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Greece on the Brink

Greece on the Brink

Will they default?

There are financial crises, and then there are financial crises.

Greece is smack in the middle of the latter.

Today Greek officials instituted drastic controls over the country’s financial institutions, making it difficult (if not impossible) for citizens to access money locked down in bank accounts. Officials have limited cash withdrawals to just 67 USD per day, a move that is causing panic amongst those who either live paycheck to paycheck, or who rely solely on the use of cash to make ends meet.

The sense of unease was evident in the number of pensioners lining up at bank branches hoping they might open. Many elderly Greeks don’t have ATM cards and make cash withdrawals in person, and so found themselves completely cut off from their money.

“I came here at 4 a.m. because I have to get my pension,” said 74-year-old Anastasios Gevelidis, one of about 100 retirees waiting outside the main branch of the National Bank of Greece in the country’s second-largest city of Thessaloniki.

“I don’t have a card. I don’t know what’s going on. We don’t even have enough money to buy bread,” he said.

And here I thought relying on cash instead of the almighty plastic was a safe bet.

Fears of default, and an all-out bank run, have followed the breakdown of negotiations between Greece and its creditors. Greece’s bailout ends Tuesday, which means that if negotiations don’t proceed, or if an extension is not granted, the flailing country will lose access to all of its remaining funds, and will be unable to pay back the almost 2 billion euros it owes the International Monetary Fund. Over the weekend, Prime Minister Alexis Tsipras announced a surprise July 5 referendum in which voters will decide whether or not Greece should stay on the euro, or leave the Eurozone and revert back to the drachma.

Eurozone officials blame the Greek government for the stalled debt negotiations, saying that Greek “egotism” is to blame. European Commission chief Jean-Claude Juncker told the media that the negotiations were broken off unilaterally with Tsipras’ call for the July 5 referendum; still, Juncker insisted that dropping the euro was a non-option for Greece.

German Chancellor Angela Merkel generally echoed Juncker’s comments, but went further by saying that she would be open to continuing discussions even after the Sunday vote.

The AP explains what Eurozone officials are offering:

The capital controls come ahead of a big 1.6 billion-euro payment Greece has to make to the International Monetary Fund. It’s unlikely to be able to pay that without financial assistance.

Greece’s bailout program with its European creditors officially expires Tuesday, meaning the country will not have access to any of the money still available if it doesn’t secure a deal.

For months, the left-wing led Greek government, elected in January on a promise to bring an end to the hated austerity that it blames for an acute economic recession, has failed to agree on a package of spending cuts and reforms demanded by creditors in exchange for access to the remaining 7.2 billion euros ($8.1 billion) in rescue loans.

The sight of an economy on the precipice hit global markets hard Monday. In Europe, the Stoxx 50 index of leading shares ended 2.5 percent lower, while Germany’s DAX slid 3.6 percent. There were also some early warning signs that Greece’s problems may prove contagious — the borrowing rates of other highly indebted eurozone countries such as Italy and Portugal inched up slightly.

My explanation of the referendum above was overly simplified; in reality, Greeks will be deciding whether or not they’re willing to agree to the specific terms laid out by Greece’s creditors:

“Should the agreement plan submitted by the European Commission, European Central Bank and the International Monetary Fund to the June 25 eurogroup and consisting of two parts, which form their single proposal, be accepted? The first document is titled “Reforms for the completion of the Current Program and Beyond” and the second “Preliminary Debt sustainability Analysis.”

For Eurozone officials, the choice is clear—vote yes, and we’re here to help; vote no, and the next step will be to decide whether or not Greece is allowed to remain on the euro.

Featured Image via AP Video.

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Comments

Sammy Finkelman | June 29, 2015 at 5:06 pm

When they close the banks, or when they stop the merry go round of course, somebody loses out, of course but the Greek govewrnment (and its people) didn’t like what their interlocutors were proposing.

They Actually even told them how to get the surplus – specifying how MUCH taxes could be raised and that pensions MUST be cut.

My feeling is, Greece should offer to give up its independence. If outsiders are going to legislate, let them openly legislate and not hide behind a Greek government that isn’t doing what any Greek government would dom, that was specifically elected not to do it, but which they force to do as they wish.

In the 19th century and early Twentieth century this happened wth some governments that owed money. The countried were occupied and tariffs collected to pay off bonds.

    clintack in reply to Sammy Finkelman. | June 29, 2015 at 5:23 pm

    Raising Greek taxes doesn’t seem like it would be helpful.

    The Greek reaction to the current confiscatory tax rate has been a massive shift to cash and barter to avoid paying taxes.

    Raising the rate won’t help. It will just increase the rate of tax fraud.

    Not saying I have a solution — Greece is in huge trouble. They’re a democratic society where a majority has forgotten that TANSTAAFL and are voting out any politician who tries to tell them.

    They should be a cautionary tale for all of us in the West.

      Estragon in reply to clintack. | June 30, 2015 at 12:50 am

      What “shift”?

      They haven’t paid the business and point of purchase taxes since the military junta fell – at least, the Colonels weren’t exactly transparent. That is a big reason any “solution” which includes collecting taxes which not only haven’t been collected in the working lifetimes of most current Greek consumers, but for which in fact no infrastructure to collect them even exists, has always been a joke.

      Do the math. Greece defaults sooner or later, no matter what reforms are put in, no matter how many bailouts and extensions, because they can’t pay their debt back within the next 30 years.

Sammy Finkelman | June 29, 2015 at 5:06 pm

They actually did impose capital controls, at least for the time being, preventing transfers of money abroad. No checks can be cashed for paper Euros.

A primer on what led to this moment…

10 Facts About The Greek Pension System Destroying Any Hope Of A Bailout

The precise headline for this post should be “Defiant Greek Socialists push Grecce to the Brink”

    “Defiant Greek Socialists push Greece to the Brink”

    Sammy Finkelman in reply to Aucturian. | June 29, 2015 at 5:12 pm

    But aren’t pensions just another form of debt, and mostly owed to people who can probably not easily take the loss?

    Ragspierre in reply to Aucturian. | June 29, 2015 at 5:12 pm

    Yeeeup. Older Greeks are insisting on marching their nation off a cliff.

    In that, they are just a few steps ahead of us.

      Estragon in reply to Ragspierre. | June 30, 2015 at 12:57 am

      What “older Greeks”? Even the reforms proposed by IMF and ECB didn’t reduce the pensions for those already retired. It’s the young and middle aged Greeks who won’t agree to work a few years longer. But that isn’t the real problem.

      The real problem is called “arithmetic.”

    Estragon in reply to Aucturian. | June 30, 2015 at 12:55 am

    The citizens don’t appear willing to undertake any reforms in the pension system, even for new pensioners, but that is NOT the problem (not the main one, anyway). Even if all those EU/ECB/IMF pension demands were implemented directly, they could not repay the amounts they owe with the cost of their government and the revenue that they collect.

    You cannot manage that which has become unmanageable. There is no possible deal the IMF could accept which would not lead to a default by Greece. None.

Sammy Finkelman | June 29, 2015 at 5:10 pm

And here I thought relying on cash instead of the almighty plastic was a safe bet.

Not if
most of the time, you keep the cash in the bank.

Or new money cominmg in is deposited in bank that is closed and you don’t have or lost your ATM card.

I suppose these are people who kept most of their money in a bank and always withdrew at the teller, and were not fast enough last week to pull out their Euros.

The Prime Minsiter scheduled a referendum but he also recommended to vote no.

I don’t see anybody putting Euros back into banks until this is entirelty resolved.

Sammy Finkelman | June 29, 2015 at 5:12 pm

The way it is not shaping up, the people who will make out best are the people who panicked the most and teh earliest.

Until recently Greek public sector employees could retire at age 55. It’s now at 57. This is one of the real problems Greece has. It eats up so much of the economy. The other problem they have is that almost half the country are tax cheats. Greece wants to avoid austerity at the expense of the much harder working Northern Europeans. I retired at 68, more than a half generation after my Greek peers. I just can’t garner any sympathy for them.

not in the headlines…. the half dozen other countries who are two pay-day loans away from defaulting.

Cash is King and the paid off national debt is the status symbol of choice.

Henry Hawkins | June 29, 2015 at 6:41 pm

You’d think Greeks of all people would cover each other’s asses.

And then, closer to home, there’s Puerto Rico…

Midwest Rhino | June 29, 2015 at 10:28 pm

Probably too late to be salvage Greece in the euro … haircuts for all creditors, or scalps, or the leveraged have their heads handed to them. New currency, big inflation, rinse and repeat. Somehow Soros will probably profit.

China has been sliding, though still up over the last 12 months. But they did a rate cut and reserve reduction and popped it for a couple hours, but then it sank another 3%. Not good when big central bank measures are met with big sell off.

The global contagion will probably occur, but US bonds will be a safe haven at least for a while. Stocks could really start to roll over. Too much funny money, too many unfunded promises to buy votes, too many liars and crooks in our government. They all know this is coming, but they keep buying votes. At least Greece’s commie is more honest about it than ours.

    Estragon in reply to Midwest Rhino. | June 30, 2015 at 1:01 am

    Chinese and Brazilian debt issues, among many others, are on the horizon. Modern governments only deal with the issues already pooping in the punch bowl.

    That’s another reason IMF simply can’t cut any more slack to Greece. They have too many other debtors looking on.

      Midwest Rhino in reply to Estragon. | June 30, 2015 at 8:21 am

      yeah, in the near term, Portugal, Italy, Spain may take heed if Greece gets cut off the dole. Otherwise they can be confident in demanding to be underwritten by Germany. Always the brinksmanship, pushing it to the edge. Greece has to go over.

      There are already smaller countries with issues, also tied to the off the books economy.

      Andorra on Monday slapped a 2,500 euros per week withdrawal limit on depositors in Banca Privada d’Andorra (BPA), which it took under state control last week following U.S. allegations that the bank laundered money for international criminal enterprises including Venezuelan gangs defrauding state-owned oil companies.

      http://www.reuters.com/article/2015/03/17/us-markets-saft-idUSKBN0MD0BE20150317

      Had a friend caught up in that. (“fortunately” I don’t have that kind of money to worry about) There are land mines everywhere. Even savvy big names got stuck in MF Global when Goldman boy Corzine reached across the iron wall protecting private accounts and took $1.5B to cover his “gambling” bets, then lost it. They eventually got their money back, and since he is apparently “connected”, nothing happened to him.

      Then there’s Loretta Lynch overseeing the “wrist slap” to HSBC, with many officials actively involved in laundering billions for terrorists and drug cartels, over a trillion unaccounted for … “too big to jail” Holder said of big banks. She admitted she had overlooked some issues, but still follows in Fast and Furious Holder’s footsteps.

      Southern Europe is corrupt as hell, it’s not just the bad economy. Communism seems to just be organized crime with a government kicker, and a propaganda veneer. But the globalists want the western masses singing about all the children of the world holding hands under a rainbow flag. Apparently that plan is working, for now.

Shrinkage of the Greek economy is inevitable. This is because government spending is itself part of the economy. Greek government spending is dependent on how much money the rest of Europe is willing to lose, and now that it’s realized that Greece has neither the means nor the desire to pay it back, Europe will be not be giving Greece as much money as it has in the past. Therefore Greek government spending will decrease, no matter what else happens; and ipso facto the Greek economy will shrink. This isn’t oppression by bureaucrats, it isn’t a European assault on Greek honor, it isn’t even economics; it’s just arithmetic.

If Greece can stay in the EU, its only salvation will be to convince the rest of Europe that the cash subsidies should continue. Europe might still fall for this pitch, although it’s hard to see even dumb ol’ socialistic Europeans agreeing to keep up the lavish levels of the past; that gets Greece back to the inevitability of economic shrinkage. But it’s better than outright collapse. This is fairly obviously why the Greek-in-the-street favors staying in the EU; it’s the only way that Greece can possibly continue to live it up on European money. No EU, no more free ride.

If Greece leaves the EU—and, more importantly, the Eurozone—well, that’s good news and bad news.

The bad news is, no more loans from Europe. The worse news is, no more loans from international bond buyers, either, because by now everybody from here to Mars knows that Greece is a miserable risk. And it won’t be getting any better in the forseeable future. Since WW2, the Greeks have shown a strong, or rather, overriding preference for Communist governments. And screwing over capitalists (such as bond buyers) is, to Communists, a positive virtue. This will not help to make Greek bond offers attractive. Greeks have also managed to make cheating—not only on taxes, but blatant theft from employers—into something of an Olympic sport. Anyone who knows someone who’s been involved in a business venture—or even an educational or nonprofit one—in Greece might ask about it; but be prepared to get an earful.

The good news is, a Greece outside of the Eurozone will control its own currency, and it can then play all the tricks traditionally used by countries with miserable economies. The major one is printing money as needed. This generates money, but not wealth, so the immediate penalty is inflation. But if they don’t overdo it (yeah, right) the Greeks can avoid the disaster of hyperinflation. Ordinary inflation will squeeze anyone with savings and anyone on a fixed income, but it will beat bank runs and overnight collapse of the monetary system. Also, outright repudiation of the current debt won’t be necessary, since it will be eventually paid in inflated money. Investors will know that they’ve been skinned, but inflated money beats no money at all, and the Greek reputation in the international bond market will be … well, not good, but not quite disastrous.

Predictably, steering clear of Scylla runs one into her next-door neighbor, Charybdis. A great danger of printing money to pay the bills is that it also provides an illusion that the economy is expanding. So by running the presses full-time, Tsipras could claim that the Greek economy is expanding again and that he’s licked “austerity”, while at the same time thumbing his nose at those EU and IMF pirates. This should get him scads of votes … So the temptation to send Greece into hyperinflation may be irrestible.

And here I thought relying on cash instead of the almighty plastic was a safe bet.

Cash isn’t the stuff you think you have in the bank. It isn’t a check which you’ve been assured is “in the mail”.

It’s the stuff you have in your mattress.

    Midwest Rhino in reply to tom swift. | June 30, 2015 at 9:09 am

    of course cash in mattresses is also inflated away. Precious metals are more like real “money”, as opposed to federal reserve notes.

    Or other real things are good, especially if they can be used to produce stuff. But if one produces something, the government wants a big cut, Bernie says up to 90% or profits. I think the serfs gave 10%, plus a tithe to the church.

    But the black market avoids all that silly tax stuff, and they have friends in high places now.

What can’t go on, won’t. The socialists in the northern economy’s have decided not to pay the socialists in the southern economy’s. They may kick the can down the road a bit further, but the can will still be there. Eventually the leg will no longer be capable of kicking.

    tom swift in reply to Barry. | June 30, 2015 at 6:35 pm

    What can’t go on, won’t.

    Well, actually, so long as the “what” is just Greece, it probably can go on. But only because the Greek economy is so tiny—somewhere between one and two percent of the entire EU economy. It’s not beyond question that some bureaucrats in Brussels might consider that a reasonable cost for perpetuating the illusion that the EU is the functional equivalent of a real country.

    The most obvious danger is if a couple of the other European countries which have basically passed the economic “point of no return” and are in terminal spirals down the debt bucket, like Italy or Spain, play the same game as Greece. Then the problem for the EU becomes far more severe, because the Italian and Spanish economies together comprise a much bigger percentage of the EU economy—something over fifteen percent … not an easy thing to hide with bureaucratic sleight-of-hand.

Sammy Finkelman | June 30, 2015 at 3:02 pm

It doesn’t make sense (and is a illegal also by the eway)|) for greece tro leave the Euro.

The problem is their banks may be insolvent. But givinbg depositors drachmas instead of Euros would give them les than if they just got back 90% or even 70% of their deposits.

I think Greece could get 4 currencies:

1) Electronic Euross

2) Certified Euro checks drawn on banks, and endorsed by banks, which would be allowed to circulate and to be deposited in Greek banks.

3) Paper Euros. Prices in paper Euros should drop, maybe by even 40% or 60%. If that happened, Greece would get a lot of lot of paper Euros by September or December, and people would spend the 200 billion or so Euros people have socked away.

4) Scrip issues by the Greek government, denominated in Euros,

4)

Sammy Finkelman | June 30, 2015 at 3:08 pm

The scrip would not be identical, but issued in prioroty or date order, so that, while there would not be a promise of any date on which they would be redeemed, there would be a promise of priority.

So if the Greek government can only pay 60% of what it wants to pay, 60% would be in Euros checks and 40% would be in Euro scrip bonds.

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