What If There is No Deal on Greece?

A resolution of the Greek impasse still looks remote, particularly given that Angela Merkel, in a speech to Parliament this morning, made all sorts of apple pie and motherhood statements about the importance of the Eurozone, but nevertheless pointed to the need for Greece to make concessions: “When the politicians in Greece muster this will, then an agreement with the three institutions is still possible.”

The alarming part of the deadlock is the lack of a plan on the creditor side to develop a Plan B, a sort of mirror image of the Greek government’s claim that its has bet everything on securing a favorable agreement. Even if the ECB has been gaming out scenarios (as was rumored as early as February), it can only do so much unilaterally. The Eurozone crisis is on the verge of entering a phase where a common view among different governments and institutions is necessary before any concerted action can take place. Even allowing for a relatively quick agreement on preliminary steps, there is still a ton of moving parts, as well as the near certainty of continued high friction with Greece.

A Eurogroup meeting today is expected to be short and inconclusive. Finance minister meetings extend into Friday, with all EU members attending. That may allow for further discussion, but it’s hard to see how anything more could emerge than a very high level agreement on a few principles, like “We need to develop a plan for how to keep Greece in the Eurozone if it defaults” and maybe also “We need to get serious about preparing for what happens in the event of a Grexit” (a variant might be “Can/should we assist Greece with a Grexit?” I think the latter is too hard to accomplish given the short timeframe and the fact that Greece would have to trust and rely on foreign technocrats, ironically including the IMF, which allegedly has the most technical expertise).

It is possible that as a result of the Thursday/Friday meetings, the Eurocrats hit the panic button and try to extend the bailout, which is set to expire June 30 (June 21 appears to be the last viable emergency meeting date). But that was offered to Greece before, with the condition that it agree to crossing its red lines of pension and labor market “reforms”. We keep coming up against each side’s boundary conditions. It’s career suicide in too many countries for politicians to vote through a deal with Greece with no pension reductions, and far too little time to soften public opinion by June 30.

The ball moves into the ECB’s court after a bailout expiration/IMF non-payment. Other lenders to Greece apparently do not have cross-default clauses with IMF debt, so the immediate impact of an IMF missed payment (the term of art is “arrearage”) is the blow to confidence, a bar on new IMF lending, and a reduction in the quality of the collateral pledged to the ECB for loans under the ELA, particularly Greek government debt (which is a comparatively small portion of total collateral). Note that the Eurozone member states, many of which are lenders through the European Financial Stability Fund and the Greek loan facility, won’t suffer any immediate impact. As Bloomberg notes:

No European state will be unable to balance its budget because of missing Greek interest payments, which have already been deferred by 10 years and would in any case be linked to the European Financial Stability Facility’s minuscule funding costs.

The bank run is certain to accelerate in anticipation of an IMF non-payment and immediately thereafter. So the liquidity demands will rise as the ECB will have every reason to impose higher haircuts on collateral, moving the banking system closer to the end of its ELA runway. Draghi stressed in his presentation to the EU parliament earlier this week that the ECB was a rules-based institution and would keep providing support to Greek banks as long as they were solvent and had collateral against which to lend. The Greek banks are deemed to be solvent by the ECB despite the fact that they clearly aren’t. And their underlying insolvency is getting worse. From a different Bloomberg story:

Greek banks, which received two capital infusions in the past two years, may need a third one as a recession drives up losses from bad loans.

The four biggest lenders, accounting for 91 percent of the country’s banking assets, could see their 12 billion euros ($14 billion) of tangible core capital wiped out by mounting provisions as overdue and restructured loans default.

Even if Greece reaches an agreement with European creditors to free up additional money, its next bailout will need to include a new round of funding for the ailing banks.

Bad loans rose last quarter as the economy slipped back into recession and Greeks delayed payments waiting for the new government to pardon debt. With the recovery stalled, the four banks — National Bank of Greece SA, Piraeus Bank SA, Alpha Bank AE and Eurobank Ergasias SA — could require 16 billion euros in additional provisions to cover losses if half of the 59 billion euros of overdue and restructured loans on their books sour.

While the ECB could in theory cut off the ELA air supply on June 30, the complexity of the situation, plus its “rule driven” message seems to signal that it will wait to act until it has a clear cut cause. But going past the June 30 event horizon means Greece will be under more pressure to introduce capital controls, particularly since experts have estimated that Greek banks will run out of collateral eligible for the ELA sometime in July, and that was before allowing for the possibility of increased haircuts on collateral as a result of the IMF arrearage. That is not a pretty picture. From the Financial Times:

If the bailout expires and Greece fails to make the IMF payment — but the ECB decides emergency loans to Greek banks can continue — Greece enters what Mario Draghi, ECB president, recently called “uncharted territory”. An economy hamstrung by capital controls, a government without any cash and a banking system struggling on life support, Greece would essentially begin a drawn-out process of economic suffocation.

And while imposing capital controls will help with liquidity (as in access to the ELA), it will further erode solvency. Back to Bloomberg:

As Greece and its creditors head for a showdown, the specter of the country’s exit from the euro or the imposition of capital controls is rising. The latter would try to halt the deposit flight from the banking system by restricting cash withdrawals and money transfers abroad. Such controls could hurt the economy more as importers face difficulty paying suppliers and consumers without full access to their savings cut spending. That could further sap borrowers’ ability to pay and speed up the rise in bad loans.

Greece has two payments due to the IMF on June 20 that total €3.5 billion. The Financial Times contends that “it would be virtually impossible for Greece to survive inside the eurozone if it defaulted on the ECB.” Analyst David Zervos of Jeffries (hat tip Scott) claims that an default against ECB would make all Greek collateral ineligible for Eurosystem loans. I’ve tried verifying that and have come up empty.

But independent of when the ECB decides to pull the trigger, Zervos gives an idea of how brutal the process is (and recall this sort of threat was what drove Ireland to assume responsibility for its banks even though there was no government guarantee). You need to read past Zervos’ schadenfreude; a more borrower-friendly writeup in Tagesspiegel of how the ECB executed the Cyprus bail-in made it clear that the central bank had planned its moves carefully and left Cyprus with no good escape routes. From Zervos:

And to be sure, making an example of Greece is a probably the greatest achievement for the fiscal disciplinarians of Europe. Maastricht never had any teeth. But this exercise is impressive. It shows that fiscal excess will be squashed in Europe. The Portuguese, Spanish and Italians are surely taking notice. And in the days that lead up to a Greek default on 30 June, and then more importantly on 20 July, these disciplinarians will surely display their power for all to see. Oddly enough, I actually think this has been the German plan all along. With no real way to ensure fiscal discipline through the treaty, they resorted to killing one of their own in order to keep the masses in line. It explains why Merkel took out Samaras when she knew a more hostile government would surely emerge in Greece. This was masterful political manipulation.

In any case, enough about the past, let’s run through the most likely end game for this Greek saga as a deal never gets agreed before default.

1. Greece misses its IMF payment on the 30th of June. This could be a trigger but it may not be. The IMF has 30 days to call Greece in arrears so technically Greek government guaranteed collateral, and hence the Greek banks, are still solvent after the 30th. However on the 20th of July the Greeks will surely default to the ECB without a deal. This is the official d day.

2. Upon default, the collateral at Greek banks cannot be posted any longer to the Euro system. The Greek banks then become insolvent and the ECB, through the newly created Single Resolution Mechanism (SRM), is obligated to resolve the Greek banks.

3. So the ECB goes to Tsipras and tells him – we are immediately instituting capital controls and we will begin resolution of your banks unless u sign the agreement and re-enter a program. Without a bailout program in place the Greek government, and banking system, are both insolvent. So Tsipras says – what do you mean resolve my banking system? And then Mario explains as follows. First we wipe out all equity and bond holders. And then, as in Cyprus, we bail in depositors. There are 130b in Greek deposits against 90b in ELA. And while those deposits are technically insured up to 100,000 euro, there is no pan European bank insurance yet in place. That only comes in 2016. Right now Greek deposits are only insured with a Greek deposit insurance fund that has about 3b in it. This Is hardly enough for the 130b in deposits. So we take the 130b against the 90b in ela. Any remaining deposits go to fund a bad bank that begins resolving all the NPLs. The good loans of course will go into a good bank which will be funded with German capital and most likely will have a German name. Of course depositors will get 2 to 3 euro cents on the dollar for their existing balances from the 3bio in the insurance fund. So you have that going for you!

4. Tsipras hyperventilates and quickly reaches for a bottle of ouzo.

5. Then it’s basically time for the gallows. He either signs a document cutting pensions, raising VAT and violating all his red lines. Or he takes the Greek people into bankruptcy and out of the euro. Either way he is a dead man. His own party destroys him if he does the former. And the 70 percent of Greek who want to stay in the euro destroy him if he does the latter. Of course there is one other choice for Tsipras. He could just resign and call for new elections. In that case maybe the banks stay closed and the ECB does not start the resolution process until the Greek people decide what they want. But in any event, it’s over for Tsipras in that case as well.

The German fiscal disciplinarians have won the battle. Tsipras dies under that bridge. The end!

We warned readers that the creditors had implements of torture that they had yet to deploy. The forced choice of a bail-in versus a Grexit is the ugliest, but the fact that the ECB has used this weapon before (under its “we’re just following the rules” excuse) means it might resort to it again. Since this post is already long, we will save the description of some of the other possible discipline mechanisms for future discussions.

What about a default in the Eurozone? The big impediments to the ECB going down the path above is concern that it can’t contain financial contagion after a Grexit and not wanting to buck EU political leaders who are correctly worried about political contagion. But other roads are hard to clear. I’ve read twice the most definitive legal brief on this matter, a 2009 ECB paper, which tooth-gnashes over ambiguities in the treaties. One of its firmer conclusions is that a Eurozone exit means an EU exit, and Varoufakis also seemed to be of that view (he has mentioned the loss of EU subsidies, particularly agricultural subsidies, as one of the many reasons to shun a Grexit).

The consensus is moving away from our initial view, that the best solution for Greece is a default in the Eurozone. The problem is that the country remains in what I’ve called the creditor sweatbox, without a primary surplus due to the deterioration of its economy. It has to pay pensioners and government employees in scrip. Even if the Eurocrats tolerate that (and my guess is they will), this will put the Greek economy in even more duress and damage the ruling coalition’s credibility. This state is probably not sustainable for more than a period of months. The creditor hope would be that Tsipras has to form a new coalition, and the result would be a more tractable negotiating counterparty. Most observers think that default morphs into a Grexit; but if the creditors have steeled themselves to that risk, they have little to lose if they can keep Greece in a zombie state and see what happens next.

Even if the creditors decide to be more generous, it’s hard to make that work. A Politico article today gives a high-level overview of how messy the legals issues are. On the one hand, that means some can probably be fudged, but even fudging takes time, and that means more uncertainty for Greece, which in turn hurts its economy and isn’t so hot for the rest of Europe either (except for making the euro cheaper).

The worry is that European law could force Greece to abandon the EU before it can leave the eurozone.

At a time when anti-EU parties are on the rise across much of the Continent and the U.K. is debating its future in the union, Europe’s leaders don’t want to risk letting Greece go…

Greece’s Central Bank, in rare public comments Wednesday on the crisis, echoed those fears, warning that a default would force Greece from the euro and “most likely from the European Union.”

From a legal standpoint, however, Greece would still be a member. Even if a country violates the treaty, there’s no mechanism for kicking it out.

Yves here. While that is true, there is a mechanism for suspending membership in the EU. Back to the Politico article:

Europe has a long history of giving political expediency precedence over the fine print. Both the U.K. and Denmark, for example, were granted exceptions to a requirement that EU members eventually join the euro. Why not let Greece leave the euro and stay in the EU, advocates of a compromise argue.

If Greece defaults, it will have left European taxpayers holding the bag for more than €200 billion in aid. Offering Greece a special arrangement is likely to cause a further outcry in Germany and other EU countries

So while there may be a remedy, financial time moves faster than political time, making it much harder to reach consensus on any “don’t cut off your nose to spite your face” options to give Greece a glide path.

What about Russia? We’ve argued that the idea that Greece will get a rescue from Russia is overdone. Putin has signaled that he is not overly eager, even bothering to make clear that certain contacts were initiated by Greek officials, not Russia. There’s an old saying in finance, that you don’t buy on the courthouse steps (on the verge of bankruptcy) if you can get it cheaper after bankruptcy. Anything Putin might want from Greece he can get at lower cost later….if he can get it at all.

The reason we doubt the concerns voiced about Greece slipping into Russia’s orbit is that the US, which is treating Putin as Public Enemy Number One, isn’t worried enough about it to cudgel the Europeans into being less bloodyminded in the Greek negotiations. Even Guntram Wolff at Bruegel, a card carrying believer in austerity, argues that the primary surplus targets that the creditors are seeking are unproductively high. Perhaps the US believes it can give Turkey rope to discipline Greece if it gets too cozy with Russia.

But the objective risk of a new Greece-Russia alliance is not what will drive European reactions. It is whether Europeans are worried enough about this risk to change course. Despite the fact that this issue is mentioned regularly in the mainstream press, Merkel has also not moved her position meaningfully regarding Greece either since deciding to back the IMF two and a half weeks ago. And Merkel likes Putin about as little as Obama does.

Now Merkel is in a tough position with her coalition on Greece and she may be doing a lot of behind the scenes arm-twisting, and the Russia card is probably her best leverage point to bring other countries along. But at this juncture, the fear of Russia getting a foothold seems secondary to domestic political considerations.

I must confess to being fried by following this drama so closely, and the idea that this could go on another month or even longer is draining. Imagine how the officials involved feel. Frayed nerves and exhaustion increase the already high odds of bad decisions and impulsive action.

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  1. NeilA

    Is it possible there is a plan b which has been formulated but they will not mention it as admitting it is a possibility might weaken their hand in negotiation?

    1. Yves Smith Post author

      First, the Greek government leaks like crazy.

      Second, it would be extremely hard to conceal preparations for a default or a Grexit. And number one would have been imposing some capital controls which they should have done as soon as they took office (it would have improved their negotiating position and slowed the bank run).

      Third, sources close to the Greek government say they see no signs of any thought along those lines, that the officials are completely fixated on the negotiations and not on the bigger picture. The one exception is I have been told that they have spoken to experts about parallel currencies, but that’s as much part of Plan A (conserving scarce funds) as a relatively easy to implement piece of a Plan B.

      1. Synoia

        completely fixated on the negotiations and not on the bigger picture

        Ah! The plan with the milestone “Then a Miracle Occurs.”

        Obvious one of the best form of plans, given the abundant supply of miracles.

      2. kemal erdogan

        Yves, If the ECB can bail in the depositors, isn’t it better to let the bank run to continue? If the banks run dry, ECB threats would have a lot less effect. What am I missing?

        1. Nathan Tankus

          a bail in is making a bank solvent by reducing the value of deposits (liabilities of banks) until the bank’s net worth is positive. This would be very politically destructive for Syriza. the continuous bank run means that the remaining depositors will have their deposits written down even more than they otherwise would.

          1. kemal erdogan

            Thanks Nathan for the explanation. My question was rather what would happen if most private citizens and companies take their money from the banks i.e literally leaving banks dry.

            I know that most medium to large companies need to keep some money in banks for clearing their payments and receipts. But, the Greek government can inform (or a tip if open declaration is deemed bad publicity) everyone that they will impose capital controls in a week, allowing everyone to think what to do with their money. EU already have a very effective and practically free cross-border electronic transfer system that allows any company in the EU to work with any bank in the EU. They can, then, shift those working accounts to abroad along with their other deposits.

            This is not a rhetorical question: what can ECB do against that?

            1. Nathan Tankus

              all Deposits can only leave the country if ELA assistance increases. They can simply stop ELA and essentially freeze international payments for an indefinite time period.

              In a rational modern banking system this would never happen because making sure that all insured bank liabilities trade at par is crucial to a modern monetary system but the Eurosystem is one of the least rational central banking systems around.

              1. HotFlash

                but the Eurosystem is one of the least rational central banking systems around.

                OK then! Nathan, this is invaluable information. Thank you.

              2. ian

                Ok, but what if you are a small depositor. How are you hurt if you get your money out in the form of real Euro bank notes? If I were Greek, that is exactly what I would be thinking.

                1. H. Alexander Ivey

                  Take your credit cards and shredded them. Take your check book and burn it. Take all your money out of the bank.

                  Now live for a week paying for everything with cash – good luck with the utilities bills, or credit card loans, etc.

                  Now you will see what happens with a bank run.

              3. kemal erdogan

                Thanks Nathan, so it seems it has always been better for the Greeks to drag their feet to allow their citizens and companies to transfer their money while they can.

                It also means that ECB must move before the Greeks which would allow the Greek government to blame the ECB for an Grexit.

            2. Bill

              “My question was rather what would happen if most private citizens and companies take their money from the banks i.e literally leaving banks dry. ”

              This what they are afraid of and the reasoning behind ‘cashless’, as there isn’t enough cash in circulation. As finances are getting tight, banks now need to charge for ‘deposits’, this, [in real world] would lead to people withdrawing their money, so the plan is to ban cash. Already started in Louisiana, US, it’s illegal to buy ‘used goods’ with cash?
              This will entail a ‘virtual’ currency, much like ‘on-line bingo and poker’, and people will be issued ‘units’. Imagine the control banks will have with this? I would advise everyone to withdraw their money NOW, just leave enough each month to cover D/D’s, otherwise they ‘walk all over us’!

              1. Thomas W. Headley

                Digital money is still cash as a means of exchange. It can be tracked & taxed. Not as many trees to chop.

      3. Susan Pizzo

        Ummm – key players have been pretty straight forward about some contingency measures:

        “If things go badly for Greece, finance minister Yanis Varoufakis has said he would consider creating a parallel digital currency, using Bitcoin’s digital security and transparency, but doing the exact opposite of what the money fundamentalists intend.”


        Socializing banks, issuing a virtual currency utilizing phone apps and debit cards, and litigating Greece’s odious debt to prove the neoliberal emperor has no clothes could be global, epochal game changers. I look forward to hearing more from Professor Hudson on these and related subjects.

      4. Bill

        “The one exception is I have been told that they have spoken to experts about parallel currencies, but that’s as much part of Plan A ”

        Surely this is merely a ‘ruse’ to avoid using the term ‘Default’, therefore allowing Goldman Sachs to get away with their terms of CDS?

        1. David

          I suspect that even complete and utter repudiation of all debts will be redefined to avoid triggering a CDS event. The big US and European banks probably have written billions of euros worth of CDS to rake in easy money thinking that a default would never happen. If one actually did happen on the scale of Greece the losses would be huge considering the fact that derivatives are magnitudes larger than the real global economy. Then it might not be where you think that the breaks happen. It could be in the counter party risk.

          If Germany pushes the Syriza to an election and they lose to anti austerity and anti EU Neo Fascist party Golden Dawn it will become Merkels legacy.

          1. Yves Smith Post author

            No, the sovereign debt market on CDS is REALLY small. And past CDS events (the global financial crisis of 2007-2008 was more than anything else a CDS event, which is not widely understood, ECONNED provides the math on the exposures) did NOT provide for the repudiation of the debt on which it was written. subprime mortgage bonds. In fact (and this was the opposite of what happened in the days when banks owned mortgages, as opposed to sold them into securitizations), borrowers who were viable (as in still had some income) didn’t even get modifications (what in the sovereign or corporate debt context would be called a restructuring or renegotiation). They were foreclosed upon and lost their homes. This was despite the fact, as we wrote about at great length at the time, that the people who had set up the securitizations had failed so badly at performing the steps necessary to get the mortgage to the securitization trust that the servicer (who nominally worked for the investors but actually cared only about his own fees and so abused investors too) should not have been able to foreclose (as in the trust never got the mortgage, it was stuck in some nebulous legal state, and the trusts were designed to be so rigid from a legal perspective that there was no way to go back and fix it).

            Some borrowers were winning cases using that argument. So the Administration and 49 states pushed through a mortgage “settlement” that made sure state attorneys general (who were staring to take interest in this issue) wouldn’t go after it. Borrowers fighting foreclosures by definition are broke, which means attorneys fighting foreclosures could barely make a living, so there were only a few who were giving good representation for these cases. And the legal theory, although sound, was so complicated that most foreclosure judges didn’t want to deal with it (they don’t like it when a defense attorney for what to them looks like a deadbeat borrower makes them feel stupid and asks them to work hard).

            So that’s a long winded way of saying no way will this happen. And that’s before you get to the fact that it is private investors who run the ISDA panel, not governments, and vulture investor Paul Singer, who is on the ISDA board. ISDA decides what determines a credit event. No way is that being changed in any meaningful way. It’s embodied in tons of outstanding contracts and for the most part clearly defined. You can’t wave a magic wand and change private contract law by fiat except at most on a jurisdiction-specific basis (the Greek government, in the event of a Grexit, passing a law that all contracts entered into in Greece and were subject to Greek law were now in euros, not drachma. Even so, expect that provision to be effectively unenforceable in a lot of cases. For instance, if a pharmacy has a contract to buy medicines from a drug distributor, the effort to redenominate the prices into drachma won’t work. The supplier will just refuse to ship and the pharmacy will have to enter into a new agreement. It will cost it time to get the new contract and in the meantime, it won’t get getting any product to sell, so it will suffer financially).

            Anyway, Paul Singer has managed to get ISDA to make determinations that are favorable to him on sovereign vulture debt bets like Argentina. So CDS rules are not your friend.

  2. Synoia

    Perhaps the US believes it can give Turkey rope to discipline Greece if it gets too cozy with Russia.

    That would cause a war. And would be very unwise given Erdogan’s Imperial ambitions.

    New Ottoman Empire? The last one, and its Muslim precursors, fought with Europe for hundreds of years.

    1. digi_owl

      WIth ISIS on the other side of the Turkey/Syria border? Even DC can’t be that blinkered?!

      Nor do i think Erdogan would play ball, because if ISIS don’t seize the initiative the Kurds likely will.

  3. Michael Hudson

    Well, Yves, I’m not going to leak.
    But I am getting on the 8:55 PM plane to Athens tonight to spend the weekend discussing how to resolve the problem.
    Hint: No payment. The IMF economists themselves said in 2011 that Greece could not pay. Strauss-Kahn overruled the staff economists AND the Board.
    If the ECB wrecks the Greek banks, it will clear the way for a socialized banking system afresh, with the Treasury financing public spending (but not debt service to the troika).
    I doubt that the EU will expel Greece from the eurozone because the IMF and ECB made bad loans in the past.

    1. Yves Smith Post author

      The EU cannot expel Greece from the Eurozone or EU. It can only suspend membership. And that could actually be worse. They can vote to revoke all of Greece’s benefits of the EU but still require Greece to meet its obligations to the EU.

      The ECB as se discussed can force a de facto Grexit.

      This is awfully late in the game to be thinking about Plan B. And not paying is not an option. Greece can default and enter into restructuring negotiations, but if it tries not paying at all, it invites the creditors to impose economic sanctions. They could start with suspending EU membership, which would mean the loss of over 2.5% of GDP in subsidies. I don’t think that would be their first move, they’d probably so something more incremental unless the officialdom was already behind having the ECB lower the hammer when it thinks the moment is ripe.

      I must also remind you that you e-mailed me in early May, that you had inside information, and that I had been too pessimistic about a deal. That inside reading did not prove to be accurate.

      1. which is worse - bankers or terrorists

        This exchange between Yves and Michael just shows why this is quite possibly the best blog on the internet.

        “If the ECB wrecks the Greek banks, it will clear the way for a socialized banking system afresh, with the Treasury financing public spending (but not debt service to the troika).”

        I don’t have any professional experience with this but negotiate quite a bit and deal with political strategy. I always wondered if part of the Syriza’s goal is to wipe out the existing banking system, which has the effect of wiping out the existing elite. Thoughts?

        1. Lexington

          I always wondered if part of the Syriza’s goal is to wipe out the existing banking system, which has the effect of wiping out the existing elite.

          You think Varoufakis became finance minister for the purpose of wiping himself out? And that’s why he’s been throwing cold water on the idea of a Grexit since day one?

          1. which is worse - bankers or terrorists

            I’m saying that ultimately there will have to be a banking system, but it can be with Syriza ‘s buddies, not Samaras’ buddies.

            1. OpenThePodBayDoorsHAL

              One thing is clear, the Greeks must be made to suffer, pour encourager les autres: Spain, Portugal, etc.
              I think they’ve suffered enough but Brussels seems to be just warming up.
              Illinois is next, the D.C./Wall St Citadel of Corruption must squeeze the debtors to the last drop of blood. They’ve got tax haven billionaires to answer to, ready with their escape islands after the last debtor expires.
              Texas is fighting back, repatriating their gold from the Citadel to the Republic of Tejas, nice move. Kyle Bass took delivery of $5 million in nickels, performing his duty as a fiduciary. How many other fiduciaries are not doing theirs, holding obligations that mathematically can never be repaid? For the moment they can be rolled, but we’re at the zero bound, only one direction from here.

            2. Jim

              Who are Syriaz’s buddies capable of helping to form a new monetary system?

              Total Speculation:

              Michael Hudson is going to Athens this evening. The Levy institute appears to have had a relationship/connection with prominent moderate members of Syriza.

              On the other hand Wilber Ross and Company (the distressed asset king) still, I believe, has a significant investment in Eurobank, although, I also believe, he had originally hoped that the former regime would make him a quick a few billion) had they won the last election and then made a deal with creditors. There is also a Toronto group called Fairfax Financial ( run by Premi Watsa, often called the Warren Buffet of Canada that may still have a significant investment in some of the top 4 Greek banks.

              Maybe this entire crowd could come together to potentially form a new banking system for Greece.

              If push comes to shove over the next month or so– a new government-bank arrangement will have to be made.

              1. Yves Smith Post author

                None of these people know anything about setting up and managing a banking organization or what it takes operationally to resolve banks. They are all economists!!! Rob is also a money manager, but that does not qualify him for that task either.

                Banks are actually hard to run. They are very high transaction environments which are fault intolerant. Mistakes in a payment system, Treasury operation, risk management, or back office and you can go bust very very quickly. That means you need lots of people who have highly developed and narrow expertise. That is NOT the same as “talent” although the industry would have you believe that that is what it amounts to. You cannot acquire that narrow expertise (save on some aspects of the IT systems) save having worked in the banking industry. Look, I’ve worked in and consulted to the financial services industry in an unusually broad range of functions. I don’t even begin to have the expertise to manage any of the high transaction volume or risk management functions.

                My big worry is that the Greek government and their advisors don’t know what they don’t know. That is guaranteed to lead to bad decisions.

          2. bILL

            I always wondered if part of the Syriza’s goal is to wipe out the existing banking system, which has the effect of wiping out the existing elite.”

            The ‘existing’ banking system needs wiping out, Russia, Hungary and Iceland have all thrown out the Rothschild bankers, Hitler did it after the Wiemar collapsed.
            When the Weimar Republic collapsed economically, it opened the door for the National Socialists to take power. Their first financial move was to issue their own state currency which was not borrowed from private central bankers. Freed from having to pay interest on the money in circulation, Germany blossomed and quickly began to rebuild its industry. The media called it “The German Miracle”. TIME magazine lionized Hitler for the amazing improvement in life for the German people and the explosion of German industry, and even named him TIME Magazine’s “Man Of The Year” in 1938.”

            1. Yves Smith Post author

              Um, Iceland prosecuted the top people at the banks that went bust. They most assuredly did NOT get rid of the banks themselves.

              Soviet Russia and Nazi Germany are not terribly positive precedents, in terms of outcomes for ordinary citizens.

        2. Disturbed Voter

          You know too much ;-) Yes, wipe out the existing Greek elite … well the part that isn’t hiding the Switzerland or the Caymans, right? Darwin award for … the less smart elites. There is no way to clean up banking corruption, without overthrowing every society on Earth, because of the interconnections and the “nod and wink”.

        3. Yves Smith Post author

          The financial wealth of the existing elite was moved out months ago. All that anyone has left in Greece proper is physical assets like real estate or businesses. The people who get hurt in a banking system failure are private citizens and businesses that can’t avoid having transaction balances at the banks.

          1. OpenThePodBayDoorsHAL

            So, just like 2009, the ones who will suffer are Mom and Pop Kalikanakis, after all you mustn’t interrupt the flow of caviar and champagne in Frankfurt and Brussels and Davos, (Oh the horror, what an inconvenience especially with that new signature series opening by Cartier next month, and did you remember to call the concierge at the second St. Barts house, tell her to fly in that same Thai massage expert for Pippy when she arrives?)

      2. drb48

        Yves – of course not paying is an option. They’re already not paying. The only money the creditors have been receiving is their own – which only adds to the total that they won’t get back. As I told you a while ago, if the Greeks can’t pay – and they can’t – then they won’t. Default was and is inevitable. There seems to be some faith – unsupported by evidence – that if the creditors can force the Greeks to accept enough austerity – particularly pension cuts – that they can then run a primary surplus, allowing them to pay back their debt. But those cuts come out of the Greek people’s pockets and will simply further reduce GDP – making it impossible to service their debt. Greek is already bankrupt, the creditors aren’t going to get their money and the sooner everyone acknowledges that and gets on with life after default, the better for all concerned. As for –

        The German fiscal disciplinarians have won the battle. Tsipras dies under that bridge. The end!

        They haven’t won shit that I can see. A new government in Greece won’t change the underlying reality. And all that fiscal weaponry you talk about would, if actually used, IMHO be likely drive more of the Greeks into the “let’s GTF out of the EU” camp rather than force them to capitulate and become slaves to the banksters for generations. The creditors have – I believe – over-played their hand. I guess we’ll find out in the coming days.

        1. stephen

          Yes, Yves gets caught up in negotiating tactics, when this is war by other means. He who has the most will wins. Of course the Greeks have the option of not paying. Do they have the will?

          1. drb48

            Their creditors have left with them with the option of dying on their feet or dying on their knees. Presented with that choice most people would choose the former. I doubt the Greeks are any different.

            1. JTMcPhee

              Too bad that unlike the Israelites, then and today, there is not the “Samson Option…” http://thehypertexts.com/Nakba%20Holocaust%20Palestinians%20Samson%20Option.htm

              …but maybe there is that ability to “take the whole world down with them,” in the way that some idiotic bunch of interconnected skullduggers catalyzed the long-in-the-making, very-profitable-for-a-vary-few, mortal-for-millions cataclysm we mopes called the “Great War…” https://en.wikipedia.org/wiki/Assassination_of_Archduke_Franz_Ferdinand_of_Austria
              (anyone not familiar with the details of that shemozzle, please read it all for a nice flavor of the complexity of the mess — kind of like “derivatives” with all the levers and moving parts and wagers built in.)

              Per Barbara Tuchman’s parsing of the history, the “peoples” of Europe and the US and so much else of the industrialized – izing planet. lost in their tribal and libertarian and oligarchic passions and dreams, were just ACHING for “it” to finally happen — hence the jubilant headlines, “IT’S WAR!,” in many capitals and many languages, on August 1, 1914. The Greeks may not be “prepared” for the outcome of another in our manifold human proofs of the primacy of axxident and error as the determinants of fate, but like a whole lot of the rest of us, along with their enemies in the rest of Europe and the world, they long for it, lust for it even, knowing the death wish that seems sort of inarguably at the heart of how our species interacts internally and with this frailer-than-it seemed planet…

              1. Lambert Strether

                Mass conscription and elite choices also has a lot to do with it; see Sleepwalkers. The title is very deceptive. Elite factions in all countries, very much including France, wanted war, and the jackstraws fell that way. Not so much a conspiracy as chauvanist mediocrities in Edwardian suits playing office politics with countries and lives. Reminiscent of our own day, fact. I should post some excerpts from that book, at some point.

                1. JTMcPhee

                  Agree of course on the point. Generals and suits in and out of titled “government” positions and banksters and lawyers and journalists and all the other Player categories all prepping for the same thing. And that was my point: everyone WANTED WAR, including the mopes who had been prepared by the propaganda for it.

                  And what is in our own little-person heart of hearts, I wonder? What are WE lusting for? There’s not a whole lot of talk about what constitutes a livable ethos that “we” should all be working toward, or what little pushes or tugs might be applied to the house of cards to get it to do a controlled collapse into a more stable configuration… There are remarks from people who are sort of privately and successfully working the system, with various “investment strategies,” and of course there are lots of blogs and web sites catering to “traders.” But that don’t do much for the species…

                  And every exposure of the idiocy of the heirs and successsors of those “chauvanist mediocrities in Edwardian suits playing office politics with countries and lives” is well warranted.

                  Even in grade school the opportunities to learn exist: http://r.duckduckgo.com/l/?kh=-1&uddg=http%3A%2F%2Fvashonsd.org%2Fteacherweb%2Fzecher%2Ffiles%2FThe_Origins_of_World_War_I-_Historiography.doc

                  What outcomes do “we” want?

          2. Lambert Strether

            “He who has the most will wins.” Ah, yes, elan.

            “The will to conquer is the first condition of victory.” –Ferdinand Foch

            How unfortunate for the French in 1914, and especially the troops, that “the will to conquer” was not the only condition!

            1. ian

              You can scoff if you want, but we (the USA) have gotten our butts kicked by much more poorly equipped enemies precisely because of this ‘will’ thing.

        2. Yves Smith Post author

          Huh? Greece stripped its government cupboards bare to pay the creditors this year. It went into hidden reserves, borrowed from the pension fund, is late on payments to pharmaceutical companies, has public universities turn over spare cash, and passed a statute requiring municipalities to turn over their deposits (most of the muncipalities defied that order). Greece is not going to be able to pay pensions in cash this month due to borrowing from the pension fund or pay its lenders in prior months!

          Oh, and their famed relief to the poor? They passed a bill in March and as of May they were still taking applications for relief. So effectively by stripping the government cupboards bare first, they also prioritized paying creditors over doing more for the most desperate citizens.

          The creditors have been winning all along, but you’ve been so taken with Syriza’s bluster that you have not paid attention to what they’ve actually done.

          And the creditors haven’t even started to deploy the tools they have to increase pressure on Greece, like withdrawing the ELA, suspending its membership in the EU (which it could easily do if Greece tried not negotiating its debts to EU institutions after a default). That means the loss of EU subsidies which represent over 2.5% of GDP. The creditors could impose other economic sanctions.

          Argentina didn’t try not paying after its default in 2001. It renegotiated. And that was with private creditors who have much less power than official creditors.

          1. drb48

            I’m sure you’re following the money more closely than I am but my impression was that all of the above was insufficient to meet their obligation w/o another tranche from the lenders – which it was intended to ensure. And, in any case if they indeed “stripped the cupboard bare” as you say then that’s a one-off. They can’t do that trick twice. I refer to my previous statements re the likely effectiveness of the creditor’s “tools”. Beating a dead horse won’t get it to run.

            1. Skippy

              It never stopped them in south – central America, then there’s that bit of energy still in the cupboard.

              Skippy…. plus all of this is happening whilst there is a wee struggle going on in the IMF, old guard clinging for the sake of it.

            2. Yves Smith Post author

              Yes, but they will require Greece to pay what it can. That is what “renegotiate the debt” means.

              My issue is people who think that Greece can just walk away from its debts are smoking something very strong.

              1. ian

                I’m missing something here. Why can’t they walk away from it?
                I’m not saying there wouldn’t be consequences, but what would they be?
                Is the EU going to send in an army to collect?
                Seems to me like there would be a few years when no one would want to lend them money, after which someone would break the ice and find reasons why they are once again ‘credit worthy’.
                I’m not trying to be obtuse, I really want to know.

                1. Yves Smith Post author

                  The EU can suspend them from their membership in the Eurozone, which would cost them over 2.5% of GDP in subsidies that they get every year.. They can seize assets. Argentina’s PRIVATE creditor have impounded ships. They could go the Russia/Iran route and impose economic sanctions.

              2. drb48

                Agreed, but “renegotiate” seems so far to mean different things to the Greeks than it does to the creditors.

                “And the creditors haven’t even started to deploy the tools they have to increase pressure on Greece, like withdrawing the ELA, suspending its membership in the EU (which it could easily do if Greece tried not negotiating its debts to EU institutions after a default). That means the loss of EU subsidies which represent over 2.5% of GDP. The creditors could impose other economic sanctions.”

                Well and good but I don’t see where any of that repatriates the cash already lent to Greece. In fact if imposed it would only further reduce the Greek economy and the likelihood of them paying off the debt. The way I see it, the EU begins to look like a bunch of thugs threatening to break the legs of a gambler who can’t pay off his losses.

                1. drb48

                  Which may be an effective means of deterring others but as a means of getting their money back it seems counter-productive.

          2. FG Rideau


            it may be an very amateur analysis.

            1) Looking at facts, yes, Syriza has already compromised on a lot of things, did horrible things like raiding pension accounts or not paying pharma companies to make IMF payments, but hey, when you’re negotiating tens of billions of new loans (that you’re going to blow away immediately anyway), when doing the math, isn’t it worth making a token payment hoping to get the big money ? it still leaves the option to default *after* getting the money… just asking.

            2) supposing Syriza’s strategy was to default all along, weren’t they obliged to win time to get prepared and had to suffer humiliation after humiliation, and just waited their hour ?

            3) how about a scenario where Syriza is not rational ? or ready to use (military) force amid the ensuing chaos after default. are Syriza just some politicians just thinking about the next polls or are they driven ?

            Maybe this point of view is wrong but i think i’ve never read in your analysis what a determined greek government should do if they are determined for ideological reasons to leave Euro (unless ECB/Brussels is stupid enough to give free money) and what would be their best course of action.

            4) i would be very cynical, but lets not forget politicians are human beings and can be corrupted. there is so much at stake, there must have been attempts to personally corrupt and/or to threaten both Tsipras and Varoufakis from the EU side. the fact that the negotiations are so hard tells me those 2 guys are hardliners and much more determined and ready to do things that in your book are not rational, and that you may be missing the whole point.

            Now its another question yet to be seen whether Syriza has actually the power to pursue such an agenda. it seems apparent they don’t have the mandate. doesnt mean they wont do it.

            did Obama have a mandate to support ISIS against Bassar when nobody was looking, to spy the world over with the NSA ?

            1. Bill

              when you’re negotiating tens of billions of new loans

              But this is the problem, they aren’t new. The final €7.2bn is from the LAST bail-out, not only do the Troika ‘lend’ they also tell how it should be spent! Lets also not forget, Syriza have paid back €13bn since they came to office, from the ‘initial loan’ €240bn, the Greek people only received €20bn, the rest went to EU banks?

            2. Yves Smith Post author

              If Syriza’s strategy was to default, the worst thing they could have done was what they did, to strip every government cupboard to pay creditors. And there’s no evidence that they’ve done anything to prepare with the time they’ve spent on negotiations. I have long-standing contacts that are close to the Greek side and all I’ve heard is optimistic talk about how a deal is near for months. Other parties that have direct contact with Greece (as in are sympathetic) similarly say they really do have no Plan B.

        3. Bill

          Greek is already bankrupt, the creditors aren’t going to get their money and the sooner everyone acknowledges that and gets on with life after default, the better for all concerned.

          CORRECT! The only thing the creditors want, which we Brits gave away for sod all, are the Greek Assets, Islands, Utilities and Ports, those deals Tspiras stopped when coming to Office.
          If they lose these, they have no future, their ‘Tourism’ will be owned and controlled by foreign bankers, stopping any future growth!

        1. Yves Smith Post author

          See my comment above. This is not going to lead to a win for Greece and if the government tries pursuing it, it will only produce more misery for its citizens, far more than continued austerity. If Greece tries using that finding, which no court outside Greece will take seriously, to not negotiate upon default, it will justify the creditors using all the tools they have against the government. And Greece, being a small country that is somewhat integrated into Europe (tourism, markets for agricultural products) with an economy already in desperate shape, is far more vulnerable than, say, Iran.

          1. MyLessThanPrimeBeef

            If the creditors have been worrying about setting a unfavorable (from their vantage point) precedent with respect to relaxing demand for austerity up to now, not going after, much less not going hard after, a not-negotiating Greece post-default would be an even more worrisome example.

          2. drb48

            The creditors can punish the Greeks for their failure to abase themselves and make an already miserable populace even more miserable but they’d just be engaged in cripple-kicking. They can extract their pound of flesh but that isn’t going to magically make Euros fall from the sky. What’s their end game?

            If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem. – J. Paul Getty

            The creditors think they have the Greeks by the balls – the reality is the reverse. Which is why they’re so desperate.

            1. Yves Smith Post author

              As I said, it’s Greece that has emptied every pocket it had to satisfy the creditors, including raiding pension funds by borrowing against them when it now cannot repay that borrowing. You are seriously telling me that Greece in in a position of strength? This is an economy that is already prostrate. It won’t take another body blow at all well.

              This has not been about optimizing creditor returns. Other countries have swallowed their austerity medicine and economies eventually bounce of the bottoms, enabling the creditors to present them as successes. And in a version of Stockholm Syndrome, the governments and even many of the citizens in the countries involved believe that austerity works.

              This is about enforcing their rules and their peculiar ideas of fairness, that no one should get special breaks, particularly a party that has behaved badly in their eyes.

              1. kemal erdogan

                Yves, isn’t emptying pockets is only relevant only if they remain in Euro? They can easily replenish every pockets once they are out of it while their populace can use Euros for a while.

                The whole saga explains why ECB has been so reluctant to increase the emergency lending ceiling. It appears that ECB also knew the Greek plan but could do nothing about it as long as Greeks appear to be negotiating. This also nicely explains why Greeks appeared to accept a humiliating defeat in February as they thought not enough of money has been withdrawn from the banks.

                I am now convinced that Greeks planned an exit from euro from the beginning if the creditors would not agree to their plan: debt reduction, payments linked to GDP growth, etc. Once the citizens have drawn enough cash from the banks there are 3 advantages:
                1. the basic functioning of the payment system can continue as it is with euros
                2. the citizens would end up with hard currency for the rainy days coming, most people would also have all their savings in their pockets
                3. the only losers would be the medium to large companies which still have to keep some money in the banks for daily operations. I am not sure about the scale of potential loss. But if significant this will give the government a strong leverage on them and force them play nice with the government if they want to survive from the fallout of the Grexit

                1. Yves Smith Post author

                  No, they would not have drained government reserves and in particular NEVER would have borrowed (as in spent) pension fund reserves if they intended to exit. Nor would the government have reacted in fury as they did yesterday to the head of Greece’s central bank warning of a Grexit, which amplified the bank run up to 2 billion euros in the last three days, if they though it was to their advantage. And how is hurting medium to large companies good for Greece? They’d be the largest and (formerly) the most stable domestic employers.

                  The ECB has been stoking the bank run, and everyone from former IMF staffer (and critic) Peter Doyle to staunch Syriza supporters like Ilargi at Automatic Earth see it as an attack. It will force the introduction of capital controls, which will be very bad for the economy, and perhaps a bank holiday, which is a disaster (a mere 12 day bank holiday in Cyprus, which was in much better shape than Greece is now, did a great deal of damage).

                  1. kemal erdogan

                    Thanks for answering my question, Yves.

                    Not sure about the medium ones but hurting large companies certainly would have an advantage: They cannot risk a media campaign against the government (who holds the strings of the credit purse they would need to survive) in case of a Grexit. Controlling (or at least keeping it neutral) the media is infinitely important if you want to stay in control. This is, in fact, how Hungarian and Turkish governments control the media.

                    And, I don’t believe what people say matters in such high stake poker: one must watch what they actually do. The governor of the central bank was certainly talking beyond his mandate. Syriza only complained and did nothing else. If they were really concerned about such talk, they could easily make life like hell for such irresponsible people and nobody would have said anything about it.

                    I still do not get why confiscating some billions of euros from pension funds, municipalities, etc. should matter if they were to reintroduce their own currency. Thanks again

              2. Santi

                Sorry, Yves, but no. No uther country have swallowed their austerity medicine and eventually bounce of the bottoms. Show me an example of a similar dose of austerity, taken without devaluation, surrounded by a deflationary environment.

                All the pseudoexamples that the austerians show are fakes once one looks into the numbers.

                1. Yves Smith Post author

                  Huh? “Bounced off the bottom” is hardly a term of approval. You are so vested in arguing with what I write that you aren’t even comprehending what I penned. Both Ireland and Latvia ARE showing growth from a very-much-lowered-by-austerity base. That is what “bounced off the bottom” means. And Latvia and Ireland tout that as success stories! See the New York Times putting lipstick on that pig:

                  Latvia, feted by fans of austerity as the country-that-can and an example for countries like Greece that can’t, has provided a rare boost to champions of the proposition that pain pays.

                  Hardship has long been common here — and still is. But in just four years, the country has gone from the European Union’s worst economic disaster zone to a model of what the International Monetary Fund hails as the healing properties of deep budget cuts.

                  Latvia’s economy, after shriveling by more than 20 percent from its peak, grew by about 5 percent last year, making it the best performer in the 27-nation European Union. Its budget deficit is down sharply and exports are soaring.


                  And we’ve written repeatedly about the depopulatoin of Latvia too.

              3. drb48

                “You are seriously telling me that Greece in in a position of strength?”

                What I’m trying to say – and doing it badly I guess – is that the EU is now in a position re Greece analogous to that of the US with Iraq – they broke it, they own it. The difference being that Greece is in the EU and on its southern periphery. The creditors can either mark the Greek debt to market – essentially zeroing it out – and prop up the Greeks, or they can do all the things you indicate to try to compel the Greeks to heel. But, you already indicated that meeting the creditors demands is politically impossible and having “emptied the cupboard” in terms of assets it looks financially impossible as well. Forcing Greece out of the EU while creating a failed state on their border doesn’t look to me to be a viable option. So, if not “in a position of strength”, how would you characterize it? Yes, Greece will go down the tube if they try to walk, but can the EU afford to let them go down the tube? Maybe, but what’s that gamble worth? The Greeks are hosed either way but the EU looks better off to me to bail them out than to destroy them to make a point. Whether they eventually come to the same conclusion remains to be seen.

              4. drb48

                “You are seriously telling me that Greece in in a position of strength?”

                What I’m trying to say – and doing it badly I guess – is that the EU is now in a position re Greece analogous to that of the US with Iraq – they broke it, they own it. The difference being that Greece is in the EU and on its southern periphery. The creditors can either mark the Greek debt to market – essentially zeroing it out – and prop up the Greeks, or they can do all the things you indicate to try to compel the Greeks to heel. But, you already indicated that meeting the creditors demands is politically impossible and having “emptied the cupboard” in terms of assets it looks financially impossible as well. Forcing Greece out of the EU while creating a failed state on their border doesn’t look to me to be a viable option. So, if not “in a position of strength”, how would you characterize it? Yes, Greece will go down the tube if they try to walk, but can the EU afford to let them go down the tube? Maybe, but what’s that gamble worth? The Greeks are hosed either way but the EU looks better off to me to bail them out than to destroy them to make a point. Whether they eventually come to the same conclusion remains to be seen.

                Another view:


  4. Percy

    You say “the idea that this could go on another month or even longer is draining.” There’s no prospect of escape from this. They are not going to pay. The word “default,” however, is unwelcome in bank circles. The EU will stagger along with four busted banks, some disappointed creditors, strange law suits, and a great fog of confusion. What else is new?

  5. Felix

    The Greeks are not stupid. They have already gotten all their money out. The younger ones are all in Germany already. The rich ones have their money in Switzerland or the US. They can joint the Iraqis and Afghans in Hope Ranch. The common worker in Germany is the one that is getting screwed here. The Mittelstand entrepreneurs are the ones getting screwed. Germany is emulating the US in its style of corporate looting….probably because Germany is a wholly controlled division of Washington. Merkel is the errand girl for Washington and this is punishment for not backing the Iraq war. This whole Greek game is a way for hedge fund billionaires to play the exchange rates and bond prices.

  6. vidimi

    There’s an old saying in finance, that you don’t buy on the courthouse steps (on the verge of bankruptcy) if you can get it cheaper after bankruptcy. Anything Putin might want from Greece he can get at lower cost later….if he can get it at all.

    but that’s just the thing: if he waits until greece has a firesale, putin may not get what he wants as other vultures may get there first. on the courthouse steps he has first choice.

    i wouldn’t discount the value of the option to get preferential pickings that much.

    1. Gaylord

      Good insight. Tomorrow and Saturday the St. Petersburg Economic Summit will decide on whether to admit a sixth member to the BRICS. You can be sure there’s a lot more on the agenda and the timing is perfect for Greece. The BRICS bankers will show the West how to conduct finance in a mutually beneficial way rather than winner takes all.

      1. vidimi

        i can’t see greece being admittedto the brics club: they’re just much too small. a sixth member might be maybe argentina, indonesia, possibly nigeria. i doubt it would be mexico due to nafta. turkey would be a shoe-in, but would their nato membership get in the way?

        anyway, with greece, one scenario i can see easily happening is the government falls and is replaced with monti-style technocrats as appointed by the ecb, fully in line with nato thinking. greece holds a fire sale and russia isn’t invited plus sanctions continue. that’s a potential penalty putin might pay if he tries to be too greedy.

    2. Yves Smith Post author

      No one is circling. Greece has been peddling assets in privatizations for years and the good ones have already been sold. Who wants to invest in an economy with an erratic legal system (meaning you as a foreigner can’t protect your rights) which is on the verge of becoming a failed state. Please tell me who is circling to help out Greece. There’s no one.

      1. vidimi

        that’s not really the point. western vultures may well be waiting for a post-default corpse to gorge on, and showing interest now would make their feast less opulent. greece still has valuable assets: part of piraeus is still available, offshore oil and gas fields…also, remember that russia still wants to build a pipeline to europe.

        second, russia is not happy with EU sanctions against it. by helping greece out now and keeping the syriza government in power, they can gain an ally with veto-power so long as greece isn’t suspended from EU membership. if they wait until the government collapses and is replaced with EU technocrats, they will have missed a golden opportunity to have the sanctions lifted.

  7. EmilianoZ

    Once you eliminate the impossible, whatever remains, however unthinkable and difficult, must be the solution.


    (I’m sure the the Russians will behave humanely and not like vulture capitalists. The Greeks must learn to say spasibo and as a small token of good faith leave NATO asap)

  8. Swedish Lex

    Tsipras will be seeing Putin tomorrow, Friday. Presumably to talk shop. Putin has continued to surprise most Western observers. Perhaps we are in for more surprises.

    Exiting the EU is cumbersome. An exit Treaty has to be drafted and then ratified by all EU Member States :)

    With total legal uncertainty surrounding a default/euro-de-facto exit, and at least a year, in my view, before an EU exit could take place, the Troika has painted itself into a corner. Unless Greece yields, the Troika would have to administer a systemic breakdown and a possible humanitarian crisis. Well done.

    Zervos seems to ignore the possibility that Greece goes down the road of actually declaring a political war on the EU. Had Greece been Finland, the Finns would at Zervos’ point 3 above, have unlitaterally asked the Troika to go screw itself. Small nations with proud people have a tendency not to march as requested by the Prussians.

    A good read: http://carnegieeurope.eu/strategiceurope/?fa=60420

    1. which is worse - bankers or terrorists

      Can I ask: when you say “political war”, what do you mean? I can’t tell from the link you referenced.

    2. Lexington

      Putin is nothing if not a hardheaded realist. He isn’t going to throw Greece a lifeline worth billions of dollars when Greece has nothing substantive to offer in return, especially not when Russia’s own economy is tipping into recession as a result of sanctions orchestrated by NATO – of which, btw, Greece happens to be a member.

      He’ll happily lend Tsipras a sympathetic ear because it costs him nothing, it stirs the pot in the West, and keeping the lines of communication open may pay dividends in the future if unfolding events eventuate in Greek disenchantment with the West. In the short term however Greek public opinion is psychologically nowhere near ready to contemplate a genuine rift, as evidenced by the public’s strong support for keeping the Euro and remaining in the EU. Greece’s national identity is deeply rooted in cultural identification with western Europe – in fact if you just ask them they will be happy to tell you all about how they invented Western civilization.

      Speaking of which, the US doesn’t need Turkey to keep Greece in line, it just needs to sit Tsipras down and give him the talk – about how being a member of NATO is a privilege, about how with privilege comes responsibility, about how publicly appearing to cozy up too closely to a country NATO is currently at loggerheads with is the height of irresponsibility, and also about how there’s no room on the NATO bench for second rate powers who don’t know how to be team players.

        1. JTMcPhee

          “Youth” used to be all about “hope.” Didn’t it?

          Gee, what happened?

          And please don’t say “it was the Boomers’ fault.” very few Banksters are Boomers, in any way, shape or form, nor the MIC players nor more than a moiety of our Elected Representatives…

          What outcomes do we want?

      1. ian

        What if Putin just sees Greece as an opportunity to make tons of mischief for the EU? Or, how about a port in the Mediterranean?

    3. Yves Smith Post author

      No, the process is set up in thin form already in the Lisbon Treaty. The party that wants to leave asks to leave. If they can’t negotiate a deal, the exit become effective automatically in 24 months. They don’t need to ratify an exit.

      There is already a humanitarian crisis in Greece. The hospitals are in disastrously bad shape. They’ve had shortages of medicines and have been reusing sheets for years. Women who can’t pay their hospital bill for giving birth have the hospital keep their babies hostage until the bill is paid. There was also a terrible crisis in Iraq and it’s ongoing after the US invasion. No one cares. And Syriza doesn’t appear to have taken even the most basic steps to try to embarrass the lenders on this front. They even use bloodless language like “humanitarian crisis” and from what I can tell, have not invited foreign documentary teams in.

    4. Yves Smith Post author

      The Telegraph confirms that there will be no money forthcoming:

      Meanwhile, Greek prime minister Alexis Tsipras arrived in St Petersburg to meet with Russian president Vladimir Putin to discuss Russia’s planned extension of the ‘Turk Stream’ gas pipeline and a BRICs bank.

      Russian Deputy Finance Minister Sergei Storchak said that despite speculation “there have been no requests [for help from Greece]”. He added that “there are no resources [in our budget to provide money].


  9. Michael Hudson

    All the inside information that one really needed was the IMF whistle-blowers who quit and told their story — with more and more former IMFrs coming forward. Quite apart from what quickly went public from Tsipras and Varoufakis.
    I said that Syriza and Greece were NOT going to give in, and they haven’t.
    It was neither economically possible or politically possible, so this shouldn’t have been a surprise.
    You’re quite right to point out the caveat “unless the officialdom was already behind having the ECB lower the hammer when it thinks the moment is ripe.” The time wasn’t ripe then. But since then, many Greeks have seen the handwriting on the wall and have withdrawn their money in euro-notes. They’re better situated for a bank failure now, dividing the banks into good and bad banks (at the ECB’s expense).
    If Greece/Syriza pay ANY money at all, they concede the validity of the debt. There’s a much more hardball position to be played.
    I’ll try to write more from Europe after this weekend’s meetings.

    1. OpenThePodBayDoorsHAL

      Fantastic to see you here on NC Michael, please keep us posted (NC is the best financial blog by far)

    2. kemal erdogan

      Yes, indeed. The more I think about it the more I am convinced that this is the plan B of Greece: let the banks run dry and then default, and exit EMU. The ECB would hold the bag if they continue to insist on austerity.

    3. Yves Smith Post author

      I did not want to publish your e-mail, but now I feel I have no choice, since you are now saying something different than what you said then:

      There are things that I can’t put in e-mail, that should cheer you up about Greece. I’ll be glad to tell you off the record. It looks like you were too pessimistic. The reports in the media were wrong from the outset. But I was pledged to silence.

      This was as of early May. I do not see any positive developments for Greece between then and now. I did not take up your invitation to speak on the phone then because I was too busy.

      A bank resolution still has to have the bad bank funded while it is in runoff mode. Congress had to allocate $50 billion to the Resolution Trust Corporation to do that. That may not seem like much in light of the TARP, but that was seen as a huge amount then and had Congress up in arms for having no choice but to allocate the monies. Iceland got $5 billion in foreign support while it was resolving its banks, a massive amount for a country with fewer than 350,000 people. Where does Greece get the funds to do that? And how about the damage to the economy during a bank holiday? Cyrpus, which was in vastly better shape than Greece when it had a 12 day bank holiday, took a huge hit. A Greek bank holiday is likely to go even longer. As the Financial Times pointe out:

      The official also warned that capital controls — which were used in Cyprus’s 2013 bailout and are being prepared for Greece to prevent a bank run if eleventh-hour efforts to strike a deal fail — only succeeded in Nicosia because of the “very co-operative attitude of the Cyprus authorities and the very high quality of the Cyprus administration”.


      Capital controls are vastly simpler than bank resolution. Pray tell where does Syriza get the expertise? And it has to manage that on top of managing a Grexit, which it needs to do to plug the hole in bank balance sheets.

      1. kemal erdogan

        Yves, it seems that you consider Greece as a banana republic. Doesn’t Greece already have a body to handle bank supervision (and resolution)? They can certainly order that agency to handle the task. Why should they look further?

        1. Pancho

          Indeed it’s way premature to write off Greece based on sheer lack of information or just some personal gut feeling. While the Greek state bureaucracy might not be all too efficient, the country’s government is both competent and capable.

          Varoufakis, Tsakalotos and others are well connected in Anglo-Saxon economic circles. Greece has access to all expertise it might need. Actually it might already receive economic advice by capable organizations, individual economists and networks, including the OECD, the World Bank, and INET. Even those with limited support for Syriza’s policy, such as parts of the Greek opposition, don’t want to see Greece collapse.

          Of course things may turn out better or worse. But there’s no need to hit the panic button, and no justification for that either.

  10. Skippy

    Exploiters being gamed by exploiter theorists working on the run…. seeking that last flip of the coin that falls in their favor….

    Epic~~~ tho timing is still a random strange… more so when the event horizons converge…

    Skippy…. at the end of the day there are too many players with too many agendas… playing a game of MAD… yet flesh will not fall from bone… that is quite troublesome from a psychological point of view…

  11. Disturbed Voter

    Que the color revolution on … doesn’t anyone remember the rule of the Greek generals from 1967 – 1973? Greece and Turkey are similar that way … though the current Turkish government thinks it has blocked that possibility. If Syriza and friends, aren’t ejected by constitutional means … the unconstitutional will be tried. Really, failing to “fix” the election last January … was a major mistake. They have been fixed several times over the last 5 years.

  12. pebird

    “5. Then it’s basically time for the gallows. He either signs a document cutting pensions, raising VAT and violating all his red lines. Or he takes the Greek people into bankruptcy and out of the euro. Either way he is a dead man. ”

    Not exactly how I would characterize the situation.

    More like the ECB saying “you agree to punish the Greek people or we will”. Which is a no brainier for Tsipras.

    1. HotFlash

      This situation is riveting b/c it is Their plan for all of us, everywhere. If Tsipras refuses to be the Loyal Overseer for Massa, then he’ll be thrown to the houn’ dogs. But if he can beat Them, we can. The people of Ireland, Spain, Portugal, etc are watching, of course, but so should we all. Watching may not be enough, they need real help. Is it possible, I wonder, to do a Kickstarter for a government?

      1. JTMcPhee

        …and we here in ‘Murica are watching (and yelling as we do) to see if our Reps are going to finally blow off the last vestiges and fig leaves of “democracy” in favor of global corporate one-world-government hypocristocracy, or carry it forward a few more months or years… TPP-TTIP-TISA-TAA, you can’t even get “Tsipras” out of that concatenation of letters…

  13. No one in particular

    too many diversionary leaks around, everything up in the air:

    – EFSF loans cross default with the IMF (they have to act, otherwise it is breach of trust)
    – Committe of the Greek parliament declared Troika debt “odious” (ZH, yesterday)
    – ELA has to be cut off come 1st July, if an extention of the 2nd bailout is not in place – in theory, but they may add more broken rules

    – Wolfgang Bosbach, hard-line anti bailout CDU MP, staked his political future -[ big interview (link below), too many compromises, too little effective reform in Greece, no cheap solution, contagion under control (Greece is exception), choice is between expensive (Grexit) and very expensive (extend and pretend, permanent transfers), (most) colleagues will – possibly sign off an extension for the 2nd package, but not a third bailout, He is claiming high aversion against a last ditch deal, which does not leave time for the parliament to consder]
    – SZ http://www.sueddeutsche.de/wirtschaft/griechenland-auf-zur-ewigen-krise-1.2524805
    They discuss Grexit as an necessary evil, given Tsipras is not willing to accept need for reform; can be viewed as blame game, but is the first time this newspaper diverted from “euro is TINA” – whilst stating “to keep within the EZ might threaten the viability of the euro” – this is almost a 180 degree turnaround for this newspaper. The now have a headline “what would a dirty exit mean for Greece”

    Tsipras has clearly made “extend and pretend” impossible now, and the normal compromise solutions are off – one side is going to loose face if a deal is done, and thus we are sleepwalking into a “dirty exit” – I think. Happily it is Friday tomorrow, so a lot of time to impose capital controls over the weekend.

    1. Yves Smith Post author

      The ESFS loans do have a cross default? That is an important bit I have been trying to track down with no success. Do you have a link?

      But the IMF process is an arrearage, not a default. Are you sure about the language? Lagarde does not notify the IMF board till 30 days after the event, so even so, that would seem to be the trigger date.

      I did see the debt repudiation press release via a Greek site through Twitter. All this is going to do is give more grist for the creditor PR machines.

      We thought the “we need to deal harshly with/expel Greece to protect the Eurozone” idea could get traction. From a June 10 post:

      There is a group of hardliners among the Eurozone members that are hostile to Greece, and are taking a tougher line than Germany. For purpose of convenience, we’ll call them “ultras”. They include Spain, Latvia, Finland, Austria and Slovakia. They want to make sure that Greece suffers visibly for its defiance since their countries swallowed the bitter austerity medicine. There are separately quite a few ultras on the ECB board, but they won’t act unless they have political cover.

      In a chaotic situation, people tend to gravitate around parties that come up with plans of action quickly and advocate them forcefully. That gives the ultras the potential to have influence out of proportion to their political weight. They can also sell radical action as necessary to protect the Eurozone from the existential threat of other countries of the Eurozone also departing, that it is necessary to make a Greek default as punitive as possible pour decourager les autres. That argument could carry weight with other countries and institutions which might not otherwise be punitive towards Greece.


      1. No one in particular

        Cross default via Bank of Am,


        I’ve read this in several places, when I find other sources, I will post them.

        However, Moody’s comes from a slightly different angle,
        But the note is focusing on the default risk of the EFSF bonds (which is the other side of the deal) as the guarantees would kick in

        1. Yves Smith Post author

          Thanks. As I read this and think about it, the official creditors won’t accelerate the debt. So even though there is a cross default provision, they don’t have the motivation to accelerate the way a private lender would. They don’t want to force loss recognition and they might be able to finesse it for a while. They could argue they didn’t have to if they still believed they could renegotiate it without reducing the principal amount. But this all seems pretty dodgy if my guess is right.

          1. No one in particular

            I think along the same lines, but it will depend on the actual legal text to which extent they have scope to betray the other side of the deal, i.e. EZ taxpayer. Because there are the guarantees to the bondholders (the moody reference), which if triggered, would effect the actual national budgets of the guarantors. Can they call the guarantees without triggering cross default first? And the political fallout in Spain – before the elections – of Spain having to pay for Greece…… and of duping the public about the real cost. Dodgy is only the start of it.
            And, much more tricky, I presume – the ELA without the bailout extension. Again, the legalese will be deceisive, Again, potentially dodgy. And to add
            Who decides when solvent becomes insolvent in Greek banking terms? Not only the legal bit, but the “whose fault was Grexit bit” – vs. who has to pay the bill in the end.

            With a reference to Christopher Clarke, I think we are sleepwalking into a minefield of unintended consequences. Either the insolvency blows up, or the constant law breaking, or both.

          2. No one in particular

            …… I think along the same lines, but it will depend on the actual legal text to which extent they have scope to betray the other side of the deal, i.e. EZ taxpayer. Because there are the guarantees to the bondholders (the moody reference), which if triggered, would effect the actual national budgets of the guarantors. Can they call the guarantees without triggering cross default first? And the political fallout in Spain – before the elections – of Spain having to pay for Greece…… and of duping the public about the real cost. Dodgy is only the start of it.
            And, much more tricky, I presume – the ELA without the bailout extension. Again, the legalese will be deceisive, Again, potentially dodgy. And to add
            Who decides when solvent becomes insolvent in Greek banking terms? Not only the legal bit, but the “whose fault was Grexit bit” – vs. who has to pay the bill in the end.

            With a reference to Christopher Clarke, I think we are sleepwalking into a minefield of unintended consequences. Either the insolvency blows up, or the constant law breaking, or both.

            This might turn up in the wrong place, I had trouble posting it.

      2. No one in particular

        I think it is high time for Grexit. Not to make somebody suffer or to get revenge, but to get the incentives right. The self-victimisation and blame game, aka not taking responsibility has to stop. Nothing good will happen in Greece unless the corruption is removed, and I do think Syriza is too much part of the old to be a leading light of the new. The quandry, IMHO, is therefore – for the change of thinking to gain traction on all levels, the Greeks need to implement the changes themselves (with as little help from the outside as possible, especially not other EZ countries) – [Greece has been occupied by the Ottomans for centuries, the cultural mistrust against outside influence runs too deep for any of us to imagine] – but: a) currently, and as long as there is new money to maintain the current power brokers, nothing will change b) there are no “lead by example” beacons in sight – anybody close to power will traditionally first follow their “clientelist” instincts to look after their own buddies, perpetuating the status quo. Best hope would be international experts with Greek roots…. but not very probable.
        The mood, as least on German TV, yesterday night was “resigned to the inevitable” – as is dawns on the public and politicians that the Greeks do not want to live like the Germans….. thus the whole reform effort was discussed and described as a “failure”.

      3. No one in particular

        I do not have acess to the contractual language, and there has been much said – und being unsaid – about when the IWF tranches would be “delayed”, or default.

  14. David

    There was a deal in February, but here we are renegotiating. Even if there is a deal, will they be renegotiating it again in four months?

  15. Mike From Michigan

    If a depositor had 50,000 Euros in one of the 4 banks, would the depositor expect to lose a portion of their deposit if a bail in was declared?

    What is an anticipated bail in threshold?

    1. ambrit

      I’m doing this from fallable memory, but, I think the latest figures were about 140 Billion Euros for the end of April in Greek bank deposits and 90 billion euros in outstanding indebtedness. So, a maximum pain bail in would cut the average Greeks bank account by 9/14 or roughly 64%. (Please correct if wrong. I’m not accounting for some minimum figure for “protected savings.” )
      The Bank of Cyprus took 47.5% of deposits over 100,000 Euros per account. Laiki Bank was liquidated and only the 100,000 Euro “insured” deposit limit was honoured. The “bail in” provisions will be standard in the Eurozone in early 2016.
      If I wasn’t a cynic, I’d suspect all of this was engineered by good old fashioned “Gold Bugs.”

    1. Yves Smith Post author

      Oh, I know! If I’m so overwrought just getting this in print media (which is a lot less emotionally engaging than radio or TV) when I have no personal stake, I can’t imagine how intense this is for Greeks. This is their future and the future of their country at stake.

  16. George Phillies

    Some of these scenarios are a bit unlikely. The ECB might arrive and announce they are going to resolve the Greek Banks, but the Greek government has the feet on the ground to naysay this proposal. The IMF could cut Greece out of he international payments system, but the Greeks might then see if the rumored Russian/Chinese alternative is interested in launching. It will likely not occur to the Eurocrats that anything they do that is really unpleasant will redound to the favor of UK anti-EU campaigners.

    1. Yves Smith Post author

      If the Greeks refused the ECB demand, the ECB would cut them off from the Eurosystem. The Greek economy would be cut off from the ability to move cash electronically in and out of the country (tourists could not use ATMs) or make or receive wire payments or even send and receive payments to/from parties outside Greece. Bye bye imports and exports.. The ECB has the trump card. The Russians only have a payment system internal to Russia, to stand in place of Visa/Mastercard. There’s no “Russian/Chinese” payment system to speak of as of now.

        1. Yves Smith Post author

          So how does that help them with tourist from Europe, Australia, and North America who want to use ATMs, or paying pharmaceutical suppliers in Europe and the US, or getting paid for their petroleum refinery exports, which again are to Europe?

          The only way that payment system is of any use to them is if they abandon all of their trade right now and see if they can make it up with China and Russia.

          1. Pancho

            The unevitable autarky a Grexit would require from Greece’s moderately competitive sectors – including Greece’s remarkably successful pharmaceutical sector – in any case means a profound reorientation of most sectors. This reorientation – such as matching their own citizens needs in producing medicine – will make self-sufficiency first priority. Beyond that, exports to BRICS states would become an interesting perspective, though not a full-scale replacement for inner-European trade.

  17. Jesper

    Most banks can handle multiple currencies and accounts with foreign currencies. Suppose someone had USD on an account in a Greek bank, would those USD ever be subject to forced conversion to a (possibly) newly created currency?

    1. Yves Smith Post author

      I have not read that Greek banks offer that service. There would be no obvious need to, given that Greece does not have strong economic ties to the US. You tend to see dual currency accounts in small countries that have their own currency, big international venues like London (so the rest of the UK has it) or countries where the locals have doubts about the stability of their currency as a store of value (Russia). None of those would seem to be operative with Greece and the euro.

      Thus even if there were dollar deposits in Greek banks, I can’t imagine that they would be all that significant relative to the total amount. That means the Greek government would probably treat them as an afterthought.

      1. alex morfesis

        there are (were ?) dollar deposits but the last greek administration made it hard to manage them so the few greek people i know who had them just shut them down…was not something i remembered being available back when i was living in athens…

  18. Trish Flanagan

    I think the real fear here is that Greece will be better off after they do the unthinkable, that is throw off the yoke of neoliberalism. “When you don’t have nothing, you have nothing to lose and been down so long it looks like it is up to me.” Neoliberalism’s veneer of civility is wearing awfully thin. When the dominos began to fall, we might get to see who in the financial world are wearing no clothes.

    1. Nathan Tankus

      Food consumption has fallen nearly 30 per cent. it can fall more. Production has collapsed in the country. It can fall more. Hospitals have experienced shortages of various basic necessities. They can deteriorate more. Like Reek says in Game of Thrones “It can always be worse”.

      Neoliberalism is not civil. It has come with assassinations and real brutality on various populations across the world. However, just because an international program in defense of creditors is brutal and “uncivil” doesn’t mean that completely defying its dictates will work out well for Greece.

      If you want to argue that for Greece’s long term political and economic future it needs to unite as a society and organize around defaulting whole cloth and possibly exiting the Eurozone, that’s fine but let’s acknowledge how seriously damaging that can be and how much worse the Troika can make it by not cooperating in a transition period. We do not live in a neoclassical world where once “shocks” are overcome a country returns to a trend growth path. The choices and series of events that happen over the next course of months can so completely redefine the economy of Greece that it may never recover from the impact. If it does go through an unplanned Grexit and by some miracle gets through it to the other side, it will be because of an extreme level of cooperation from the Troika. Greece will be just as, if not more, reliant on them to make a transition smooth than it has relied on them for euro denominated loans and restructurings .

      1. MyLessThanPrimeBeef

        What we humans do to each other.

        Crises in Afghanistan, Iraq, Syria, Libya, Ukraine, Spain, Portugal, Ireland and Greece.

        Each is special that none is exceptional.

      2. Robert Dudek

        Maybe. Maybe not. It’s hard to make predictions, especially about the future, someone once said. That defying the neoliberal institutions leads to utter ruin is THE CORE PILLAR behind TINA.

        You seem to have bought into this, and I repeat, you may be right. But if you are right, there really isn’t much for Greece to do other than sign themselves into permanent serfdom.

        As you point out, there has been much pain. And yes, it looks like there will be more if the troika play hardball. But by fighting, Greece has a chance to emerge on the other side of things as a nation renewed. You and other commentators can’t possibly know that that won’t happen.

        Let’s put things in perspective. What Greece has suffered, and what Greece will suffer, is small beer compared to what most European nations suffered during WWII. and guess what, most of those nations were not destroyed in the process.

      3. brazza

        All very likely, Nathan, yet worth the pain. Surely if we take the long view we must see that rebellion to the neoliberal agenda/system is the only way to invert the current unsustainable trajectory of consumerism, and concomitant extravagant, extractive life-style. Greece would be the first domino to face a musical score that sooner or later (and I’m not talking multiple decades) we shall all have to follow willy nilly. No amount of sophisticated analysis will allow us to dodge drastic change. If Greece succeeds in providing a model for drastic change (including mistakes to avoid), the whole world will be as grateful to them as for the inception of democracy.

    2. ian

      As bad as it may be for the Greeks, at least they would have their self-respect. Right now, they look like junkies desperately in search of a fix.

      1. brazza

        ? like the only junkies in a world-full of opiates willing to go cold-turkey … maybe.

  19. -jswift

    re lagarde’s remark about “adults in the room”, she did have more success when Sarkozy and Bernard Tapie were her interlocuteurs, sounds like she misses having such fine company.

    But does such talk help get your counterparties to settle up? Maybe she’s giving them some moral cover to invoke the debt truth committee conclusions when they miss her deadlines.

    1. JTMcPhee

      I don’t see that any of the players, those self-proclaimed “adults in the room,” certainly the ones from the rape-the-public-steal-the-Commons side, have any idea what they are about to trigger. Any more than the idiots who developed and instituted the Schlieffen Plan, and Plan 17, and thought their little piece of the dying polity would benefit from killing a couple of Euro royalty…

      August 1 is not that long from now, the planetary temperature is rising… going to be a long hot summer…

    2. Yves Smith Post author

      Yes, that was troubling. Not regarding what it said about the impasse, which is ongoing, but the signal. I’ve only seen her speak once, but between that and what her bio means (becoming the head of a major US law firm as a foreign woman in an era where women had trouble breaking the “partner” glass ceiling, much the less assuming leadership positions), she is clearly a master actress (her performance on a technical level was impressive, Helen Mirren would have a hard time besting her), salesperson, and bureaucratic infighter. She’s either telling the media that the criticisms of the new government performance are justified (which is perfectly logical given that that’t already the IMF house view) or her famed composure was slipping a tad. The latter would not be a good sign at all in terms of the creditors exercising restraint.

    1. Yves Smith Post author

      Polls have shown 60% to 80% support for not leaving the Eurozone since Tsipras came into office. You can’t fake that many polls over such a long time. And you seem to forget that he had to promise that to get elected. Most people in Greece seem to still believe Tsipras, that Greece won’t need to leave the Eurozone, hence there’s no reason to demonstrate if the government says it is supporting your position.

      1. vidimi

        i think what these polls ignore is how strongly people feel this way. they ask a binary question, do you support staying in the EU? and a majority of people respond favourably. i’d be interested to know how the questions are framed.

        for example, a polll asking
        Do you support Greece staying in the EU? Y/N

        will get a different set of results than one asking

        Greece should remain in the EU even if it means no resolution to the debt and continued austerity
        Strongly agree; agree; unsure/undecided; disagree; strongly disagree

  20. wanderingmind

    One thing I keep thinking about in this situation is the reaction of ordinary depositors in other eurozone countries if Greece defaults and there is a banking collapse followed by a bail-in.

    If depositors in other countries are rational, then this would not, in and of itself cause withdrawals from their respective banks. However, the problem is that people do not act rationally during such times. That is why solvent banks were forced out of business during the depression of the 1930’s.

    Perhaps a story from the U.S. in the eighties will illustrate. There was a massachusetts bank called the Bank of New England, which got into trouble with bad real estate loans and was going under. At the time, ATM’s were relatively new and deposit insurance was at $100,000.00 per account. The day before the FDIC took over the bank, there was a rumour that it was going under. People lined up at the ATM machine, taking out money, even though there was deposit insurance and even though the ATM would not let them take out more than a few hundred dollars per account.

    No one was going to lose any money as a result of that bank closing, but that did not prevent people from panicking.

    Another example from 2008. The money market fund which “broke the buck” was not all that much exposed to Lehman Brothers paper. It was overwhelmed, however, by counterparties who were panicking and trying to get as liquid as they could.

    I am thinking that a similar scenario could develop in the event of a bad outcome in Greece. Ordinary people in other countries will panic and start to take their money out, regardless of the real risk and regardless of the level of deposit insurance.

  21. alex morfesis

    but you must surrender…alexis…we have spent our lives working thru scenarios and you and that v guy…you just must stop teasing us and eat you porridge…you are a little country and we shant let you dictate terms…

    hey…wait now…you cant just park those tanks and naval vessels…who will protect us from all those foreigners…you are a nato country and have the tanks we northern europeans need you to drive around in to protect us from vlad the inhaler

    you cant just ignore us like this…do you not understand what we will DO to you if you do not OBAY…do you not understand the MASSIVE PAIN your people will SUFFER !?!?!??

    you have been around for two million sunsets and have survived many occupations ???….so what…this time IS DIFFERENT…do you not know how powerful we are…how powerful we HAVE BECOME…

    please do it our way…pretty please

    1. MyLessThanPrimeBeef

      Does it seem like it’s getting personal? With leaders as clowns comment.

      1. alex morfesis

        how i wish it was all just a bad dream and toto could just pull back the curtain and lead us to peace and prosperity…it is sad this mess…germany afraid of its demographic future and reacting like a desperate grumpy senior trying to suck the marrow out of europe since german women dont want to have children with german men and are wilting away the great german machine…

        and greece afraid to step into the future

        this is a truly sad situation

  22. The Insider

    I must confess to being fried by following this drama so closely, and the idea that this could go on another month or even longer is draining.

    I appreciate your coverage of this crisis, which indeed has been exhausting.

    But I hate to say it, but it’s far from over. The just-announced “emergency meeting” for Monday may be only the first of many “last chance” emergency meetings. The European approach to this crisis from the start has been to kick the can down the road, and I don’t expect that to change.

    There are, as you have noted, some real deadlines, particularly with respect to Greek bank capital levels. But I wouldn’t underestimate the ability of the bureaucrats to find ways around the rules for the express purpose of pushing the resolution of the crisis back by a month, or a week, or even just a day. It should be remembered that this is not a physical currency system where accounts have to balance, but a soft currency system where electronic ledger entries can remain out of balance for an indefinite period. With electronic banking, “extend and pretend” is as easy as it ever was. Bank settlements can continue until the day that the switch is turned off, and that day can be pushed back a thousand times for a thousand weakly justified reasons.

    I agree with your assessment that emotional decisions are likely to lead to the real resolution of this crisis – but that point may be further off than any of us imagine.

  23. William C

    And now I gather there is to be an emergency meeting of Heads of Gvt on Monday.

    Unless they change the script it could be a modern day version of the Mad Hatters Tea Party. The Greeks being asked to make promises no one believes they will keep in order to lend them money to roll-over debts no one believes they will repay? Lewis Carroll would have had a field day.

  24. Rosario

    “70 percent of the Greeks that want to stay in the Euro.”

    Even if this is absolutely true…Stockholm Syndrome? They are being strangled by their supposed partner. They want to stay with the EU because they are scared. As I would be in their situation. However, this does not mean staying with Europe is the best option. Whatever best intentions the EU project had early on they got hijacked by the most heinous elements of the Capitalist system. The financial crash exposed this and we are dealing with a drawn out unraveling of unserviceable debt. Like I said months before this is an inherently revolutionary situation, it will play out that way no matter what attempts are made at damage control. The managed chaos option came and went a little over 4 years ago.

    1. madisolation

      The “70% of Greeks want to stay in the Euro” so-called consensus might have something to do with IMF-sponsored seminars that Greek journalists attended.

  25. jabre

    There are 130b in Greek deposits against 90b in ELA

    Interestingly the savings rate at the NBOG is 4% (http://greece.deposits.org/providers/national-bank-of-greece.html). It would be interested to understand the breakdown of Greek vs. non-Greek EU deposits. I’m wondering if this default will hurt Greece or the rest of EU more? Does anyone know if there is a way to determine balance by country?

    It would certainly help Tsipras position if much of those deposits were high rate seeking non-Greeks.

  26. GeorgeNYC

    Every time I try to get my head around the technical details of this situation I keep coming back to the fact that the “fear” seems to arise out of concerns over purely “abstract” wealth. No homes or factories will be destroyed. How does this translate into anything tangible?

  27. CDT

    Yves–I’m happy to assume that the current state of affairs is the result of Greek incompetence rather than brilliant strategy. Nevertheless, whatever happens next seems like a disaster either way. There is no doubt that, if economics is the only consideration, then the Troika will not hesitate to shoot Greece in the public square. But Greece is a NATO member, and NATO members Hungary and Turkey are already shaky. I find it hard to believe that at some point the creditors won’t pull back to avoid cascading exits from NATO. NEXIT is the real risk. I do not understand why a bunch of central European countries who underfund their own defense against a newly hostile Russia are so unconcerned about grinding into dust a NATO member on the security perimeter.

  28. Mr. G

    Time for the nuclear option…..U.S. Steps in with money and buys out/forgives Greek debt.

    1. Pancho

      Not a totally absurd scenario.

      Though they don’t really care about the actual fate of the Greeks, the U.S. administration is frightened by the possibility of losing Greece and the whole Eastern Mediterranean to Russia. It is also angered about the German obstinacy and more general, its neomercantilist and unflexible austerity policies.

  29. Fool

    Yves — This will sound like a stupid question, but where are all the “alternative investors”? You’ve mentioned (cynically?) how there’s little left for the vultures to circle over. But still, trillions of dry powder and many outsized egos…why the silence? Where are the Elliotts/Apollos/Paulsons/Blackstones etc? Despite credit markets being as opaque as they are, I would have expected some chatter on what they’re up to…

  30. Santi

    Varoufakis says in his blog today:

    The only antidote to propaganda and malicious ‘leaks’ is transparency. After so much disinformation on my presentation at the Eurogroup of the Greek government’s position, the only response is to post the precise words uttered within. Read them and judge for yourselves whether the Greek government’s proposals constitute a basis for agreement.

    i.e. he publishes his intervention to avoid the usual round of fakes and propaganda.

  31. charles 2

    The scenario described by Zervos in § 2 and following (referring to the SRM) is not grounded on facts :
    A) the SRM comes into power on 1st January 2016 only,
    B) Greece has not ratified it yet : see http://www.consilium.europa.eu/en/documents-publications/agreements-conventions/agreement/?aid=2014031.

    As I wrote before, I can’t count the number of Bankers, even seasoned ones, who don’t grasp the concept of fraudulent conveyance and suspicious period. Syriza and Varoufakis don’t keep telling that Greece, and Greek Banks, were already Bankrupt since 2010 just because they like to say the truth. It will be a major legal argument when it will come to the final resolution (which, as the etymology indicate, means becoming solvent again) of the insolvent components of the Greek Economy (essentially, its Banks, and, in the context of the Euro, its Central Bank).

    The argument that Countries who don’t respect treaties can be expelled or suspended is moot. EVERY country in the EU doesn’t respect the treaties in one way or another. After all, the treaties require balances current accounts, or making serious efforts in that direction.

  32. mpr

    There’s a bit too much hyperventilation here by Yves about what would likely follow a Grexit, and debt repudiation. Sure the EU *could* impose the equivalent of economic sanctions if Greece just refused to pay and to renegotiate, but this would be so stupid its probably beyond even ‘the institutions’.
    I recommend AEP’s analysis here


    Even Schauble has supported the idea of helping Greece recover outside the Euro. No one is going to kick them out of the EU.

    On the other hand, Tsipras has now apparently got what he wanted as far as the issue will be resolved at a leaders summit. We will see.

    1. Yves Smith Post author

      You are taking my remarks out of context. I brought that up only to illustrate how the creditors could retaliate if Greece went rogue by refusing to pay any of its debts, to attempt a repudiation, not a renegotiation. That is what some readers have suggested. That approach also looks utterly inconsistent with what Varoufakis and Tsipras have done so far.

  33. alex morfesis

    no hyper ventilation involved…greece is not able to draw exterior capital in beyond tourism money…it has no oil…like iran…no soybeans farms or cattle like argentina…and odious debt arguments make zero sense….cuba, mexico and ecuador had dictatorships or royals who were in no position to debate after they lost power…greece is more in line with colorado attempting to get out of its debts by arguing the previous governor had milked the state coffers…greece needs to smile and get on with the getting on…

  34. Bill

    “You need to read past Zervos’ schadenfreude; a more borrower-friendly writeup in Tagesspiegel of how the ECB executed the Cyprus bail-in made it clear that the central bank had planned its moves carefully and left Cyprus with no good escape routes.”

    It’s exactly because of the way ECB treated Cyprus, we have this ‘bank run’ now! People are also aware of the new ‘Bail-In’ rules they brought in at the G20 in Australia, last December.
    These ‘Greek’ banks, who exactly own them, certainly not the Greek government? So why do ECB insist they are ‘solvent’, when the whole world and his dog know they aren’t?

  35. Nathanael

    I have to remind you again that the ECB has NOTHING, NOTHING, NOTHING.

    Suppose they threaten to not pay off depositors, as you suggest.

    Greece can print euros and pay the depositors off.

    Greece has the printing blocks. They have the paper. They have the ink. They have the presses.

    There is absolutely nothing the EU can do to stop this short of sending troops in.

    I’m not sure the Greek government understands this, but they should.

    The Euro system is set up in such a way that any single country with its own press can start printing, and there is absolutely nothing the ECB can do to stop them. They were relying strictly on goodwill.

    1. Yves Smith Post author

      If Greece were to try to print euros, that would be in violation of its agreements and would be a nuclear level financial event. The ECB would bring its wrath down on Greece. That means destroying its banking system by withdrawing ELA support. Greek depositors would get cents on the dollar (and there are still billions of euros of domestic deposits still in the banks even with the bank run). Having a banking system failure means ATMs don’t work, you can’t pay for imported goods like pharmaceuticals and petroleum (Greece refines but does not produce petroleum products). It will lead to widespread cancellation of tourist bookings during the peak season, another big blow to the economy.

      You are really out of your depth on this issue.

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