The Financial Times reported over the weekend that the US has woken up to the risk that the impasse between Syriza and the Troika over the Feb. 28 bailout funds deadline could lead to a disorderly Grexit, which short term would give Mr. Market a sad, and long term has good odds of being the first step in the unraveling of the Eurozone. That would turn Europe’s borderline deflation into a full-blown depression, and seriously impair the US economy, which is moderately integrated into the European economy. For instance, roughly 25% of S&P 500 profits come from Europe.
The overview from the Financial Times:
The US lobbying comes amid mounting concern in Brussels and Washington about the hardline stand taken by some eurozone governments, particularly Germany, that Greece must press on with budget-cutting commitments made under its existing €172bn bailout regardless of last month’s election, which brought anti-austerity party Syriza to power..
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US officials are expected to raise their concerns at this week’s meeting of the Group of 20 leading economies’ finance ministers’ gathering in Istanbul and during bilateral meetings in Washington on Monday between US President Barack Obama and Angela Merkel, his German counterpart.Over the course of the five-year-old eurozone crisis, Mr Obama has intervened with EU officials repeatedly, and sometimes decisively. Many EU officials credit an eleventh-hour call from Mr Obama with convincing Ms Merkel to back the first Greek bailout in May 2010.
But the German chancellor has not always welcomed US pressure, resisting Washington’s lobbying in 2011 and 2012 for a bigger “bazooka” of bailout cash to calm panicking financial markets.
The personal involvement of Obama is a welcome sign of seriousness, and contrasts with the fact that the head of the Treasury team dispatched to Athens, Daleph Singh, looks troublingly young, and his previous experience consists of being an emerging markets trader at Goldman.
But what is far more worrisome is what we hear from a source with knowledge of the Treasury discussions, namely, that they are worried about the run on the Greek banking system. As readers may know, that started with the Syriza win and we suspect was in large measure due to oligarchs voting with their feet. However, the ECB kneecapping of Greece, by effectively ending its access to financial markets, has had the additional effect of re-stoking depositor worries about the banking system, since it called attention to the fact that the backstop, the Emergency Liquidity Assistance program, is subject to reauthorization every two weeks. Now in fairness, the ECB gave a big boost to the amount the Greek central bank could access under the ELA, from €15 billion to €60 billion. I am cynical enough to believe, and plenty of others share my views, that the ECB wanted to keep the bank run going to pressure Greece but have plausible deniability about what they were up to. And the continued impasse has led to a considerable ratchet up in media chatter about Grexit, which is another reason for depositors to take flight.
What is particularly troubling about the word from Treasury is that their concern about the Greek banking system is tantmount to saying that the ECB might withdraw the ELA. This would be catastrophic for Greece, and it would also mean that no depositor in the Eurozone could regard his deposits as safe, since the supposed leader of last resort reneged on that commitment for strictly political ends.
Ambrose Evans-Pritchard confirms this reading. From the Telegraph, emphasis ours:
The EU authorities have told Mr Tsipras that a series of crucial meetings in Brussels this week are his last chance to retreat from hot campaign rhetoric and agree to an extension of the Troika bail-out.
The clear threat is that the European Central Bank will cut off €60bn of emergency liquidity support for the Greek financial system when the existing Troika arrangement expires on February 28. This would force Greece to impose capital controls, nationalize the banks, and reintroduce the drachma within days.
Even if the ECB agrees to a stay of execution, Athens will start to run out of money in March, when it faces repayments to the International Monetary Fund, followed by other creditors. Tax revenues have dried up over recent weeks as Greeks wait to see what Syriza does in office. The treasury’s cash reserves have fallen to €1.5bn.
It is also worth noting that even if Obama gets something of a respite for Greece, it won’t amount to much. Given that the Administration is firmly neoliberal, we suspect they won’t do much to support Greece in its desire to improve wage and employments levels, and will instead push for a mere lessening of the severity of austerity. So rather than the Troika breaking Greece on the rack, its citizens will have to continue to labor in the salt mines.
As we noted yesterday, Bernie Sanders is pressing the Fed to try to talk sense into the ECB, which is a clearly an uphill task.
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How irresponsible would it be for the ECB to withdraw the ELA. Gaming for a bank run is equally irresponsible for the institution theoretically involved in monetary stability in ALL the eurozone. The message that is sending to other countries migth turn fear into rage and that’s not the role the monetary authority is supposed to play. Particularly troubling for the EU could be the effects on public opinions in France as Swedish Lex has written in this blog.
The US may be rigthly worried about a disorderly outcome in Greece but yet there are other fundamental problems that should be addressed. Austerity has already turned the eurozone to a large net exporter. For instance, Spain used to run a small commercial deficit with the US and austerity has turned it into bilateral superavit. Not large but noticeable. While authorities are negotiating TAP inside closed doors, other nasty developments could derail globalization while policymakers in Germany or Netherland insist on beggar-thy-neighbour policies.
I’m glad Bernie Sanders questioned the wisdom of listening to Alan Greenspan, has the man’s reputation not even suffered in the eyes of the corporate media?
Sadly, also CNBC is acting like austerity worked just fine in the other periphery countries. I wish Senator Sanders did more to dispute that, but there’s only so much idiocy one can battle at once.
Seems to be a Greek truck loaded with munitions playing a game of chicken with a Mercedes on a steep winter mountain with the Brussels greasing the slope.
Of course it will end well.
Depositor worries about the banking system? Why would anyone trust the banking system after all we’ve seen? How many countries have bail-in laws? Just wondering how many people consider the banks criminal yet continue to keep their life savings in the banks. The trust we place in strangers, even criminals!
I see in today’s news that the EU may have blinked. If that’s the case then it indicates how fragile the global economy really is. Can it not even survive a Grexit without a total collapse? What depositors in the banking system? There’s only monetizied liabilities.
The US has a stake in the Greek outcome. Yves is correct to assume the economic winds from this could easily hit our shores.
But I don’t think the push from the WH (or Sanders from Senate) is appropriate. The US is not willing to increase its quota in the IMF to bailout the EU, So it would be better to sit and watch rather than make suggestions that have no substance behind them.
If D.C types want to talk about debt, then they should look no further than Puerto Rico. Greece has $350B of debt shouldered by 11m people. PR has $165B of debt carried on the back of 3.5m people. Half the debt, but only 1/3 the population.
Greece’s debt is vastly lower in NPV terms as a result of the bailouts. The Telegraph estimated it at 70% of GDP.
And Puerto Rico does not have the potential to set off a series of events that can do outsized economic damage.
Moreover, the idea that “Greece” borrowed is narrowly accurate but substantively wrong. 90% of the bailout money did not go to Greece. Greece was a money-laundering vehicle for insolvent French and German banks.
In addition, unlike Puerto Rico, Greece is in the midst of a humanitarian crisis. And the results of austerity have shown again and again that they only make debt to GDP ratios worse (absent haircuts, which Greece has effectively gotten). Cutting the numerator (fiscal spending) simply makes the denominator fall faster. The time is long overdue to end this failed economic experiment.
Syriza is the only party not connected to the oligarchs and thus willing to take on a tax system that collects revenues from only about 30% of its citizens. Despite its Troika-alienting rhetoric, Syriza is the best hope for fixing Greece’s largest fiscal problem.
‘Greece was a money-laundering vehicle for insolvent French and German banks’
That’s it, the issue distilled, in a nutshell. The debt, even though supervised by ‘the authorities’, is as odious as that of any junta. Perhaps that’s a distinction without a difference nowadays – our authorities have become juntas.
I hope someone from Senator Sanders staff has the audacity to go back and look at the fine print of the London Agreement of 1953 that Dr. Strangelove of the German Finance Ministry thinks protects his little creative amnesia…In that agreement, Article 5(2) covers and in Abt’s own side notes and comments to the agreements, he accepts and acknowledges the “terms” that were included in the Bonn Agreements of 1952 which allowed Kesselring and his crew to walk around like loud idiots so soon after the war…as part of the Partial Treaty to restore Sovereignty to Germany(Bonn 1952)…The “Convention on the Settlement of Matters Arising out of the War and the Occupation”, covers the purported “reparations” that Germanys own little Dr. Strangelove has decided is now part of a mineshaft gap…or was that a memory gap…The Bonn Agreements had a condition precedent…that the US would waive most of its recovery of costs of the occupation for Abts promise that Germany, when she was reunited and on her feet economically, would in fact deal with reparations…along with starting the payments on the Hoover Stand Still agreement from ww1 Dawes/Young issues.
So…If, Dr. Stangelove thinks he has the upper hand, then perhaps Senator Sanders can ask Germany to pay back to the United States those funds that were by treaty to be waived, “only for the specific promise”, and in fact, from the insistence of Abt that Germany could not pay both, and since “it really wanted to one day pay reparations”… He can ask the State Department if it has received any official communication from the German Government that it has chosen to abrogate the Bonn 1952 and LDA of 1953, and if so, what actions the State Department is now prepared to take to collect those expenses whose collection had been suspended subject to the German pledge to pay out reparations in the future. As to the purported German argument that the payments made from 1990 to 2010 were the TOTAL payments, they were at best, (and since the BIS does not seem to have actually forwarded to Greece its 2.7% of the funds)… at best in some type of attempt at compliance with the part on payments for the Standstill agreement of President Hoover at the beginning of the Depression for the Young Payments and Bonds of 1930.
Any honest and total review of the German antics over the years, from the insisting on and then ignoring the 1946 Paris Reparations agreement, to all the nonsense internal and infernal German laws, to the bad faith arguments against both Lichtenstein and the Seimens judgment obtained in Greece and ignored by Germany via Italy…Each and every German government has lied to tribunals and judiciaries for 70 years. The problem is that back then, there were no PDF’s and one could hide these lies inside a clerks file drawer in each of these little gambits. But now, it is not difficult to show the pattern of fraud, and contempt by each and every German Government since the end of the war. So much on the insistence by Germany that we must all follow the rules…So the question is why do Moodys and S & P continue to give Germany such a high rating if they know or should have known if they were actually doing any analysis, that Germany has an outstanding treaty obligation, either to give out reparations or to pay back the US for post war occupation expenses…
As to the “Foundation”…in the Lawsuit, and settlement the US Government filed a document into the court record the Germans seem to want to hang their hats on…STATEMENT OF INTEREST OF THE UNITED STATES PRELIMINARY STATEMENT…but if one bothers to go to page 7 of the document…”and the United States has not extinguished the claims of its nationals or anyone else.”
so maybe Dr Stangelove should think about what he is saying before he says it…gotta love adobe…
or better yet…
to paraphrase Mr. Jackson…(or was that Mr. Fishburne)
now tell me…whose in your wallet….
‘So much on the insistence by Germany that we must all follow the rules…’
It is this rank hypocrisy that adds the incredible icing to the cake, the gall of it. I read (probably here) that Greece alone is still owed the equivalent of 95 billion euros; that would remove much of the sting of the present debt, and have the added allure of reducing the destructive German surplus. If all nations threatened by the Troika’s use of the debt weapon were to institute a ‘class action’ to recover unpaid German war debt and/or reparations, the surplus would become a deficit and hooray we might have a growth motor at the centre of the ailing EU. Such a co-ordinated effort could not be ignored or fudged by the neoliberal MSM, but the chances of that sort of unity in the face of the debt-wielding divide and rule strategy of the Troika, aided by the still majority presence of its lieutenants in the capitals, is remote.
When I retailed this idea at another blog, a commenter thought it outlandish, on the grounds that so much time had passed and that there was ‘such a thing as forgive and forget’. So I wondered aloud if Greece’s best strategy was just to stall for time, a lot of it, so that this statute of limitations could kick in. There was no reply.
Some nations are obviously more equal than others.
Since every step of this drama is largely predictable the question to ask is: “What advantage does the Troika get from having fascist parties take control in Greece and possibly France?”
The death spiral of austerity cannot be sustained any longer in Greece in any case. So their choice is really no choice at all. They may as well simply refuse to yield and force the Troika to execute them. NOT because Grexit is going to lead to a good outcome, but because their choice is between exit now or in 6 or 9 months. Of course the Greeks realize that Grexit would be horrible. What is the point of surrendering for a mere stay of execution that comes at a horrific political and economic cost? Say they surrender. Then they are forced out and the fascists take over. We’ve been down this road before:
A collapse of parliamentary government in Greece will lead, as with Chancellor Bruning in the ’30s, to rule by emergency decree, followed by the installation of a fascist government that will repudiate it’s foreign obligations. I repeat. How does this help the Troika?
If you consider that the Troika vs. Greece contest represents, in a sense, the very institution of sanctity of debt, the threat of the rise of Golden Dawn:
* Provides a ready pretext for exigent interference with political organization and expression for non-elite individuals in both creditor and debtor EZ countries
* Offers a “pour encourager les autres” spectacle for other debtor nations to contemplate before asking to break their indentures
* Likewise, reminds individuals to treat their own financial debts as inviolate
* Asserts a place in (at the top of) the order as its protectors and defenders
Too often, the “Ferengi ask” — “Why would they” in regard to some apparently individually unprofitable action — can be answered correctly with “class interests”.
Yves, do you really think the ECB is going to withdraw ELA ? This is not meant to be a rhetorical question. I’d be interested to hear under what scenarios you imagine this is actually possible.
One of the cornerstones of my understanding of the situation is that they will never do that, since the outright collapse of the Greek banks would be a disaster for the European banking system, which the ECB is charged with protecting. Moreover they would be seen as responsible for, likely very serious, political consequences, up to and including the collapse of the Euro.
If they’re really willing to pull the pin on that grenade all bets are off.
I don’t think they’d be so ham handed as to do that directly. But they might impose conditions, which takes a 2/3 vote of the ECB governing board, that are hard for Greece to meet and/or require Syriza capitulation. That would make their hands look less dirty.
https://www.ecb.europa.eu/pub/pdf/other/201402_elaprocedures.en.pdf?e716d1d560392b10142724f50c6bf66a
These are the terms of the ELA.