Why Greece is all but guaranteed to default on March 20


From Gonzalo Lira:

On March 20, Greece has to come up with €14.3 billion—or else it will be bankrupt.

Of course, Greece doesn’t have €14.3 billion—that’s why the Troika of the IMF, the EC and the ECB are trying to hammer out a deal to bail them out again: A bailout to the tune of €136 billion. They’ve had marathon-length negotiating sessions, one “crucial emergency meeting” after another—hell, they even called the Pope to send them a case of holy water and a truckload of wooden stakes. I’m serious!

Last Monday, a deal seemed to have emerged: That’s what the announcement sounded like. In fact, it looked so much like a done deal—it was spun so decisively as a done deal—that I was all set to write something snarky like, Greece Takes It Greek Style: “Thank You Troika, May I Have Another” Bailout On Its Way. (What can I say: I’m a vulgar bastard.)

But then . . . then we all started looking at the fine print of the deal. And that’s when everyone who follows this stuff started to realize that the deal wasn’t a deal—merely the illusion of a deal.

A motto of mine: Never try to do the work someone else has already done for you. In the case of analyzing the Greak “deal”, I turn to John Ward, who pretty much nailed the critique of the deal:

1. [A]lthough the ECB has made a reasonable fist of complicating its subordination of the private bondholders – money out, profits redistributed, local central banks reinvesting and so forth – it remains a preferential deal done outside this so-called ‘bailout with PSI’. The IIF creditors have sort of voluntarily taken the extra 3.5% hit, but the coupon they’ve been offered is worth less than the original. In a statement issued by representatives of private bondholders, the new interest rates – 2% for the first three years, 3% for the next five, and 4.2% thereafter were described as “well below market rates”, and the creditors will lose money on them. The tone of the statement screams ‘involuntary’. In English, all these factors spell default.

2. Nobody has actually signed up to anything yet: as usual with all things EuroZen, the bankers are alleged to be on-board, but the IIF statement made after the press conference suggests otherwise: ‘We recommend all investors carefully consider the proposed offer, in that it is broadly consistent with the October agreement’. That’s not true for one thing: but as a recommendation, it’s somewhat limp. Further, there is still a body of hardline ezone sovereigns who don’t want to do the deal – and in Germany itself, a growing rearguard campaign to stop it. (See this morning’s Spiegel for immediate evidence). And finally, most Greek citizens themselves will react violently to some of the more pernicious clauses.

3. The ‘agreement’ contains almost a full bottle of poison pills: Berlin has got its debt Gauleiters in the end, only 19 cents on the euro will go to the Greek Government itself, 325 million euros in additional spending cuts have been found, Athens has agreed to change its constitution to make debt repayment the top priority in government spending, the escrow account must have three months debt money in it at all times etc etc. The idea that Greece can now toddle off and have a liberal democratic general election without any of these being issues is Brussels space-cadet stuff at its most tragi-comic. (An opinion poll taken just before the Brussels deal showed that support for the two Greek parties backing the rescue package had fallen to an all-time low while leftist, anti-bailout parties showed gains.)

4. Several Grand National leaps lie ahead before the default is avoided. Parliaments in three countries that have been most critical of Greece’s second bailout – Germany, the Netherlands and Finland – must now approve the package. In Greece itself, further violence will test political resolve about yet more cuts in wages, pensions and jobs. Greece’s two biggest labour unions have already lined up protests in the capital tomorrow. Very significantly, Jean-Claude Juncker of Luxembourg and the IMF’s Christine Lagarde stressed at the press conference that Greece still had to live up to a series of “prior actions” by the end of the month before eurozone governments or the IMF can sign off on the new programme. If ever I saw a get-out clause, that’s it.

5. Other loose ends are left hanging everywhere. Nobody has elicitied any response so far from the Hedge Fund creditors. Entirely absent from comments was the IMF’s contribution to the €130bn bail-out. Christine Lagarde would say only that the contribution would be ‘significant’, but my information is that she’s lying through her $240,000 teeth as usual: the IMF will only contribute €13bn to the in new Greek funding. Not exactly a resounding vote of confidence for the deal. Juncker said he was optimistic that ezone members would cough up more cash at the EU summit in March, but this too simply doesn’t bear examination: Portugal is broke, Spain is technically insolvent, Italy has asked to be excused from this dance, and Germany has already shown extreme reluctance to to increase its exposure further still. Fritz Schmidt in dem Strasse isn’t too keen either. Finally, as Bruno Waterfield notes in his latest column at the London Daily Telegraph, the agreement remains ‘overshadowed by the pessimistic debt sustainability report compiled by the IMF, ECB and Commission, that warned of a “downside scenario” of Greek debt hitting 160 per cent of GDP in 2020 – far higher that the agreed 120.5 per cent target’.

6. This is where we get to what the MSM will largely dismiss as ‘conspiracy theory’….but for which the circumstantial and corroborative evidence gets increasingly compelling: whole crowd-scenes of actors off-stage (and several on it) simply do not want this deal to reach fruition: they have factored in a Greek default, and believe that the best way to avoid further debt-crisis contagion is for the money earmarked for bailouts to be invested in bank-propping and growth.

The cast of players who think this include David Cameron, Mario Monti, Mario Draghi, Wolfgang Schauble and most of the German Finance ministry, Christine Lagarde, probably Angela Markel herself, Tim Geithner, huge swathes of the German banking community, The White House – and elements in both Beijing and Tokyo.

(Emphasis added.)

John Ward nails the essence of the Greek deal: There is no Greek deal—just the illusion of one.

My only quibble with Mr. Ward is his point 6.: He writes that “whole crowd-scenes of actors off-stage (and several on it) simply do not want this deal to reach fruition”, which I think is accurate—but not for the reason Mr. Ward posits: I think the eurocrats have given up on Greece not because they “believe that the best way to avoid further debt-crisis contagion is for the money earmarked for bailouts to be invested in bank-propping and growth,” as Mr. Ward writes.

Mr. Ward is making a smart financial analysis of the situation. But the big decisions in macro-economics are never financial: They are always political—always. And politics is ultimately about psychology.

I think the eurocrats won’t bail out Greece not because they believe letting Greece default is the best way to avoid contagion: No, I believe the eurocrats will let Greece default because they no longer trust the Greeks or the Greek leadership.

Trust is like virginity: Once you lose it, it’s gone for good. Add to that truism a basic observation: If two parties truly want to make a deal happen, then the deal happens as if it’s on rails.

The key players of the Troika and the eurodrones generally just don’t trust Greece anymore. The Greeks have burned through that particular capital a long time ago. And by the passive-aggressive negotiation style of the eurocrats, they’re making it crystal clear that they do not want a deal with Greece. If they truly wanted a deal, it would’ve happened by now.

They don’t want a deal because the eurocrats and Establishment drones charged with saving Greece—for all their obvious flaws—are neither stupid nor blind: They realize that Greece is in all likelihood a never-ending hole. Whatever deal they hammer out now, they’ll have to hammer out yet another bailout package in 12 to 24 months’ time.

They realize—even if they don’t want to or can’t articulate it—that saving Greece is simply throwing good money after bad.

So they won’t. They will let Greece default. And the way they will do that is by demanding such egregious conditions—such as giving up Greek sovereignty—that Greece will refuse the bailout, or get locked into more and more negotiations, until March 20 finally rolls around.

Then it’s game over for the Greeks: They will default, exit the eurozone, go to the drachma, devalue, and go through hell for a few years.

It has now become too expensive—financially, politically, psychologically—to save Greece. The holes in the Monday deal show that there is no deal—and there won’t be any deal.

So on March 20, Greece defaults.

Now . . . if Greece defaults . . . then what about the rest of the eurozone?

Ahhh: That is the real question.

At my Strategic Planning Group, we have game-played what will happen when Greece defaults, and how it will affect the eurozone, other economies, and other asset classes. If you’re interested, check out the preview page.

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