Category: European Union

Óχι* Euro?

No Comments

So Greece has now officially defaulted on its IMF loan:

Greece has officially missed its payment to the IMF.

Though this is not technically considered a “default” — the IMF now considers Greece “in arrears” — Greece has now officially not paid the 1.6 billion euros (or about $1.8 billion) it owed the IMF by Tuesday.

IMF managing director Christine Lagarde, however, said in June that she would consider Greece in default if it did not pay.

 This is the largest missed payment ever owed to the IMF.

Greece is now no longer in a bailout program for the first time since 2010.

 In a statement, the IMF confirmed that Greece missed the payment due on Tuesday and added that Greece requested an extension of its repayment, which the IMF’s executive board will consider “in due course.”

 Greek banks and the Athens stock exchange remain closed through this week ahead of a July 5 referendum to vote on the latest bailout proposal from Greece’s creditors.

This is a big deal, but I do not think that the Greek government was left with a choice.

It has become increasingly clear that the goal of the Troika has been regime change ever since Syriza won the last election, primarily because they are a bunch of moralistic† idiots, who do not realize that the alternative to Syriza is not a return to the center-left and center-right parties, but rather the rise of the fascist Golden Dawn party”.

This is why Greek PM Alexis Tsipras felt compelled to call a referendum.

The demands of the Troika have always been about a number of things, none of which have anything to do with the well being of the Greek people:

  • Protecting their own domestic banks from thrie exposureto Greek Debt.
  • Reinforcing German hegemony of the Euro Zone. (Berlin only on this one)
  • Making a public example of Greece as a warning to others.
  • Preventing other “leftist” (social democrat by the standards of the 1960s) parties, particularly Die Linke (The Left) in Germany, from coming to power.
  • Discrediting the modern social safety net.

It should be noted that I do not see any way to a happy ending here:

………

But a former deputy governor of Cyprus’s central bank, Spyros Stavrinakis, has warned that reopening the banks will be hard.

Stavrinakis lived through the 2013 Cyprus crisis, in which capital controls were imposed for almost two years.

He says:

Once you impose capital controls, you immediately send a message that there is something wrong with the banking sector.

It is very difficult to phase down and unwind capital controls, once they are imposed, Stavrinakis adds.

………

Most things in the European Union are designed to actively obfuscate reality. These are called deposit insurance schemes but that is a legal lie. In the United States the FDIC is Federal (its right in the name). The EU imposes a requirement that each country “insure” their deposits but it provides no financing for this. The last data I saw (which I can only verify from 3 years ago) is that the Greek deposit insurance fund has a paltry 3 billion dollars in it. In short there is no current backstop for Greek depositors. This is why they are talking about implementing a European wide deposit insurance union but that isn’t supposed to come until next year at the earliest and who knows if that will really happen and to what extent it will be universal among current Eurozone members. relevant links below.

………

Three-and-a-half billion euros. That is roughly how much cash Greece’s banks need to get through the week if each adult takes out the €60 ($67) they are allowed each day. It isn’t much for Greeks to live on, but it may be more than the banks have.

Also, in the realm of the absurd, there is a  crowdfunding project for the Greek Bailout Fund on  Indiegogo, with about €¾ million raised, out of the €1.6 billion needed raised so far.

The German insistence on Versailles Treaty economics, when juxtaposed with the Greek tradition financial profligacy and corruption, has produced a truly toxic mix, which will probably break up the Euro Zone, if not the whole European Union.

*Greek for no.
†The word for “debt” in German is “Schuld”. This is also the word for “guilt” or “blame”, which explains why the Germans are so fond of Sado-Monitarism. The Germans see this as a morality play, and the last time that Germans tried to enforce a morality on the rest of Europe, it was pretty unfortunate.

And So the Dissolution of the EU Begins

No Comments
Greek Prime Minister Alexis Tsipras will be calling for a referendum on the Troika’s proposal:

In a dramatic move that will put Europe on tenterhooks, the Greek prime minister Alexis Tsipras told his fellow citizens last night he would call a referendum on the bailout accord that international creditors have proposed to keep the debt-stricken country afloat.

Following an emergency meeting of his cabinet, Tsipras said his leftist-led government had decided a package of austerity measures proposed by the country’s creditors – made in a last-ditch effort to avert default – would be put to popular vote. The referendum will take place on Sunday 5 July.

“After five months of hard negotiations our partners, unfortunately, ended up making a proposal that was an ultimatum towards Greek democracy and the Greek people,” he said in a national address, “an ultimatum at odds with the founding principles and values of Europe, the values of our common European construction.”

The leader, who only hours earlier had rejected the proposed reforms after several days of high-stakes talks in Brussels, said Greeks now faced a “historic responsibility” to respond to the ultimatum.

He said the reforms were “blackmail for the acceptance on our part of severe and humiliating austerity without end and without the prospect of ever prospering socially and economically”.

This is actually the intention.

This is politically motivated sadism.

The Germans want it because the want to demonstrate their power and virtue, and because of memories of  a period of hyperinflation that was caused by the triumphalism of the victors in the First World War.

The French want to be sure that they are not on the losing side of this alone.

The other northern tier EU countries have been relegated to spectator status.

What would seem to be Greece’s natural allies, Ireland, Spain, Portugal, and Italy, are desperate for Greece to fail, because if Syriza succeeds, it bolsters the anti-austerity parties in their countries, which threatens their political elites’ hold on power.

So I expect that Greece will be crushed under what is largely a German boot, and that various neo-facist parties, particularly New Dawn in Greece, will gain power as the center delivers misery, and the left is systematically excluded from meaningful governance.

Tell me that this does not look like 1932.

(on edit)

I read something similar to this, but had neglected to bookmark it.

I have now found who it was who explained the politics of this, it was Paul Krugman:

As a political matter, the big losers from this process have been the parties of the center-left, whose acquiescence in harsh austerity — and hence abandonment of whatever they supposedly stood for — does them far more damage than similar policies do to the center-right.As a political matter, the big losers from this process have been the parties of the center-left, whose acquiescence in harsh austerity — and hence abandonment of whatever they supposedly stood for — does them far more damage than similar policies do to the center-right.

The Problem with the EU in a Few Sentences

No Comments

I strongly suggests that you read Katharina Pistor’s essay on how the EU is betraying its ultimate goal, a unified and peaceful Europe, in their dealings with Greece in her OP/ED, The Problem With a Small Europe:

News headlines notwithstanding, the fundamental challenge facing Europe today extends far beyond Greece. The real question is what kind of European Union Greece’s creditors want: a “small” one, comprising only the countries that are prepared to live by their exacting standards, or a “big” one that heeds the Treaty of Rome’s call for “ever-closer union.”

………

European integration was built on the ideal of a united Europe working together to uphold peace, generate prosperity, and advance democracy. At first, cooperation centered on the creation of a common market, with European technocrats, led by the European Commission’s then-president, Jacques Delors, pushing for a common currency, despite deep structural differences. The assumption was that political integration would follow.

That did not happen. Indeed, the approach was tantamount to putting the cart before the horse – with serious consequences, exemplified in the eurozone’s enduring crisis. Yet the technocrats are back, now advocating a fiscal union to support the monetary union, with political union nowhere in sight.

Perhaps European leaders still believe that the needed political integration will eventually occur. But, even in the unlikely event that it does, a political union that emerges from desperation to save the common currency will be very different from one built purposefully, as the Treaty of Rome envisioned, based on shared values and goals. And, in the meantime, a fiscal union without a political union is an anti-democratic nightmare.

………

In this context, it is perhaps understandable that the creditor countries are increasingly promoting a “small” EU that includes only those that are willing and able to meet their high standards. But, while this might make for a stronger euro – and even a stronger EU – it would carry a huge cost, as it would effectively force members to abandon their democratic ideals. Meanwhile, the excluded countries would be forced to engage in competitive currency devaluations and other beggar-thy-neighbor policies. The dream of shared prosperity in Europe would be dead.

This outcome is not inevitable. A common currency is a means to an end, not an end in itself. If European monetary union is not leading toward the desired end, it – not the goal of ever-closer union – should be altered. And, in fact, most Europeans favor a different means, based on greater flexibility for domestic preferences and a bottom-up approach toward further integration. In such an environment, Greece might not only survive, but thrive.

I would note that the founders of the Euro currency said that their goal was to create a uniform standard of living across Europe.

It appears that they may get their goal, but it will be lowering living standards of more prosperous nations, not raising up their less fortunate neighbor.

Not surprising when one understands that Robert Mundell, the “father of the Euro”, is also considered by many to be the “Father of Reaganomics.”

Impoverishing ordinary people is a feature for people like Mundell, not a bug.

Finally, a Good Analogy for What Is Happening to Greece

1 Comment

What the Troika is actually trying to do is not to do the right thing, they are, as Nobel Prize winning economist Amartya Sen notes, trying to go Versailles on Greece:

On 5 June 1919, John Maynard Keynes wrote to the prime minister of Britain, David Lloyd George, “I ought to let you know that on Saturday I am slipping away from this scene of nightmare. I can do no more good here.” Thus ended Keynes’s role as the official representative of the British Treasury at the Paris Peace Conference. It liberated Keynes from complicity in the Treaty of Versailles (to be signed later that month), which he detested.

Why did Keynes dislike a treaty that ended the state of war between Germany and the Allied Powers (surely a good thing)?

Keynes was not, of course, complaining about the end of the world war, nor about the need for a treaty to end it, but about the terms of the treaty – and in particular the suffering and the economic turmoil forced on the defeated enemy, the Germans, through imposed austerity. Austerity is a subject of much contemporary interest in Europe – I would like to add the word ­“unfortunately” somewhere in the sentence. Actually, the book that Keynes wrote attacking the treaty, The Economic Consequences of the Peace, was very substantially about the economic consequences of “imposed austerity”. Germany had lost the battle already, and the treaty was about what the defeated enemy would be required to do, including what it should have to pay to the victors. The terms of this Carthaginian peace, as Keynes saw it (recollecting the Roman treatment of the ­defeated Carthage following the Punic wars), included the imposition of an unrealistically huge burden of reparation on Germany – a task that Germany could not carry out without ruining its economy. As the terms also had the effect of fostering animosity between the victors and the vanquished and, in addition, would economically do no good to the rest of Europe, Keynes had nothing but contempt for the decision of the victorious four (Britain, France, Italy and the United States) to demand something from Germany that was hurtful for the vanquished and unhelpful for all.

The high-minded moral rhetoric in favour of the harsh imposition of austerity on Germany that Keynes complained about came particularly from Lord Cunliffe and Lord Sumner, representing Britain on the Reparation Commission, whom Keynes liked to call “the Heavenly Twins”. In his ­parting letter to Lloyd George, Keynes added, “I leave the Twins to gloat over the devastation of Europe.” Grand rhetoric on the necessity of imposing austerity, to remove economic and moral impropriety in Greece and elsewhere, may come more frequently these days from Berlin itself, with the changed role of Germany in today’s world. But the unfavourable consequences that Keynes feared would follow from severe – and in his judgement unreasoned – imposition of austerity remain relevant today (with an altered geography of the morally upright discipliner and the errant to be disciplined).

Aside from Keynes’s fear of economic ruin of a country, in this case Germany, through the merciless scheduling of demanded payments, he also analysed the bad consequences on other countries in Europe of the economic collapse of one of their partners. The thesis of economic interdependence, which Keynes would pursue more fully later (including in his most famous book, The General Theory of Employment, Interest and Money, to be published in 1936), makes an early appearance in this book, in the context of his critique of the Versailles Treaty.

The purpose of the Versailles Treaty was to break Germany and German spirit, and 20 years later, Europe was at war again.

Now European powers, primarily Germany, are attempting to break Greece and Greek spirit.

This will not end well.

I Quote the Prophet, Bear Who Swims

No Comments

Over a year ago, the Bear Who Swims predicted to me (via email, not his blog) that the Europe was on a path to another war.

If you follow the history of Europe, there seems to be one every hundred years or so.

Well, now the Shrill One, Nobel Prize winning economist Paul Krugman, is making allusions to seeing the same thing:

U.S. officials are generally cautious about intervening in European policy debates. The European Union is, after all, an economic superpower in its own right — far too big and rich for America to have much direct influence — led by sophisticated people who should be able to manage their own affairs. So it’s startling to learn that Jacob Lew, the Treasury secretary, recently warned Europeans that they had better settle the Greek situation soon, lest there be a destructive “accident.”

But I understand why Mr. Lew said what he did. A forced Greek exit from the euro would create huge economic and political risks, yet Europe seems to be sleepwalking toward that outcome. So Mr. Lew was doing his best to deliver a wake-up call.

And yes, the allusion to Christopher Clark’s recent magisterial book on the origins of World War I, “The Sleepwalkers,” is deliberate. There’s a definite 1914 feeling to what’s happening, a sense that pride, annoyance, and sheer miscalculation are leading Europe off a cliff it could and should have avoided.

………

Yet there seems to be more to it than lack of trust. Some major players seem strangely fatalistic, willing and even anxious to get on with the catastrophe – a sort of modern version of the “spirit of 1914,” in which many people were enthusiastic about the prospect of war. These players have convinced themselves that the rest of Europe can shrug off a Greek exit from the euro, and that such an exit might even have a salutary effect by showing the price of bad behavior.

But they are making a terrible mistake. Even in the short run, the financial safeguards that would supposedly contain the effects of a Greek exit have never been tested, and could well fail. Beyond that, Greece is, like it or not, part of the European Union, and its troubles would surely spill over to the rest of the union even if the financial bulwarks hold.

I generally agree with my brother, aka “Bear who Swims”, that Europe is heading back into what seems to be a once a century path to conflict, though I differ in degree:  He posits a shooting war, and I expect something analogous to a Cold War along with a dissolution of the EU.

And once again, I’ll blame the Germans.

H/T Stephen Saroff      o o  The Bear who Swims      
                        (_)_____o      
                     ~~~~(______)~~~~~~~~~~
                         oo    oo

Good Move by Syriza

No Comments

With an increase in poverty, and hunger, and lack of basic medical care, the Greek Parliament has thumbed its nose at the Troika, and has passed a new anti-poverty law:

The Greek parliament has approved a package of social measures, despite warnings from the European Commission against “proceeding unilaterally”.

In parliament, the Greek Prime Minister Alexis Tsipras defended what he called a “humanitarian crisis” law.

The law – the first to be introduced since Mr Tsipras’s party won elections in January – offers food stamps and free electricity to the very poorest.

The total amount of assistance is worth about €200m ($213m; £144m).

It is the kind of anti-austerity measure that Mr Tsipras had promised before his election victory in January.

In a 30-minute speech he defended the legislation, which he described as the first bill in five years to be drawn up in Athens, rather than ordered by EU technocrats.

Soured relations

He also criticised a leaked letter from an EU official, which had advised Greece to consult with its international creditors before proceeding with the legislation.

“If they’re doing it to frighten us, the answer is: we will not be frightened,” Mr Tsipras told parliament. “What else can one say to those who have the audacity to say that dealing with a humanitarian crisis is a ‘unilateral action’?”

The new law, and Mr Tsipras’s defiant speech, come ahead of an expected meeting with Angela Merkel and Francois Hollande on the sidelines of an EU summit in Brussels this week.

This is a good thing.

With over 40% of the Greek population below the poverty line, it’s clear that there is a humanitarian crisis in Greece, and what the Troika, and the rest of the EU, don’t get is that if they manage to crush Syriza, the alternative is not the usual suspects, Pasok and ND, who have mismanaged the countries for decades, but the Fascist right wing Golden Dawn party.

Golden Dawn coming to power would not bode well for the future, either in Greece, or across Europe.

This Does not Bode Well for the Euro or the Eu

No Comments

As you are no doubt aware if you follow the financial papers, the Swiss Central Bank abruptly ended its peg to the Euro, and then all hell broke loose:

One does not normally see sharp right angles in financial charts, but you could pretty much cut yourself on this chart of the volatility of the Swiss franc against the euro:



One straightforward takeaway is: Whoa, that volatility is super high! But perhaps a more useful takeaway is: Whoa, it was super low for a really long time! This is of course because the Swiss National Bank capped the franc’s value against the euro: The SNB wanted a price of no less than CHF 1.20 per euro, and the euro itself wanted a price of no higher than CHF 1.20 for reasons of its own, so the result was pretty much a peg at slightly above 1.20. In the 12 months ending on Wednesday, the euro traded in a range of 1.20095 to 1.23640 francs:

 ………

 That chart looks more jagged than it is, because you’re standing too close to it. Here, I’ve zoomed out by two days:

………

 On the other hand! Imagine being a retail foreign-exchange broker and letting your customers day-trade Swiss francs with lots of leverage. How much leverage would you feel comfortable giving them? Well, if daily moves are typically less than 0.1 percent, then that means that 95 percent of the time their positions will move by less than 0.2 percent in a day. So if you required 2 percent margin — that is, you demand $2 of cash from them for every $100 worth of Swiss francs that they trade — you’d feel pretty safe. That would mean that, 95 percent of the time, customers couldn’t lose more than one-tenth of their equity in a day — so if they lost money and skipped out on you, you’d be able to liquidate their positions without getting close to losing any of the money you’d lent them.

On the other hand when the euro/franc moves by 19 percent in a day, they’re gonna get utterly smoked, and so are you. This is roughly the boat in which FXCM Inc. finds itself. Like many other retail foreign exchange brokers, it offered 50:1 leverage on FX trades. And yesterday its “clients experienced significant losses” on the Swiss franc move, and “generated negative equity balances owed to FXCM of approximately $225 million.” id=”footnote-1421429157415-ref”>  And now it’s in talks with Jefferies Group for a large cash infusion to fix the problem. FXCM is also distinguished by just an unbelievable sense of irony:

FXCM Chief Executive Officer Drew Niv, in remarks published in Bloomberg Markets magazine’s December issue, said individual currency traders are enticed by the chance to control large positions with little money down.

 “Currencies don’t move that much,” he said. “So if you had no leverage, nobody would trade.”

Famous last word words. FXCM is basically insolvent now, and is relying on a loan from a “white knight”, in exchange for who knows what concessions.

Here is the scary quote about this:

As realized volatility gets lower, estimates of future volatility — and so estimates of future losses — get lower. And so position limits get higher, as banks feel safer with the risks they’re taking, because, on a historical basis, they don’t look that risky. And then the risk that didn’t look risky becomes the one that gets you.

So, what we have just had a major case of “It’s different this time” contagion because a non-EU member dropped a peg following months (years?) of denials.

We have another player, and one who is one of the EU’s  “stronger” members who is not on the Euro, but is on a peg, Denmark, which retains the Krone.

And Denmark is promising to do whatever it takes to keep their peg:

Denmark moved to quash speculation it may follow Switzerland and abandon its euro peg, delivering a surprise interest-rate cut to prevent the krone gaining further.

“We have the necessary tools to defend the peg,”Karsten Biltoft, head of communications at the Copenhagen-based central bank, said by phone. Asked whether Denmark could ever consider abandoning its currency peg, he said, “Of course not.”

Since the Swiss National Bank shocked markets on Jan. 15 by jettisoning its three-year-old euro peg, Scandinavia’s biggest banks have fielded calls from hedge funds and other offshore investors asking whether Denmark could be next. Danske Bank A/S (DANSKE) has sought to dispel the speculation, noting Denmark’s three-decades-old currency regime is backed by the European Central Bank, unlike the SNB’s former system.

………


The Danish bank today cut its deposit rate to minus 0.2 percent, matching a record low, from minus 0.05 percent and lowered its lending rate to a record 0.05 percent from 0.2 percent. While the bank can adjust rates at any time, it traditionally announces changes on Thursdays and mostly in connection with ECB moves.

Is it just me, or do the assurances of the bankers at Copenhagen not sound particularly credible right now?

If Denmark is forced to drop its peg, all hell breaks loose, because it opens a Pandora’s box of asymmetries that have been growing in the Euro zone, and the EU over the past 3 decades.

It will not be pretty.