Tuesday, 7 February 2012

Greece - Cutting out the Middle Man

It seems that central bankers and politicians are endlessly resourceful when it comes to innovating ways to profit themselves and bankers at everyone else's expense. Where I had thought Greek default inevitable just two weeks ago, I no longer think so today. It appears that Sarkozy, Merkel and the Troika have decided to prevent a default regardless of what Greek politicians or citizens may choose to do.

The new plan is to take the EUR 130 billion that would have gone to Greece in the second bailout, and put it in an escrow account. The account may be labelled "Greek Government", but Greek politicians will not have any authority over the funds. The funds will be disbursed by a non-Greek overseer to pay holders of Greek debt. Official creditors will receive full payment. Private creditors will receive the new discounted rates agreed with the IIF for restructured debt. I am not sure what private creditors who reject the IIF proposal might receive, but it will not much matter as ISDA will find there is no credit event regardless.

The fear among the creditor states of the eurozone was that irresponsible Greek politicians might use any new money to pay civil servants and pensioners rather than bankers and hedge funds. With funds held in escrow and disbursed by a non-Greek overseer, they needn't worry about such excesses of sovereign generosity.

This plan amounts to cutting out the middle man - the debtor. Bailout funds are used to bail out Greek creditors, without ever passing through Greek hands.

Athens is left with uncertainty about whether any further funding will be forthcoming for actual Greek state expenses. This is intentional. The escrow overseer may withhold funding if Greek politicians do not live up to creditors' reform requirements. As Greece may have run a primary surplus in the fourth quarter of 2011, it is just possible that Greece may be able to manage on its austerity budget if the economy doesn't contract too harshly going forward.

More from the FT's Greek team:

If Greece agrees to the new programme, all the elements agreed in a high-drama October European Union summit will finally be in place: a debt restructuring that will see private bondholders lose half their holdings; €130bn in new bail-out funding; and tough new controls officials hope will ensure Greek reforms are forthcoming.

The question remains whether the restructuring of private debt will achieve the ultimate goal of getting Greece’s debt level down to 120 per cent of economic output by 2020, without calling for bigger public sector contributions.

While this plan solves the immediate problem of a March 20th Greek default, what this means for future repayments of sovereign debt is less clear. Despite never having access to the funds, the Greek government and Greek taxpayers will presumably be obligated to repay their Troika creditors at some point. And the EUR 130 billion will not cover debt payments for ever.

If I were a Greek politician, I could probably live with this deal. While it is humiliating to have the money held and distributed elsewhere, it is still money that forestalls an otherwise certain default. And Greece can always default later anyway, should that prove convenient to avoid repayment of the now even larger debts.

The can is kicked down the road for another quarter, and the bankers can pay themselves their 2011 bonuses.

After all, innovation is the driving force of economic growth, and deserves to be generously remunerated.


Anonymous said...

as long as the Greek citizens comply this plan might work.
But it does not look that way; there are already big strikes going on.
To me the plan looks more like shifting the blame for failure to the Greeks. The people will have to tighten their belts much more until they say enough is enough and go permanently on strike until the country defaults. The Troika can claim that they did everything possible and are not responsible for the resulting turmoil.

S Roche said...

When the facts change, I change my mind...

Commendable commentary, thank you. I note that Greek tax receipts are down 7% or so, rather than UP the 9% or so anticipated by the last published spreadsheet/budget.

Does this not leave Greece to play their ace (of default) as a constant threat? Granted, they can only play it once, but it remains inevitable in the face of declining revenues. What am I missing? (Yes, bonuses...but truly!?)

This reminds me of the last days of MF Global, where the creditors retained possession of vital funds, precipitating default.

Fungus the Photo! said...

This is clever.

But too factual for safety's sake, surely? This was a conspirator's problem, ensnaring the reckless populations of Europe in a Ponzi scheme with paper money, sorry, digital data money,that would make lots of money for those who could see what was going on ...
I suggest the likelihood of default is so much higher now!

PeterJB said...

Perhaps you are right @LB but I suspect it is all noise and none of this matters.

I also seem to remember reading that some equivalent of USD65B +(large) has been recently removed from Bank deposits in Greece and either moved off-shore or stuck under mattresses.

But one must ask, what Class would have access to ~USD65B? The answer of course, is the ruling elites and their handlers.

Watch Spain (Ireland is a shocker as they just sucked it all up and are totally screwed _ I have never met and Irishman like this), as this conglomerate of EU bureaucrats cannot hold the centre and it looks like Spain will be Nation that just goes Phflaaaaattt!

But then it is the USA that is really leading the global collapse and not the EU but the US has the MSM highlighting everywhere else but the USA - and they are all ("leadership") insane (and broke beyond redemption.

PeterJB said...

Here is the link to the USD65B Large


"Greeks yanked €65 billion out of their bank accounts since 2009, Finance Minister Evangelos Venizelos told parliament on Friday. “Of that total, €16 billion has been legally taken abroad,” he said. The rest? Stashed under mattresses or hauled to Switzerland via the land route. A whopping 20% of GDP! Capital flight of massive proportions. They see a forced conversion of their euros to drachmas.

And now even the political elite in Greece is taking cover: former Prime Minister George Papandreou told MPs of his party, the Pasok, that the coalition government of Prime Minister Lucas Papademos should stay in power till the regular elections in late 2013—rather than hold early elections.

Thus, Papademos would take the fall for Greece’s default and exit from the Eurozone. The former Governor of the Bank of Greece is a “technocrat” who was anointed last November when Papandreou resigned. He is expendable. Dynastic career politicians like Papandreou might then rise from the chaos that would follow Greece’s return to the drachma. Political positioning for the “afterwards” has begun."

A Tragedy of Idiots, er, globally speaking.

Todh said...

"And Greece can always default later anyway, should that prove convenient to avoid repayment of the now even larger debts."

Says it all, really!

Timothy Tan said...

Well, the script has been laid out before and as usual, the Greek people will be sold out by their politicians. However, if what you are saying is true, then when the Bundestag passes the approval, someone will bring up this fact that the moneys are not going to rehabilitate the Greek economy, but to bail out lenders (and private lenders at that). Of course, it also requires the PSI to pass and that is another huge hurdle. With the Greek cabinet getting progressively smaller (more resignations over this vote) and protests getting louder, what is most interesting is what the police union of Greece and where they stand.


I wonder what it will take the police to step away from between the protestors and the parliament.

Not much I fear.

In any case, it is always good to hear your views on the matter LB.

Knute Rife said...

Kick the can indeed, LB, which is the game everywhere. Pay the line out until the end of the quarter, until after the election, until we collect our commissions and front-end fees. But sooner or later you reach the end of the tether. The Greeks are rioting, and soon this agreement will crack, and the government will have to say, "That's all, folks!" What the Greeks are really saying is, "We're going down the tubes, but we've been there before, worse than this, and you know what: History is long.

Anonymous said...

Surely it's the Euro crowd that are kicking the can rather than private bankers. They've bailed out the Greeks twice, yet further bail outs will be needed. The markets would have pulled the plug years ago and left the Greeks in peace to sort out their own mess without interference from the acronyms.

Knute Rife said...

You believe the financial industry isn't dictating these policies? That certainly isn't how it is here in the US.

Anonymous said...

I don't know about the US but I believe that in Europe the policy is being driven by politicians. They do not want to admit that the common currency will fail without a fiscal union, a solution that the German government will not accept. Also public sector institutions such as the ECB are the most exposed.

Crinkly & Ragged Arsed Philosophers said...

Perhaps the title for this article should read - "Cutting out the Middle Man & Slaughtering Democracy"

And,no doubt some 'politicians' will go for it but will the people put up with real misery for the benefit of funny money?

PeterJB said...

""To expose a 4.2 Trillion dollar ripoff of the American people
by the stockholders of the 1000 largest corporations over the last
one-hundred years will be a tall order of business."
-- Buckminster Fuller


The question is, not 'who done it', but why did we not avoid the state of global collapse that we are in today.

Why is the USA a Mafia run Nation? A fascist state?

We have all been pre-warned


Peter Kershaw IN Caesars Grip etc.


et al.

Why did our "leadership" take this route and ignore all the data? Was it because they were too busy looting the public for themselves?

Anonymous said...

PeterJB I think that you may be exaggerating.

"... the state of global collapse that we are in today."

If "global collapse" means that most people are still employed, public transport runs, public utilities operate, law courts are open etc. then what how will you describe the situation when things really get bad?

"Why is the USA a Mafia run Nation? A fascist state?"

Mafia run AND fascist? I think that the Italians found that the two were mutually exclusive. Anyway are there chaps in black shorts parading outside with flaming torches? Fascism doesn't mean " a government that I disagree with".

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