BREAKING NEWS: Greek Prime Minister Alexis Tsipras arrives to meet with representatives of a business community in St. Petersburg

Reuters 1 hr ago

Reuters 1 hr ago

Picture:
Greek Prime Minister Alexis Tsipras (L, bottom) arrives to meet with representatives of a business community in St. Petersburg, Russia, June 18, 2015. Greece has not asked Russia’s finance ministry for financial assistance and its prime minister is visiting Russia to discuss joint projects, not to seek cash, Russian Deputy Finance Minister Sergei Storchak said on Thursday. With time running out for Athens to reach a reform-for-aid deal with its international creditors, Tsipras arrived in St Petersburg earlier on Thursday for talks with Russian President Vladimir Putin and other officials. REUTERS/Maxim Shemetov

Athens (AFP) – The Greek central bank warned for the first time on Wednesday that the country could suffer a “painful” exit from the eurozone and even the EU if it fails to reach a bailout deal with international creditors.

The warning came as negotiations over the release of the last 7.2 billion euros ($8.1 billion) in rescue funds from Greece’s massive international bailout remained deadlocked, with payment deadlines looming.

All eyes are on a meeting of the 19 eurozone countries to take place Thursday in Luxembourg, but several officials including Greek Finance Minister Yanis Varoufakis said they were not expecting a breakthrough in the cash-for-reforms standoff there either.

Asked during a visit to Paris whether he thought an accord could be reached at the meeting of eurozone finance ministers in Luxembourg, he said late Wednesday: “I don’t think so. Now it is up to political leaders to arrive at an accord.”

In a sign the EU’s top financial brass are seriously considering the implications of a “Grexit”, the head of Germany’s central bank, Jens Weidmann, said it would “change the character of the monetary union” — but not destroy it.

And underscoring growing global concern about the crisis, US Federal Reserve Chair Janet Yellen warned the world economy could see significant turmoil if Greece and its creditors failed to do a deal.

“This is a very difficult situation. In the event that there is not agreement I do see the potential for disruptions that could affect the European economic outlook and global financial markets,” Yellen said.

– ‘Incomprehensible’ –

Elected on an anti-austerity platform in January, Greek Prime Minister Alexis Tsipras warned Wednesday that an EU “fixation” on pension cuts would scupper any hopes of reaching an agreement to avert a catastrophic default.

Tsipras said his government had gone as far as it could to meet the demands of the International Monetary Fund, European Union and European Central Bank for tax hikes and pension reform.

“There is no room for further cuts without affecting the core of the (pension) system,” Tsipras said after meeting with visiting Austrian Chancellor Werner Feymann, one of the few European leaders supporting Greece in the talks.

“If Europe insists on this incomprehensible fixation… it must accept the cost of a development that will benefit no one in Europe.”

In one of the starkest warnings from a Greek institution, the Bank of Greece said failure to reach an agreement would start “a painful course that would lead initially to a Greek default and ultimately to the country’s exit from the euro area and -– most likely -– from the European Union”.

Leaving the single currency would lead to a deep recession, dramatic declines in incomes and a spike in unemployment in the southern European nation, the bank said.

Greek bank deposits had already dropped by nearly 30 billion euros between December and April, to 128 billion euros, it said.

On the other side of the fence, Bundesbank chief Weidmann warned that while failure to reach a deal would cause some contagion, the eurozone did not depend on Greece.

“A Grexit could change the character of the monetary union,” he said in an interview with French, Italian and Spanish media. “But this also changes when individual countries do not live up to their responsibilities to ensure a stable currency.”

Responsibility for Greece’s future lies entirely with its government, he said, adding that the consequences of it leaving the euro “would be hard to control” for Athens.

The Athens stock exchange fell 3.15 percent on Wednesday, its fourth straight day in the red.

– ‘Democracy, Not Blackmail’ –

As the clock ticked down to key June 30 repayment deadlines, the head of the Eurogroup, Jeroen Dijsselbloem, said he was still working to keep Greece within the fold.

But the mounting pressure has frayed tempers, illustrated by a public falling out in recent days between Tsipras and European Commission chief Jean-Claude Juncker, who has accused the Greek premier of misleading Greek voters about the talks.

Both men briefly spoke by phone on Wednesday, a European official told AFP, their first contact since Sunday. They agreed to talk again “in coming days”, the source added.

Greece is due to make a 1.6 billion euro payment to the IMF at the end of the month, with another 6.7 billion euros due to the ECB in July and August — payments Greek officials say they cannot afford.

With his creditors saying his reform proposals are insufficient, Tsipras on Tuesday accused creditors of trying to “humiliate” his country.

Polls show most Greeks support the government’s negotiating strategy, though its approval rating has steadily fallen.

Some 7,000 people gathered in Athens on Wednesday evening to protest against the creditors’ demands for further cuts, police said. In a show of support for the government, protesters carried banners reading: “End Austerity” and “Democracy, Not Blackmail”.

Tsipras is set to travel to the St Petersburg International Economic Forum on Thursday and is scheduled to hold talks with President Vladimir Putin on Friday.

Although the Russian government has stressed that Greece has never requested direct financial aid, observers say Tsipras is trying to send a message to Europe that he still has other cards to play.

FORBES: Greek Bailout Deal A Farce To Benefit Banks At The Expense Of Greece

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Greek Prime Minister Alexis Tsipras

 

 

Greek Bailout Deal A Farce To Benefit Banks At The Expense Of Greece

Forbes’ Augustino Fontevechia, who covers power and money for the magazine, has said that “As it stands right now, the Greek bailout and debt deal agreed by European Finance Ministers is a farce, a program designed to pay Greece’s international creditors and buy time to somehow engineer growth in a completely uncompetitive economic environment.”

A leaked internal Troika memo proves that even under a relatively optimistic scenario, Greek debt-to-GDP levels would only fall to 129% by 2020 and could remain as high as 160%, while financing needs would still exceed Greece’s capacity to pay, prompting German daily Der Spiegel to ask the EU to admit Greece is bankrupt and stop the bailout package.

On Tuesday, the EU, the ECB, and the IMF – collectively known as the Troika – agreed to a €130 billion bailout package for Greece; this is the second bailout the Hellenic Republic gets after a €110 billion package approved in May 2010 .  Markets essentially yawned.  The bailout comes with conditions of further austerity, expectations that a “voluntary” debt restructuring (PSI) goes through, and promises that debt-to-GDP levels will be brought down to the arbitrarily sustainable figure of 120%.

Only six days before, on February 15, the same authorities that agreed to give the bankrupt Hellenic Republic another bailout warned that their own conditions wouldn’t be met, begging the question as to what the actual value of this “can-kicking” experiment is.  In a “strictly confidential” memo titled Greece: Preliminary Debt Sustainability Analysis, Troika researchers note that debt-to-GDP levels will remain well above the 120% mark, that “additional debt relief from the official or private sectors” will probably be needed, and that “prolonged financial support […] by the official sector may be necessary.” (To see the memo, go to this article on FT Alphaville).

From the memo:

“There is a fundamental tension between the program objectives of reducing debt and improving competitiveness, in that the internal devaluation needed to restore Greece competitiveness will inevitably lead to a higher debt to GDP ratio in the near term. In this context, a scenario of particular concern involves internal devaluation through deeper recession (due to continued delays with structural reforms and with fiscal policy and privatization implementation). This would result in a much higher debt trajectory, leaving debt as high as 160 percent of GDP in 2020. Given the risks, the Greek program may thus remain accident-prone, with questions about sustainability hanging over it.

Rickens makes a strong point.  “How else,” he asks, “can one explain the fact that around a quarter of the package won’t even arrive in Athens but will flow directly to the country’s international creditors?”  He explains that about €30 billion will go to holders of Greek government bonds “as an incentive to convert old paper into new bonds.”

The reasoning is simple: the financial sector is trying to keep alive the illusion that Greece isn’t bankrupt, “cleverly manipulating the fear that a Greek bankruptcy would trigger a fatal chain reaction” in order to get paid.

Greece is indeed broke, and the reason why all the bailout money being thrown into the pot should isn’t being used to foster competitiveness and help the country get back on its feet is because this bailout isn’t actually going to fix Greece: rather, it’s an attempt to buy time so that it doesn’t become Germany, France, and the rest of the EU’s problem.

Private investors can say they are “voluntarily” forgiving about 70% of the debt (according to net present value calculations by Barclays), but they are getting paid while Greece falls deeper into what already is a 5-year recession.  Among the largest IIF creditors involved in the discussion are the National Bank of Greece, BNP Paribas, Commerzbank, Deutsche Bank, Intesa San Paolo, ING, Allianz, and AXA, according to BusinessWeek.  Major US institutions like JPMorgan Chase, Citigroup, and Bank of America have a substantially smaller exposure to Greece.  While there is nothing wrong in creditors protecting their capital, policymakers appear to have decided on their behalf at the expense of the Greek economy.

Troika estimates show that Eurozone bank recapitalization needs have increased to about €50 billion.  It also suggests that given the PSI, Greece’s capacity to access capital markets has fallen dramatically, forcing it to rely on official sector help to avoid a default to the magnitude of around €50 billion from 2015 to 2020 “before actions to reduce debt.”  Privatizations and asset sales will deliver substantially less funds than previously anticipated and it will probably take Greece a lot longer to take its primary surplus to sustainable levels from the -1% projected for 2012, according to the memo.

It is clear from the official study that the current deal is definitely broken, the question is how it’s broken and why it’s going through anyways.  According to Der Spiegel’s Christian Rickens, the second bailout package “isn’t geared to the requirements of the people of Greece but to the needs of the international financial markets, meaning the banks.”

Greece’s ruling Syriza party’ Left Platform have proposed a default on the country’s international debts and the nationalization of its banks.

The Daily Telegraph reported that a confidential plan for an “Icelandic-style default” will be put forward in the next few days by members of Syriza’s Aristeri Platforma (Left Platform) and has gained the support of at least 30 MPs.

The example of Iceland, which in late 2008 nationalized its three biggest banks when they defaulted on assets worth 10 times more than the country’s annual economic output, is being cited as a potential path for Greece to follow.

Since its catastrophic collapse, Iceland has slowly recovered, with its economy growing each year since 2011 and economists predicting a 3% increase this year.

Negotiations between Greece and its international creditors – the International Monetary Fund, the European Central Bank and the European Commission – broke down again this weekend, causing Greek stocks to fall by 5% on Monday.

Greece owes the IMF a further €1.5bn before the end of the month, with €452m and €3.5bn due to the IMF and ECB, respectively, in July. [ However, the bailout billions given to Greece was used to bailout the Deutch Bank and its creditors.]

The new proposals, which reportedly would also be backed by the nationalist ANEL party which is in coalition with Syriza, would likely be accompanied by a return to the drachma and thus almost certainly necessitate an exit from the eurozone.

It would involve the creation of a sovereign central bank to prop up the new financial system. This would function as a so-called ‘bad bank’, into which Greece could shift its illiquid and high-risk securities to reduce uncertainty and get its financial system back on track.

It would also entail the imposition of capital controls – restrictions on the amount of money which can be withdrawn and transferred from banks. In Cyprus, where capital controls were implemented in 2013, cash withdrawals were limited to €300 per day.

Greek prime minister Alexis Tsipras is holding out for a deal with the country’s European creditors and is striving to hold his party together by rejecting the international creditors’ demands to slash wages and pensions.

Raoul Ruparel, co-director of London-based policy thinktank Open Europe, says that while the balance remains slightly in favour of staying in, the future of the party is hanging in the balance as support for Grexit continues to grow.

“Quite a large swathe of the hard left in Syriza are considering now whether Grexit is a better option,” says Ruparel. “If Tsipras put a deal on the table which is basically what the eurozone wants, it would be very hard for him to hold his party together.”

A key difference between Iceland and Greece is that Reykjavik has its own currency, the Icelandic krona, which it allowed to depreciate drastically in order to boost exporters’ competitiveness.

The krona’s value is still 30% below pre-crisis levels while export volumes are 10% higher than they were at the end of 2007. The tourism industry, which is similarly important in Greece, has done particularly well, with visits increasing by more than 300,000 between 2008 and 2014.

However, Ruparel says that if it were to follow the Icelandic path, Greece would still have to undergo tough austerity measures. By some estimates, Iceland has engaged in 30% more austerity than Ireland and double that of the UK.

“Iceland has done a huge amount of austerity itself. So it’s [currency] devaluation wasn’t a question of that instead of austerity, it was both default and devaluation as well as austerity,” says Ruparel.

Greek negotiators will meet again with their international counterparts on Thursday in a bid to hammer out adequate reforms to unlock the next tranche of IMF funding before the 30 June deadline, when Athens’ current bailout deal expires.

Iceland Shows Other Europeans How to Survive Bankruptcy

Greece’s Prime Minister Alexei Tsipras – June 5, 2015

Taxpayers in Europe (and the United States) who have been terrorized since 2008 by government officials warning about economic armageddon, catastrophe, and pestilence should look to tiny Iceland for a taste of how little there is to fear when the experts can’t save the people.

Christine Lagarde, managing director of the International Monetary Fund, recently branded Iceland’s economic performance “impressive.” In the last few years the small island in the north Atlantic has managed to shrink its deficit, reduce unemployment, and allow its economy to grow. [ Well, that means the IMF’s “austerity” reforms don’t work ]

Meanwhile, on mainland Europe, there is hardly any economic growth to be seen, and countries that pledged to make necessary austerity reforms have almost certainly failed to do so.

Government growth, fiscal activism, and national resentment are the norm. Officials from the eurozone have been trying to help heavily-indebted nations like Greece, Portugal, and Italy avoid banking-system collapse and exit from the single currency. Were they to examine Iceland’s example they might find that temporary financial collapse and monetary sovereignty provide a better roadmap to economic recovery than bailouts backed up by unpopular and unenforceable “austerity” conditions.

Iceland, like the rest of Europe, was faced with an almost unprecedented economic situation in 2008. Iceland’s central bank tried to rescue some of the country’s largest banks, bankrupting itself in the process. Iceland’s largest banks held almost 10 times Iceland’s GDP in assets (much of it foreign) in 2008. The central bank was forced to attempt the rescue after agreeing to guarantee future bailouts in 2001. With the central bank out of commission and a crippled financial sector, Iceland’s GDP took a nosedive.

Because so many of the assets held by Icelandic banks were foreign, the diplomatic fallout was almost as severe as the economic one. The British prime minister at the time, Gordon Brown, invoked anti-terrorism legislation in a bid to freeze assets of one Icelandic bank in the United Kingdom.

[But who are the real terrorists in this case: IMF, British Prime Minister, the European Central Bank, and the European Union? ]

 Iceland’s GDP per capita (in current U.S. dollars) was a little over $65,500 in 2007; in 2009 it was almost $38,000. It would be cruel to overlook the effect a sudden loss in wealth like this had on the average Icelander’s economic well-being. Having investments you thought were safe vanish is unfortunate at best and tragic at worst. However, the economic future of young Icelanders will almost certainly be substantially better than that of their peers in Greece.

Icelanders will do better than Greeks precisely because financial institutions collapsed in Iceland, ironically in part because of mechanisms in place requiring bailouts from the Icelandic Central Bank. Economic collapse allowed for proper refinancing. Greece has suffered from too much attention, and because of all of that attention, the actual size of the Greek economy has been forgotten.

Greece’s GDP is roughly the size of Maryland’s, about $300 billion. The eurozone as a whole has a GDP of almost $12 trillion. Figures like these only highlight the strictly political motiviations behind the attempted rescue of Greece by the rest of the eurozone. Certainly, a Greek exit from the eurozone would be a major event. However, Iceland’s example shows that letting financial institutions fail allows for strong and comparatively quick recoveries following a period of economic hardship.

Unsurprisingly, government attempts to fix the European financial crisis have made the situation worse and humiliated the most affected countries the most severely. Had Greece been left to default on its debt and leave the eurozone early, the effects, economic and political, would have been much less dire in comparison to the effect of a Greek exit now. What is forgotten about the example of Iceland is that although the initial international reaction to Iceland’s collapse was anger, the country’s reputation recovered. The animosity brewing between the Greeks and other Europeans (especially Germans) will not diminish within a matter of months. Too often the cultural changes that are happening in Europe are overshadowed by the economic fiasco.

The comparison between Greece and Iceland is not perfect. If Greek GDP, at $300 billion, puts it on par with the Old Line State, Iceland’s, at just $15 billion, puts the island nation below even Vermont, the U.S. state with the lowest GDP. But so what? The economic stagnation caused by Too Big To Fail, of which the Euro “crisis” is only the most monstrous example, resulted from policymakers believing that the same math you know to be true at the local level does not apply at the macro level. The central bankers are wrong about that, and the example of Iceland provides Greece and the rest of mainland Europe with a valuable example.

Unfortunately, it looks like it will be a lesson learned in hindsight. How severe the effects of fiscal and monetary activism will be on the eurozone will depend in part on how quickly continental policymakers can abandon their political agenda and focus on the economics.