Grexit Why and When

SUBHEAD: Grexit May 9th is being contemplated as Germany prepares saying Greece would need not only a 3rd bailout, but 4th or 5th.

By Tyler Durden on 25 April 2015 for Zero Hedge -

Image above: Greek Prime Minister Tsipras eyes German PRime Minister Merkel during recent meeting.  From original article.

It has been a very disturbing 24 hours for Greece.

It all started during yesterday's surprisingly short, just one hour long Eurozone finmin meeting in Riga, where Yanis Varoufakis not only got the most "hostile" reception yet being called "a time-waster, gambler, and amateur", but for the first time one minister openly said that maybe it was time governments prepared for the plan B of a Greek default. This happened after Jeroen Dijsselbloem slammed the door on Varoufakis' proposal for early cash after partial reforms.

"A comprehensive and detailed list of reforms is needed," Dijsselbloem told a news conference following a meeting in Riga. "A comprehensive deal is necessary before any disbursement can take place ... We are all aware that time is running out."

And so, what was once anathema, namely the official hints that a Grexit is being contemplated at the highest ranks, has now become almost commonplace, courtesy of the backstop provided by the ECB's QE, which has lulled everyone into a sense of calm because somehow the hope has been kindled that the ECB (which is rapidly running out of government bonds to buy) can offset the realization that what was once an "unbreakable union" is suddenly not only breakable, but no longer a union. As such the trillions in deposit outflows that will sweep the periphery are somehow to be ignored because, well, "Draghi."

This continued earlier today, when none other than German Finance Minister Schaeuble hinted that Berlin was preparing for a possible Greek default, drawing a parallel with the secrecy of German reunification plans in 1989.

As Reuters reports, at a briefing with reporters after a tense meeting of euro zone finance ministers on Greece on Friday, Schaeuble was asked if euro zone finance ministers were working on a "Plan B" in case negotiations on funding with cash-strapped Athens fail.

"You shouldn't ask responsible politicians about alternatives," Schaeuble answered, adding one only need to use one's imagination to envisage what could happen.
He indicated that if he were to answer in the affirmative that ministers were working on a Plan B -- what to do when Greece runs out of money and cannot pay back its debt -- he could trigger panic.

To explain his position, he drew a parallel with the secrecy that was necessary during the initial stage of planning for German reunification in 1989.

"If back then a minister in charge -- I was one of them -- would have said beforehand, we have a plan for reunification, then the whole world probably would have said: 'The Germans have gone completely crazy.'"
He is correct, but what is left unsaid is that the mere suggestion that Grexit no longer not being contemplated is a major escalation in Europe's attempts to launch a bank run, which they have done an admirable job at so far, leading to more than half of total Greek deposits being funded by the ECB's ELA as of this moment.

In other words, should the ECB boost the haircut on Greek bank collateral, and both a depositor bail-in and capital controls become inevitable.

Which incidentally, is what was also touched upon today, when the head of the Bundesbank and ECB governing council member Jens Weidmann said at a press conference in Riga, Latvia, that officials will discuss haircuts on collateral for emergency funding for Greek banks.
"As you know I have doubts about the provision of this emergency liquidity, because the banks are not doing all they can to improve their liquidity position, which I would expect from banks that avail of this assistance."

"Instead, they are extending their loans -- so-called T-bills -- to the Greek state, which is each time a new credit decision. As these T-bills aren’t liquid, this means that in comparision with the alternatives, this is a deterioration of the liquidity situation which I find unacceptable."

“The haircuts are designed according to the quality of the collateral -- which in this case is mostly government debt securities -- and that depends on the  outlook for debt sustainability which is connected to a successful conclusion of the aid program.”

“From my point of view it is clear: time is running out, the solution cannot come from the central banks, we have a clearly limited task, a clearly limited mandate, and must abide by our rules.”
He, too, is of course correct, and yet his statement is also quite hypocritical, considering it is precisely the check-kiting scheme that Greek banks are engaged in and which the ECB "suddenly" finds objectionably, that has been the norm across Italy, Spain and Portugal for years: all countries whose reform efforst are laughable, and the only reason they haven't imploded in the same pile of rubble as Greece is because the ECB has remained ss a buyer of last resort of their sovereign debt.

For now: because should Podemos or Beppe Grillo take chart in Spain or Italy, all bets are off, and the Greek "contagion", which is really just the realization that there is no ECB bid into insolvent paper, will spread overnight.

Which brings us to the final reason why it has been a very nerve-wracking 24 hours for Greece.
In an interview with Bild, Mark Hauptmann, a lawmaker from German Chancellor Angela Merkel’s political party said that "if Greece stays in the euro, it will need not only a third bailout, but also a fourth, fifth or even more."

He added that a Greek euro exit would be good in the long term because European contracts would regain their validity and Greece could regain its competitiveness.
He, too is correct.

Still, even with three "correct" statements laying out clearly why Greece should Grexit, somehow we doubt that anything will happen even as the posturing on all sides reaches a fever pitch, because while Europe may have Q€ as recourse to a Greek contagion, Greece now has a Putin threat as its final trump card. Because the second Greece is kicked out (or is forced to leave), the construction of the Turkish Stream begins, and with it the cementing of Russian energy dominance for the next decade, as well as the collapse of Ukraine (and the billions of western aid flowing into Kiev over the past year) into irrelevance.

 Is May 9 the Grexit Date?

By Raul Ilargi Miejer 17 April 2015 for the Automatic Earth -

Yes, more Greece, ever more Greece. Well, the focus is still very much there. It’s not the only topic, obviously, China warrants interest too, certainly with things like Tyler Durden quoting Cornerstone Macro as saying China’s true economic growth rate was just 1.6% in Q1 2015, not the official government number of 7%.

Never trust anyone, especially a government, that consistently meets or beats its predictions. With housing prices falling the way they have, -6% or thereabouts, and over 70% of Chinese private investment in real estate, it’s hard to see how a 7% GDP growth number could pass scrutiny. Sure, there’s the stock market bubble, but even then.

But for now back to Athens. Or Washington, actually, where Yanis Varoufakis finds himself. From what we can gather on his schedule, Varoufakis has (or has had) meetings with Obama and Lagarde on Thursday, and with Mario Draghi, Jack Lew and Wolfgang Schaeuble on Friday.

Also on Friday, he’s meeting sovereign debt lawyer Lee Buchheit, who’s a partner at New York law firm Cleary Gottlieb [..Steen & Hamilton], and has helped restructure debt for various countries. The Guardian, back in 2013 (how times have changed!), portrayed Buchheit as the ‘fairy godmother to finance ministers in distress’:
This is the man who stands up to the vulture funds – so named because they buy up the debt of desperately poor countries in order to chase them through the courts for repayment. So it is something of a surprise to meet a slight, mild-mannered lawyer, with more than a whiff of academia about him.
He insists he does not make a moral judgement in choosing who he acts for, but rather enjoys working for the debtor nations. “It’s just more fun,” he says. “If you represent the lender, your client is tiresomely saying things to you like, ‘Why don’t they just pay us the money back?’ When you’re on the debtor side, you can say, ‘If you want to get it back, why did you give it to us?’
In view of that last quote, it may be wise to once again reiterate that only about 8% of the bailout funds Athens is now on the hook for, actually went to Greece; the other 92% was used to save major European and American banks. As I said before, this has been a political decision, not an economic one. In that vein , we can take a look at the following from John Ward at the Slog, dated March 26:
At this link is an official EU release whose sole concern is the subject of ‘contingent liabilities’ entered into by EU member states. [..] the EU release in this instance contains some blockbuster facts….and adds another piece to the eurozone jigsaw of hypocritical mendacity. Contingent liabilities are often referred to as Shadow Debt: if you’re lucky, they won’t become an eventuality. But as the EU table shows, given the parlous nature of the ezone banking sector, every one of the liabilities is a racing certainty
We’ve all been asking why Germany ignored the EC bailin directive last week and bailed out a small Bavarian Bank. The answer is simple: not to do so would’ve been illegal under BundesRepublik law, because Berlin had promised so to do. On this basis, while at first sight German national debt is a ‘mere’ 70% of GDP, add the promises it has made to its banks, and the number comes in at a horrific 222%. Not far behind comes the Netherlands with a similar ‘official’ national debt at 73% of GDP. But the contingent liabilities are 115%…making a pretty nasty mountain of 188%.
The Number One and Number Two top contingent liability millstones in the EU are – by miles – Germany and the Netherlands. Now let me see…who are the two chaps working hardest to stop the Greeks and their contagious banks from going their own way? Why, none other than German finance minister Wolfgang Schäuble, and Dutch finance minister Jeroen René Victor Anton Dijsselbloem. The third prong of Troika2 is of course the ECB’s Italian Mario Draghi. Without any contingencies at all, Italy’s national debt is 132.6% of GDP. Add its 45.5% of contingents, and this too adds up to 178.1% of GDP.
Before you know it, things are no longer what they seem. If you were Lee Buchheit, you might want to argue that Greece is being thrown to the lions and the wolves because Germany and Holland bailed out their bankrupt banking systems, and vowed to keep doing it.

That would make it very hard to imagine them saving Greece today, since to do that, they would risk their own banks, which they bailed out with trillions of their own taxpayers’ money. It would be political suicide. It’s much easier to tell those taxpayers that it’s Greece that’s at fault, not their own heroic leaders (I say heroic because that’s how Bernanke portrays himself in his ‘Courage to Act’ fictional fluff).
So when, oh when, could the Grexit come? Daniel Roberts at Raas Consulting thinks he might have part of the answer:
One thing in common for almost all of my Pinewood International Schools (TiHi to some) class of ’78 is that we left. Many still live in Greece and in Thessaloniki or have returned, and they are closest to the pain. The real pain of the past decade, that has destroyed wealth and hope. Unemployment is running at levels not see in Europe since after the war, and at levels that encouraged the socialist-fascist civil wars of the 1930s. Those did not end well.
But that does not explain why the Grexit is inevitable, and why it will happen very soon.
1) This is what the Greek people voted for. No, they did not vote to stay in the Euro, they voted for the party that said it would reduce the debt and meet pension obligations. The Greek people and voters are not stupid. They knew this could only happen by either the rest of Europe bailing out Greece again, or by leaving the Euro.
2) The Greek people know perfectly well that Europe is not going to bail them out, because to do so will only set everyone up for the next bailout.
3) The Greek people, and the rest of Europe, know full well that the debt will never be repaid, and that the Troika are now acting as nothing better than the enforcers of loan sharks.
4) Syriza knows that it had six months before the voters would throw them out, and once out, Syriza would never come back.
5) The Greeks needed to show “good faith” in actually attempting to negotiate a resolution with the Troika. This has now been done, and is failing.
6) The demand for reparations from Germany is designed not to actually extract the reparations, but to anger the Germans to the point that they will block any compromise that Syriza would have been required to accept.
The Greek government, elected by a battered and exploited Greek people, has been establishing the conditions that will give them the moral high ground (in the eyes of their voters) needed to actually leave the Euro. Having set the conditions, when will it happen? I’m still guessing May 9th. Why? Greece will leave the Euro, and they will do it sooner than later. They’ve made the April payment, but simply do not have the money for the May or June payments, and they cannot pass the legislation required by Europe and the Germans and stay in power. That gives us a late May or June date. So why earlier?
Capital flight. Imposing currency controls will be a fundamental element of any Grexit. Accounts will be frozen, and any money in accounts will be re-denominated in New Drachmas. Once the bank accounts are unfrozen, the residual, former Euros will now be worth whatever the New Drachma has dropped to, and the drop will be significant, over–correcting to the downside. Once it is accepted that the Grexit is coming and there will be no last minute deal, and with memories of Cyprus too fresh in every Greek’s mind, the money will flow out of the country. Not just corporate money (most of which is probably off-share already) but any remaining personal money in bank accounts. So Greece has to move before the coming Grexit is perceived as inevitable, and the money starts to flow out.
Weekend event. When the Grexit happens, it will be on a weekend. The banks will be closed, parliament will be called into emergency session, and a packet of laws will be passed. As this needs to be on a Saturday to avoid wholesale capital flight the moment that parliament is called into session, were it a weekday.
This leaves only a few possible dates. And where there are few possible dates, I’m punting on the earlier date, so earlier in May. And looking at the calendar, that leaves us with May 2nd, 9th or 16th. My own guess is that the 2nd is too soon, and the 16th is too late. That leaves me guessing May 9th.

The top graph on the left side of my essay shows all Greek payments due until September. It comes down to about €13 billion in the next 5 months. The country is desperately waiting for a last €7.2 billion bailout tranche the lenders won’t pay out, but it wouldn’t even make that much difference. So when will the drama come to an end? Turning to the second graph, we see specifics. The next payments are:
• April 17 and 20: a combined total of €273.5 million in interest payments to the ECB.
• May 1: €195.1 million to the IMF.
• May 12: €744.9 million to the IMF. 
It’s hard to see how Greece can even attempt to make that last payment. Let alone the €1.61 billion due in June (numbers on both graphs don’t add up exactly), or the billions after that.

The big questions concern not just the difference between on the one hand, economic issues and on the other, political ones. Syriza doesn’t have the mandate to take Greece out of the eurozone. That is a huge point. But neither does it have the mandate to give in to the troika’s insistence on pensions cuts.

At a certain moment, it may come down to what can be explained to the Greek people, and how well it can be explained. This explanation will almost certainly have to come after the fact, since holding a referendum pre-Grexit would carry far too much potential risk of uncontrolled demolition of the entire Greek economy and banking system.

Tsipras and Varoufakis are not the most enviable people out there at the moment. They have hard choices to make. Still, in the end, running a society, a nation, or a union of nations, cannot be just a matter of balancing your books. That can never be your bottom line. You’re talking about real people, not mere entries in a ledger. Schaeuble and other European politicians keep bragging about the ‘success’ of Greek government policies before Syriza came to power, even as it’s been well documented that many Greek children go hungry and people have no access to health care. How is that a success?

That attitude may be the most valuable argument Syriza has available to it in its upcoming discussions with its voters. Whether these discussions take place before or after a Grexit is hard to say at this point. But Daniel Roberts’ reasoning towards a May 9 event certainly has some logic to it. We may still hope that the troika doesn’t put Syriza into a position of an impossible fork in the road, but right now it doesn’t look good, it looks like they’re getting ready to sacrifice Greece on their pagan altars.

To top off the cynicism involved Bloomberg runs an article today entitled Germany: Has Any Country Ever Had It So Good?. At the same time, a few hundred miles to the south east, children don’t have enough to eat. The European Union sure is a great place to be. What a success story! Pity it’s about to end.


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