peak and the decline in margin accounts lags the market which means plenty of people lot all they had invested and more and just don't know it yet.

      http://www.bloomberg.com/news/articles/2015-07-05/china-stock-plunge-leaves-market-more-leveraged-than-ever-before
      http://www.valuewalk.com/2015/06/china-margin-debt/

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    4. "...the PRC government will control the stock market" is exaggerated. They will shore it up and try to prevent a wider collapse (following a general pattern), and they have the financial support of the business community (which has already set up a fund to prop up prominent stocks), the publicly aired possibility of allowing investment by pension funds (which at least one prominent television commentator has endeavored to ridicule a bit), and some $21 trillion in bank deposits to work with.

      It never hurts to work the media, and the PRC government has been doing just this, spreading online rumors about US financial institution machinations (unlikely) and encouraging investment in the domestic markets in at least one fairly nationalistic essay (the content of which has been somewhat hostile in tone to the US).

      This repurposed "cartoon" shows soldiers bearing abbreviated names of state financial institutions - the gal with the child holding the apple to the right says "Finally your hoped-for return! In the days since you left, the "foreign devils" wrought severe harm on our countrymen!" Not sure whether this is meant to be taken seriously or as parody of some of the wilder accusations being flung around.

      wwepaper.cn/newsDetail_forwaw.thrd_1346999

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    5. The Shanghai B share index and Shenzhen both plunged today, despite large stock purchases by insurance companies and financial SOEs. 10-day suspensions in trade were called for over 700 companies (out of 2800, on both exchanges) - losses might have been greater had this not occurred. This brings total losses to $3.4 trillion to date.

      The bulk of the damage has been incurred by small retail investors, which comprise most of the market - in stark contrast to the US, where institutional investment comprises the bulk of the market. In the past few days there have been stories of individual investors committing suicide (sometimes in spectacular and highly visible ways) and of people who got in over their heads buying on margin. Some of these stories are claimed to be irresponsible rumor-mongering.

      It looks as if the public is not buying the idea that the government is going to effectively contain the losses, which makes it even more difficult for the government to do so. I suspect we'll see the PRC come to view these recent events as a repudiation of recent policies of harnessing free markets to generate capital, and a decrease in interest from the public in future stock speculation. It is not impossible that even broader and deeper changes are to come.

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  5. They (EU) have been kicking the can down the road. Now the Greeks turn around and kick the EU in the can (well, more like the crotch).

    There comes a time when you have to say no more and let the patient die on the table.

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    1. Hopefully not as bad as that. "Tell the child to go stand in the corner, without any supper" is preferable.

      Can or crotch, Greece *is* at the southern end of the EU.

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  6. Here is a factoid from Thomas Piketty's interview in Die Zeit (citing in English after Gawker):

    “After the war ended in 1945, Germany’s debt amounted to over 200% of its GDP. Ten years later, little of that remained: public debt was less than 20% of GDP. Around the same time, France managed a similarly artful turnaround,” Piketty says. “We never would have managed this unbelievably fast reduction in debt through the fiscal discipline that we today recommend to Greece. Instead, both of our states employed [inflation, a special tax on private wealth, and debt relief].”

    “Europe was founded on debt forgiveness and investment in the future. Not on the idea of endless penance. We need to remember this.”

    And this is Gawker's own opinion: "Remember that those who extend too much easy credit are just as foolish as those who accept it."

    http://gawker.com/all-debt-is-negotiable-1715996006

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    1. Actually it transpires that Greece has already been using inflation - they've apparently been minting Euros on the sly - some 27 billion worth in excess of their permissions - yielding yet another reason why other EU member nations are unhappy with them.

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    2. That would be a pretty big breach of confidence. I imagine Greece could use this as a bargaining chip, although a pretty crude one.

      Why would Italy cooperate?

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    3. I'm not sure - I think probably due to a mix of being one of the larger Grecian creditors (apparently Italy's exposure to Greek debt went way up after 2010, at the same time France's declined, and is now around 39 billion euros), and also because they share views and experiences on the austerity mandates - i.e. the governments of both nations view EU-imposed austerity measures as counterproductive.

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  7. IMF released a draft report stating that if the current direction of events continues debt reduction will be necessary. Otherwise the debt would never be repaid.

    https://www.imf.org/external/pubs/cat/longres.aspx?sk=43044.0

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  8. They will probably just be given a sabbatical from the Euro.

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