Friday, May 18, 2012

Facing Reality

European leaders add to rising fears of breakup
European officials are playing a dangerous game of chicken with Greece.

In an apparent signal to Greek voters, the head of the World Bank warned Thursday that if Athens were to depart from the common currency, Spain and Italy could well be the next dominoes to fall in Europe’s widening financial crisis.

After ousting the Athens government that agreed to deeper spending cuts in return for a financial lifeline, voters return to the polls in June after the winning parties failed to form a new government. Apparently hoping to convince Greek voters to return a pro-austerity government to power, European officials are now openly discussing the likely dire consequences if they don’t.

But the comments may have only served to heighten fears of a wider breakup of the eurozone should Greece exit the monetary union. Investors backed away further from Spain's government debt Thursday, raising the country’s borrowing costs to levels that sparked the Greek debt crisis in the first place. Bond buyers were also reacting to fresh economic data showing that Spain’s economy is beginning to shrink, which makes its existing debt load even harder to carry.

The growing crisis also has caused growing nervousness among U.S. investors. Since the inconclusive Greek vote May 6, the Dow Jones industrial average has fallen in seven out of eight sessions and was down again Thursday. U.S. banking giant JPMorgan Chase send another ripple of worries through the market May 10 when it said it had lost at least $2 billion in a failed attempt to hedge against European volatility.

The recession is also putting more pressure on Spain’s banks, which have been saddled with bad mortgages as the country faces a deepening housing bust. Last week, the government took over Bankia, which holds 10 percent of the banking system’s deposits, after it reportedly suffered an large outflow of deposits.

The news follows reports that depositors pulled another $900 million out of Greek banks on Wednesday, extending a capital flight that could bring down Greece’s banking system. The fear is that those worries spread among depositors in other countries like Spain where the banking system is already under pressure.

Until very recently, European officials were loath to even discuss the idea of Greece’s departure from the compact binding 17 nations with a common currency. For one thing, the treaty that created the euro has no provision for a member country to abandon the currency or for its expulsion by the rest of the monetary union.

But central bankers and officials of agencies like the World Bank and International Monetary Fund have begun to think – and discuss – the unthinkable.


Analysts who are looking at the potential impact say the losses and economic pain would be widely felt.
Replacing the euro with a new, devalued currency would wipe out much of the remaining assets on Greek bank books. Europe’s central bankers have already pulled back some forms of funding for Greek banks that have been hit hardest by withdrawals.


Any new currency – or a return to the pre-euro drachma – would be massively devalued, by some estimates as much as half the value of a euro. That would help Greece’s economy eventually get back on a growth path because it would make its products and services cheaper for buyers spending dollars and euros.


But Greek households and businesses would bear the immediate pain. Imported goods and commodities like oil would suddenly cost twice as much. Households and businesses making good on outstanding loans written in euros would see repayment double in local currency terms.


Worries about the fragmentation of Europe’s monetary union have already sapped business and consumer confidence and brought the region’s economy to a dead stop. Government austerity measures imposed on weaker economies are driving them deeper into recession.

As that recession spreads, the pain of Greece’s departure from the euro would be felt even more broadly, according to Michel Juvet, an economist at Bordier, a Swiss bank.

“At the same time we have China, which is slowing down very, very fast, we have the U.S. economy, which is losing momentum, and we have this global slowdown, “ he said. “All economies are so connected that when one country or one big zone is suffering, the others are suffering as well. This is globalization.”

Others see the crisis in starker terms.
“This is phase two of the global financial crisis," said R. Seetharaman, CEO of Doha Bank in Qatar. "That’s the reality."


This is not a game, and it is not merely a question of bringing Greek voters face to face with what an exit from the EU economic system would really be like.

It is also a question of bringing Spanish and Italian voters face to face with what will happen to them if the Greek government persists in refusing to face fiscal reality.

Further, it is a question of bringing r he governments of major economic powers face to face with what will happen to their national interests and to the global economy if the Greek government persists in refusing to face fiscal reality.

Semifinally, it becomes a question of the pressures that will now be exerted to induce or perhaps even coerce the Greek government into facing fiscal reality.

Finally, it becomes a question of whether the Greek government will attempt to adopt financially responsible policies without the support and approval of Greek voters. Thus far, there has been no indication that they would do so.


Wednesday, May 16, 2012

Greeks withdraw $894 million in a day: Is this beginning of a run on banks?
Political leaders in Athens were due to discuss an emergency government Wednesday to deal with a possible run on banks as it emerged Greeks withdrew almost $900 million in a single day, fearing their country could crash out of the euro currency by the end of the week.

An interim government would take the country through to new elections on June 17, triggered by the collapse on Tuesday of talks to form a coalition between winners of the inconclusive May 6 election.

Greeks are withdrawing euros from banks, apparently afraid of the prospect of rapid devaluation if the country leaves the European single currency and returns to the drachma.

President Karolos Papoulias warned of “great fear that could develop into a panic,” the minutes of Papoulias' negotiations with political leaders showed, according to Reuters.

The minutes also reveal Papoulias was warned by George Provopoulos, head of the country’s central bank, that savers withdrew at least 700 million euros ($894 million) on Monday, Reuters said.

"Withdrawals and outflows by 4:00 p.m. when I called him exceeded 600 million euros and reached 700 million euros," the president said according to the minutes of the meeting. "He expects total outflows of about 800 million euros."

Several banking sources told Reuters similar amounts had also been withdrawn on Tuesday. Nevertheless, there was no sign of panic or queues at bank branches in Athens on Wednesday. Bankers dismissed suggestions that a bank run was looming. A senior executive at a large Greek bank told Reuters: "There is no bank run, no queues or panic. The situation is better than I expected. The amount of deposit withdrawals the president mentioned referred to three days, not one."

Still, some were taking no risks. Jenny P., an Athens private medical clinic receptionist originally from Ohio, told she had withdrawn 85 per cent of "what's left" in her bank account.

 "We could have a new currency in a couple of days and nobody knows for sure what will happen," she said. "There are no lines to withdraw money, but maybe that's because many Greeks have precious little left in the bank. Many have been surviving on [$500] 400 euros a month, which has to cover tax, bills, food and medical costs."

She said she was planning to return to the United States amid the economic turmoil which has left her Greek husband unemployed. "It is hard to see what the future will be here," she said.

Greeks have already been withdrawing their savings from banks at a sharp clip - nearly a third of bank deposits were withdrawn between January 2010 and March 2012, reducing total Greek household and business deposits to 165 billion euros.

A senior bank executive said there had been withdrawals in recent days but there was no sign yet of a panic, as had happened in April 2010 when eight billion euros were withdrawn just before Greece obtained its first foreign bailout.

 The political vacuum in Greece has hampered the country’s chances of making the budget cuts required by the European bailout deal. Without more austerity measures, the flow of bailout money will dry up, raising the prospect of a euro exit with all its wider ramifications.

The likelihood of a Greek exit from the euro – dubbed the "Grexit" by commentators – is now so high that even political leaders committed to avoid it admit preparations are under way.
Asked in an interview whether Greece could leave the euro zone, IMF director Christine Lagarde replied: "We certainly don't hope so, from the IMF point of view ... but we have to be technically prepared for anything".

Will there be a run on Greek banks?


Reuters reported early Wednesday that there has “so far been no sign” of lines at banks in Athens, despite the likelihood that an exit from the euro would see a dramatic devaluation in of Greek currency.

CNBC’s John Carney raised the prospect of reduced limits on ATM withdrawals, citing a calculation by London analysts Capital Economics that if every working-age Greek withdrew the maximum permitted ATM amount of 300 euros a day, every single deposit of Greek households would be gone within 61 days.

“So the controls put in place in advance of an exit from the euro would have to include not only limits on moving funds abroad, but limiting withdrawals from ATMs and possibly declaring a bank holiday,” Carney wrote.

In practice, however, any Greeks lucky enough to possess any savings have already taken the precaution of withdrawing them from banks.

“Over the last two years Greeks withdrew approximately 70 billion euros from their bank accounts, an amount equivalent to approximately 35 percent of Greek GDP,” Dr Michael Arghyrou, senior economics lecturer at Cardiff Business School in Wales told

“This is a negative demand shock of enormous proportions and with increased uncertainty this trend will almost certainly accelerate. So yes, we will almost certainly see more deposits withdrawals over the next few days, I just hope is that they will not be so large as to lead to a full-blown bank run.”

How likely is ‘Grexit’? Are drachma notes being printed?
A year ago, it was nearly impossible to get officials and political leaders to talk about the possibility of Greece leaving the eurozone. Now it appears to be an open secret.

Ireland's central bank chief and European Central Bank policymaker, Patrick Honohan, signaled on Sunday that a Greek exit might not be as painful as previously thought.

"Technically, it can be managed," he told reporters. "It would be a knock to the confidence for the euro area as a whole ... It is not necessarily fatal, but it is not attractive."

The tone from the European Commission, the EU's executive, has shifted too.

On Monday, spokeswoman Pia Ahrenhilde-Hansen said: “We wish Greece will remain in the euro and we hope Greece will remain in the euro ... but it must respect its commitments. Greece has its future in its own hands and it is really up to Greece to see what the response should be.”

Asked about contingencies, she did not rule them out.

Reuters quoted one European Commission official saying: "Clearly, the future of Greece is in the Eurozone. We are working on that. The 16 other governments in the Eurozone really are at the end of their patience with Greece. There isn't room or any willingness to move. The decisions are really in Athens' hands. But it doesn't look good."

However, the official response remains that a Greek exit is not being considered.

In an interview with NBC News on Wednesday,  Angela Merkel, the German Chancellor, said: "I have the will, the determination, to keep Greece in the Eurozone. I think it will be good for Greece and good for all of us. We want Greece to stay in the Eurozone."

Some commentators have pointed to a 13 percent rise in the share value of British firm De La Rue, which is the world’s largest currency printer, amid speculation it is best placed to pick up the contract for issuing new versions of the drachma, the Greek currency phased out in 2002.

It has remained tight-lipped on whether it is working for the Greek government, but in the meantime an interim solution has been mooted in which existing euro notes would be converted into drachmas by being endorsed with an official stamp.

Would a 'Grexit' be so bad? If so, what are the alternatives?

Lagarde said a Greek exit from the Eurozone would “have consequences on growth… consequences on trade and…consequences on financial markets “. She added: “You can certainly assume it would be quite messy."

Global financial institutions have a $536 million exposure to Greek debt, according to the latest figures from the International Monetary Fund, although almost all is borne by France, Germany and other key European economies.

The Institute of International Finance has estimated that the global cost of a Greek exit could hit $1.2 trillion, according to the Daily Telegraph in London. When Argentina defaulted in 2001, foreign debtors lost around 70 percent of their investments, it said.

The Telegraph said a report in Germany’s Wirtschaft Woche magazine forecast that a Grexit would cost the Eurozone governments alone $300 billion, pushing the whole European economy – which narrowly avoided entering recession on Tuesday by recording exactly zero quarterly growth - into a crisis not seen since the 1930s.

Many are looking at the possibility that Athens issues IOUs to meet salaries and key service bills for a fixed period, much in the way California did during its budget crunch in 2009 when it issued 'registered warrants' with a coupon in place of dollar salaries and which banks then accepted for cash. Much hinges on whether the European Central Bank would allow the Greek central bank to accept such IOUs and there's little clarity on those hypotheticals.

However, strategists believe any Greek government IOUs would quickly act as a proxy for a new drachma and exchange values against the euro would mostly likely plummet in practice as people rushed to cash out - offering Greeks a glimpse of the shock of devaluation in a euro-ised economy with euro-denominated debts.

"I'm really not sure Greece could survive for very long if external money was cut off," said Darren Williams, economist at fund manager AllianceBernstein. "But what an experience of IOUs may do rather quickly is bring home to the average Greek citizen just how much more difficult a place it is outside the bailout programme and outside the euro."

What would happen to the euro?

Besides the huge liabilities, there is the risk that a Greek exit from the euro would set a precedent for the possible exit of other weakened economies including Spain and Portugal. "Opening up the Pandora's box of exit means deposit risk across the periphery,” an RBS analyst told Reuters.

Jan Randolph, head of sovereign risk, IHS Global Insight, told the BBC: “It would be difficult for the [European Central Bank] to keep banks afloat. The Greek banking sector would collapse as well. What happens next is a political question. European nations would probably not accept another Western European country descending into chaos and collapse.”

What is the political future for Greece?

Rampant inflation, civil unrest and even a return to dictatorship could be on the cards, analysts warn.
Arghyrou told “There will be no credit for Greek banks or the Greek state. That could mean a shortage of basic commodities, like oil or medicine or even foodstuffs.

The country would end up in a volatile period. There would be institutional weakness. The worst case scenario would be a social and economic breakdown, perhaps even leading to a totalitarian regime.”

Henry Wilkinson, head of analysis at the Risk Advisory Group, said: "We are entering into unknown territory and it remains profoundly unclear what actually will happen. I wouldn't overstate it, but I think the big concern out of all of this is that in times of great uncertainty and hardship, more extreme parties tend to find greater resonance with their message."


Henry Wilkinson's remarks are as good a summary of this crisis as can be found anywhere.We don't really know what will happen, but already we don't like it.The possibilities all seem to be bad.

There have even been some comparisons drawn with the financial situation in Germany in the early 1920s, when the Mark (eight years earlier, as solid as the pound or dollar) became so worthless that  one billion marks bought no more than a postage stamp. I had one, in my boyhood stamp collection. It made an impression, even though I then knew next to nothing about Gernany's disastrous defeat in the Great War, and the far worse sequel that came 27 years later.

What did remain in my mind was the impression that Germans must have lost everything. Not all Germans did; there are always some who profit from disaster. But for most decent Germans, it was very much like what had happened to the South during Reconstruction.

There were no Yankees to hate, but there were the French - who were not gentle about exacting reparations for what Germany had done during the war. Most Germans believed, not without reason, that Germany's only "crime" had been to believe in Woodrow Wilson and to expect a just peace.

The present Greek situation is, of course, quite different. Greece has not lost a war, but a battle for fiscal responsibility.The laws violated were economic, rather than moral or political. Economic laws are, however, different from moral or political laws.They are unchanging, eternal facts rather than ephemeral human agreements.

Just as two plus two will always equal four (even if the calculation is made by things that look like giant bugs a million light-years from Earth) "you can't get something for nothing" is such a fact. Its formal title is "The Second Law of Thermodynamics." Its formal statement is: "In general, the total entropy of any system will not decrease other than by increasing the entropy of some other system." As an engineering student I hated thermodynamics, but the Second Law stuck in my mind because it was one of the few concepts in that unreasonable subject simple enough for anyone to understand if restated in plain English.

If a system is at equilibrium, no spontaneous processes occur unless you add energy. The energy in can never fully equal the energy out as usable work. So, heat flows naturally from hot to cold. Water won't flow uphill, and you cannot get more out than you put in, so there can never be a perpetual motion machine. Even God could not make a perpetual motion machine, or make two plus two equal five, or create similar absurdities.

Greek politicians have pursued political perpetual motion for decades. "Greek voters want it all now and  don't want to pay for it until later." The unspoken part (which everyone understood very well) was: "when we're all dead and it's someone else's problem." Those Greeks mostly ARE all dead now, and their children and grandchildren have inherited this mortgage against Greek society. That mortgage is now headed for foreclosure. Unlike a mortgage on a house, it can't be escaped from by mailing in the keys and walking away from the debt.

Today's Greek voters don't (or won't) understand that.


Say your prayers': Attempts to form new Greek government fail
F. Brinley Bruton and Reuters contributed to this report.

Attempts to form a government in Greece collapsed on Tuesday, worsening fears that leftists opposed to the terms of a European Union bailout could sweep to victory and push the eurozone crisis into a dangerous new phase. 

In Athens, a spokesman for President Karolos Papoulias said his efforts to broker a compromise -- in which a cabinet of technocrats would try to steer the country away from bankruptcy -- had failed, nine days after an inconclusive general election.

A caretaker government will now be formed pending a new vote probably in mid-June.


'Bad news' for U.S.?
And with hostility rising in Greece to austerity policies imposed by the European Union and International Monetary Fund, speculation 
that Greece will exit the eurozone won't go away. 


Greece abandons quest to form new government
The amount of political energy and effort being spent on sorting out the Greek issue means that policymakers and politicians were simply "muddling through" and not focusing enough attention on the entire trading block's ailing economy, he said. 

Then there is the question of contagion, experts warn.


At least 100,000 march in Spain over austerity
Greece's left-wing SYRIZA party, which surged to second place in last week's election on an anti-austerity platform, rejected all compromise with pro-bailout parties, emboldened by opinion polls showing it could top the poll in a second vote. 

The tremors from Greece, compounding worries about Spain's debt-laden banking system, ended any honeymoon for new French President Francois Hollande, thrusting the growing risks to the EU to the top of the agenda for his first meeting with German Chancellor Angela Merkel hours after he took office.

Exit Sarkozy, enter Hollande: Socialist sworn in as French president
In his inaugural address, the Socialist president called for a European pact to revive growth and temper German-driven austerity measures, seeking to change the direction of eurozone economic policy.
"I will propose to our partners a pact that will tie the necessary reduction of our public debt to the indispensable stimulation of our economies," Hollande declared, saying Europe needed "projects, solidarity and growth." 


Say your prayers, indeed.An essential element of political and financial stability is beginning to come apart at the seams, and no one apparently knows how to stop what has happened thus far from developing into a much larger and much more serious collapse.

The long-term consequences of dissolution of the European union terrify some observers, yet are being welcomed by others.

No one really knows what will happen, meanwhile fear of the unknown rages like a political hurricane. Rarely have the winds of change blown so forcefully.