The Greek Butterfly Effect

SUBHEAD: Angela Merkel wanted a concluded Greek deal before markets open on Monday. Now she has a mess.

By North Man Trader on 27 June 2015 for NorthManTrader -

Image above: An illustration of the "Butterfly Effect" in Chaos Theory. From (

Many times nothing happens for a long time. Then all of a sudden everything happens at once. Like a dam break. It builds slowly and then it bursts. Example: Who would have ever thought the Confederate flag would be taken down across the South during the same week that a rainbow flag is symbolically hoisted across the entire country? Just because things seem unthinkable doesn’t mean they won’t happen.

Take the global debt construct as another example. For decades the world has immersed itself in ever higher debt. The general attitude has been one of indifference. Oh well, it just goes higher. Doesn’t really impact me or so the complacent rationalize.

When the financial crisis brought the world to the brink of financial collapse the solution was based on a single principle:

Make the math workable.

In the US the 4 principle “solutions” to make the math workable were to:
  1. End mark to market which had the basic effect of allowing institutions to work with fictitious balance sheets and claim financial viability.
  2. Engage in unprecedented fiscal deficits to grow the economy. To this day the US, and the world for that matter, runs deficits. Every single year. The result: Global GDP has been, and continues to be overstated as a certain percentage of growth remains debt financed and not purely organically driven.
  3. QE, to flush the system with artificial liquidity, the classic printing press to create demand out of thin air.
  4. ZIRP. Generally ZIRP has been sold to the public as an incentive program to stimulate lending and thereby generate wage growth & inflation. While it could be argued it had some success in certain areas such as housing, the larger evidence suggests that ZIRP is not about growth at all.
No, ZIRP’s true purpose is actually much more sinister: To make global debt serviceable. To make the math work without a default.

Here’s the reality: If we had “normalized” rates tomorrow the entire financial system would collapse under the weight of the math. In short: Default.

Which brings us to Greece the butterfly, the truth and indeed the future:

Greece for all its structural faults is the most prominent victim of fictitious numbers. From the original Goldman Sachs deal to get them into the EU based on fantasy numbers and to numerous bail-outs, the simple truth has always been the same: The math doesn’t work.

It never has and it never will until there is a default on at least some of the debt.

And in this context the Greek government’s move to call for a public referendum on July 5 may be a very clever strategic move as it forces the issue of math.

Here’s the strategic frame-up:

Ultimately what Greece needs is debt relief. Big time debt relief to make the math work.

The global cabal of creditors, ECB, EU, and IMF do not want that. Why not? Because the very second they do this everybody else would want a cut on their debt starting with Italy, Spain, Portugal etc. and the dominos would be rolling.

No, they do not want this as a default would require acknowledging that debt matters.

What are the alternatives?

Greece’s referendum move risks putting a debt deal up for a vote to citizens. When has that ever happened? Have Americans every voted on their government’s debt spree? Have citizens ever had a say on their central bank’s policies and balance sheet expansions? The answer is no. This so ever important element of our global economic system is completely removed from voters.

And so Yanis Varoufakis is very much correct in highlighting this open secret on Twitter:

Democracy deserved a boost in euro-related matters. We just delivered it. Let the people decide. (Funny how radical this concept sounds!) 2:55 PM - 26 Jun 2015
No, voters are very much not permitted to participate in this decision making process. And hence the only reason a Greek referendum may actually proceed is this: To make an example of Greece. You want to default? Watch what we will do to Greece.

But that’s a big gamble for the EU, for the ECB, the IMF and everybody else including China and the US.

Why? Because all of them have carefully orchestrated a construct that they do no want to see disturbed. It’s not an accident that we have seen 46+ rate cuts this year. It’s not an accident that China announced another rate cut just a day after Chinese stocks plummeted 7% this past Friday. It was no accident that the Fed’s Bullard talked about QE4 in October the moment US stocks got close to a 10% correction.

No, you see their primary mission in their timed actions and their words: To make the math work. And to continue to make the math work.

And hence Janet Yellen is not delaying rate hikes because she is “data dependent”. She is dealing in reality: Over $18 trillion in US debt (and ever growing) a large portion of which needs to be refinanced over the next 5 years. And higher rates will become an ever larger burden on the discretionary budget of the US. And the world, heavily indebted that it is, has the same problem:
So this next week is not so much about Greece the butterfly, but it is about keeping the butterfly from becoming a hindrance to the math working globally. And the Greek government knows this. They are negotiating on the basis that a bad Greek deal from Europe’s point of view is better than a default.

Angela Merkel wanted a concluded Greek deal before markets open on Monday. Now she has a mess.

And in the world of gamesmanship every percentage drop in the #DAX will enhance Greece’s negotiation stance.

This past week saw a massive rally in the #DAX in the hopes that a deal would certainly be positively concluded. Now this weekend all this bullish sentiment may find itself tested come Sunday night and Monday morning unless Europe blinks quickly. China is doing its part to support the construct with this latest rate cut, but the ECB can’t be happy about its QE program challenged by the constant Greece distraction. As we outlined in technical charts a default of Greece would risk a structural repeat of 2011.

And it couldn’t come at a worse time. No, odds are they’re not going to let Greece default. They can’t afford to. The math has to work.

Greek Black Monday

SUBHEAD: G-7 and EU banking officials hold emergency calls ahead of Black Monday

By Tyler Derden on 28 June 2015 for Zero Hedge -

Now that the Greek parliament has given PM Alexis Tsipras’ euro referendum the go ahead (the vote will effectively be a poll on euro membership or, on the choice between sovereignty and servitude if you will, because as the IMF flatly noted on Saturday, the proposal that was supposed to form the basis for the referendum will be null and void by the time Greeks go to the polls) and now that Greeks have pulled another €1 billion plus from the ATMs, capital controls are all but certain early next week, especially now that the ECB has frozen the ELA cap. This means the crisis, to use Irish FinMin MIchael Noonan’s words, “has now commenced” and a “Lehman weekend” is indeed underway.

Against this backdrop, multiple “emergency” meetings have been scheduled for Sunday as EU officials scramble to figure out how best to deal with what is likely to be a turbulent week and to consider the financial impact a potential Grexit will have on the currency bloc, its member nations and institutions, and on the global financial system as a whole. Here’s Bloomberg with more:
G-7 deputies to hold conference call Sunday to discuss development of Greek crisis, Handelsblatt reports, citing unidentified euro region official.

Purpose is to inform non-European govts

European banking supervision officials also will hold conference call on situation of Greek banks and possible impact of Greek developments on European financial system

Euro Working Group to hold evening conference call

European Systemic Risk Board to convene immediately after ECB Governing Council meeting: Skai TV

And more from Handelsblatt (via Google translate):

Because of the impending bankruptcy of Greece are on Sunday a series of crisis talks planned. The most industrialized countries (G7) wanted throughout the day to advise on a conference call, said a representative of the Euro zone the Handelsblatt.

The conversation should at Deputy level, ie between the state secretaries, take place. It serves mainly to inform the non-European governments on the developments in the Greek crisis.

In addition, was also a Sunday teleconference of European Banking Supervisors (SSM) planning, told the Handelsblatt. There are representatives of the European Central Bank (ECB) and the national supervisory authorities. In the Phone Unlock should be advised on the situation of Greek banks and the possible impact on the European financial system, it said.

Meanwhile, German Chancellor Angela Merkel is set to confront lawmakers in Berlin on Monday and apprise them of the latest developments in the Greek drama. Over the course of the last two months, political support for continued aid to Athens has worn thin among German MPs, while influential Finance Minister Wolfgang Schaeuble has at every turn expressed reservations about the lengths Europe has gone to in order to keep Greece afloat. Here's Bloomberg again:
"German Chancellor Angela Merkel will brief leaders of German parties and parliamentary groups on Monday at 1:30 p.m., her spokesman Steffen Seibert says in e-mailed ."
Expect some lawmakers to ask how exposed Germany is to a Greek default. After all, given Berlin's role as the EU paymaster and the country's massive TARGET2 credit with the ECB, Germany stands to lose the most (financially anyway) from a potential Grexit, considering EFSF contributions and the country's share of committed ECB credit lines. Once more, via Bloomberg:
German public coffers face loss of at least EU80b from a Greek default, lawmaker Gunter Krichbaum, chairmanof European Affairs Committee in lower house of parliament, tells Leipziger Volkszeitung newspaper. Amount includes exposure to bailout mechanisms, ECB measures.
And indeed, Germany's financial 'obligation' to assist its ailing EU 'partner' may persist long after Grexit, because as we've warned repeatedly, the economic malaise that will almost certainly accompany default and redenomination will create a political and social crisis, the magnitude of which will likely necessitate outside intervention. With that, we'll leave you with the following, again from Bloomberg, citing Gunter Krichbaum:
Lower house of parliament may have to meet during summer recess to vote on measures related to Greece. German lawmakers may need to approve “humanitarian aid” because a Greek default may ignite unrest.


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