Sitting Ducks & Flying Pigs

SUBHEAD: Even though there's plenty talk of tanks in the streets of Athens the genie is out of the bottle.  

By Ilargi on 20 June 2011 for Automatic Earth -

Image above: Proverbial flying pig. From (

First, any Greek bailout plan that will (may?!) be agreed on doesn't change anything about the country's financial reality. Greece is unable to pay down its debt. If an IMF/ECB/EU package deal is found, that debt will simply now be owed to the "Troika". And Greece will still not be able to pay it back. You can find comments from those involved in the negotiations that suggest Athens will be "safe“ until 2014, or even for the next 5 years, but this is nonsense.

The first aid package hasn't even been paid in full, and the desperate need for a second one has already led to the emergency talks we see now. The only thing that changes is that -much of- the debt is shifted from private investors to the public at large. An all too familiar pattern, and one that is really due for a change.

The situation at the talks, meanwhile, is becoming so opaque it's getting harder to beleive there's not at least to some intent intentional. If Germany and France think they can get away with more procrastination, why wouldn't they go that route? They need the euro to weaken vs the UD dollar.

These are not good times to have a string currency. But again, they fail to see what the overall perception is in the marketplace. Which is that no matter what they do from here on in, their credibility is shot. For good. On Friday, Angela Merkel was reported to have given in to French and ECB demands to not press for involuntary haircuts for private investors. Sometime over the weekend, this was denied, or half denied.

Now, all of a sudden, Greece may only get half of the next tranche of Bailout 1.0, which it's supposed to receive in July. Moreover, any decision on the topic will be delayed until July as well. By then, we'll know if Papandreou will still be the Greek PM; he has a confidence vote coming up on Tuesday.

Papandreou's (caviar-) socialist party holds 155 of 300 seats. 5 defections and it's game over, both for him and for Bailout 2.0. To prevent this, he made his big party rival Venizelos Minister of Finance, to secure the support of the left wing of the party. If the confidence vote goes awry, Venizelos will probably step in, and Papandreou will gladly pass on the poisoned chalice. Venizelos will then not be able to pass the bailout deal on account of street protests, and thus be stuck with a huge mess.

Elections follow, and the next blind power hungry doofus steps in. Spanish bond rates are rising, as are Italian CDS prices after Moody's threatened a downgrade of Rome's government debt. Italian banks are getting hit hard. That is enough to weaken Greece even further. And that in turn is a major danger in Romania and Bulgaria, where Greek banks are among the main investors.

And if that is still not enough to weaken any- and everything that has to do with the Eurozone, its very head, Jean-Paul Juncker (who, admittedly, is a self-professed obsessive liar -when things get serious-) delivered the coup de grace. And it doesn't look like he meant to do it. I think he meant to strike fear in the hearts of the negotiators. Juncker became the first main voice to include Belgium in the group of endangered European animals. T

hat gives us PIIGS +B. Can I buy a vowel? Instead, Mr Juncker has now neatly lined up the row of Eurozone sitting ducks for the bond markets: Greece, Ireland and Portugal are obvious. Spain is getting there. Italy, and especially Belgium are the relatively new kids on the -chopping- block. Or the shooting range, if you prefer. Now, if the EU wants to prevent its members from being picked off one by one, what can they do? Interestingly, I read two completely different approaches over the weekend. Unfortunately, neither makes much, if any, sense.

In the Guardian, Larry Elliott writes: Greece must exit the eurozone, while the Telegraph's Edmund Conway argues: Why Germany must exit the euro. The problems should be clear: if Greece were to leave the Eurozone, either voluntarily or forcibly, conditions would have to be defined to enable it to do that. Such conditions don't exist; there is nothing written on it in EU treaties. Once these conditions would be negotiated (something that can take months, if not years), countries like Ireland and Portugal would also either want to leave or be made to do so.

Which would make all remaining parties involved look very closely at Spain and Italy. And Belgium. If Germany were to leave, it couldn't go alone either. The Netherlands would not remain in the EU without it, and in all likelihood, neither would Finland. With the three arguably strongest economies gone, France would find itself between two rocks and three hard places.

Paris might be tempted by the power games, but not by the peripheral debt; it would have to leave, or at least strongly consider doing so. A Greek exit may seem the more obvious way to go right now, but if such a thing happens, the Eurozone, if not the entire EU, would cease to exist in its present form.

A German exit simply won't happen. For now, the Eurozone countries are stuck with one another. And there's really only one way left to go for them. That is, to deliver haircuts to private investors, as well as to the ECB, the Federal Reserve, the Bank of Japan and perhaps China's central bank. Yes, a credit event. It will take them a while to realize this is the only path to take, the resistance will be formidable. But then, so will the resistance to ever more bank bailouts with public funds.

The Greek protests are an established phenomenon that will not easily be eradicated (even though there's plenty talk of tanks in the streets of Athens). That genie is out of the bottle. Spain's protests are for now more subdued, but a country with over 20% unemployment, and almost 50% of young people jobless, has a limited life expectancy. If the ratings agencies get serious about downgrading French banks, as they announced last week -and given their exposure to Greece it seems inevitable-, and if that raises rates in Paris and beyond, it will be game on. A flag in the Athens protests read:

"The French are sleeping – they're dreaming of '68". True enough, but how much longer? .

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