Post a bond or five-year “temporary” Grexit?

That is the latest development, albeit not the final word:

Should no deal be forthcoming, the German government has made preparations to negotiate a temporary five-year euro exit, providing Greece with humanitarian aid while it makes the transition.

An incendiary plan drafted by Berlin’s finance ministry, with the backing of Angela Merkel, laid out two stark options for Greece: either the government submits to drastic measures such as placing €50bn of its assets in a trust fund to pay off its debts, and have Brussels take over its public administration, or agree to a “time-out” solution where it would be expelled from the eurozone.

Finland, the Netherlands, and Slovakia, among others, don’t seem keen to have Greece continuing in the eurozone.  And so yet another “final deadline” is approaching…

Comments

Here is my take on the "final" deadlines here: http://priorprobability.com/2015/07/10/the-bluffing-game-grexit-edition-2/

I think the EU may have more to lose if Greece leaves the single-currency than Greece has to lose if it accepts the German plan

I think you are too casual with your terms in your article. "EU has more to lose..." Meaning the EU bureaucrats? Yes. Meaning the current national governments of the EU? Quite the opposite. Meaning the current and future peoples of the EU nations other than Greece? Grexit, per se, is not pivotal to that question. It is rather an imperfect proxy for a larger, never decided, existential question about the Eurozone.

I don't think the EU is bluffing. I think the leaders of the EU would like to keep Greece in and paying their debts to the ECB and the stability funds, but I think they have finally realized that to do so will require yet another significant and immediate capital contribution to the ECB and ESM regardless, and with no real guarantee that Greece won't still be near default within a year or two at the outside- when most of them hope to still be in power and/or running for new terms in office. They face a "damned if you do, damned if you don't" decision. I think they want it over with right now.

None of the leaders can be under any illusions that Greece will pay its full debt, or that these measures won't be seen as completely insulting, or that the measures will even work. So I don't think any of them care about Greece or its future.

They just care about the idea of "Europe" and aren't willing to pull the trigger to send Greece out of the Euro. They just don't want responsibility for that. If some member like Finland vetoes the whole thing, they will all breathe a sigh of relief.

And remember that they don't have to decide anything. They can just run out the clock and let Greece collapse.

Strauss kahn is one of the main culprits. He has lent beyond the instructions. The IMF is weakened, now, politically and economically by his old actions.
He’ll never set the Thames on fire. He talks through one’s hat.
He purports to give advice now when he is one of the initiators of the situation in Greece and several countries.
Washington has transferred this incompetent before another disaster. He was a conspiracy against his employer.
A tell fibs. I have participated in several forums and meetings. Always the same song.
Thanks to Washington to bawl him out!
The German decision is a solution to restrict the in-course future.

And people say poetry is dead.

Bawl him out!

Strauss-Kahn has not been with the IMF for some years. Christine LaGarde is running the show with Blanchard the chief economist.

Where did you get this fantasy from, Nielsen?

BR,

As the head of the IMF, DSK was required to follow the IMF's rules. Instead he play "ever deeper union" Eurocrat. The IMF should never have participated in any of the early bailouts because they directly violated the IMF's own rules (an IMF plan has to be viable). DSK forced the IMF to participate anyway. His culpability was, and remains, material. Of course, Christine Lagarde has been just as bad, if not worse.

This seems out of left field. While Strauss-Kahn was leader of the IMF during the first bailout of Greece, he has been gone now for 4 years. And, in any case, the IMF largely does the bidding of the United States still, so if the institution is weakened, and I agree that it is, you can lay the blame at the feet of the present administration.

YW,

See my prior comments. The failings of the IMF in Greece were not (materially) a U.S failure. The core problem, has been, and remains, the religious attachment of Europe's leaders to the Euro, "ever deeper union", "Europe", etc. DSK and CL were supposed to objectively evaluate the bailouts plans for Greece and refuse to participate in the plans didn't make sense (obviously they never did). Both of them should have blocked any IMF involvement from the outset. Instead, they played "the Euro is our sacred cow" game and committed the IMF to bailouts that were doomed from the outset.

They also allowed the IMF to become a junior creditor to the EU/ECB. This was also a serious violation of the IMF's own rules.

This was a European fiasco/debacle/scandal/failure from the output. The U.S. role has been modest so far. Of course, the U.S. has given aid and comfort to Europe's crazy ideas.

DSK and CL were supposed to objectively evaluate the bailouts plans for Greece and refuse to participate in the plans didn’t make sense

He was distracted getting a blow job from the charlady.

Thanks, Art, we'd all forgotten.

Different charlady. The one at headquarters, not the Sofitel.

AD,

As subsequent revelations have shown... DSK had (has?) a very active personal life... Ask Tristane Banon.

the premise of a common currency is that the members form a "club" of roughly similar economic models. if one member wants a drastically different looking economy, e.g. 50%+ public spending/gdp, then why would any party benefit from having them in the club?

no reason to force or blackmail anyone into anything here . .

Sounds like something the Euro-zone founders should have grappled with 15 years ago.

Only one member? yeah right...

MK,

The numbers show that Greece is the worst member of the club. However, the club has other ailing members as well.

Can some one explain what pledging 50b in assets even means? Pawn the Acropolis or Rhodes? How would anyone ever collect the collateral?

Gold? I think they only have a billion or so though.

Gold's good. There's precedent too.

IMF flew out a lot of gold physically, under military escort from Bombay in 1991.

Greece's gold (like all EZ sov gold) is controlled by the ECB and will not and cannot be sold - just like Cypriot gold.

After haircuts and a hugely reduced EZ banking system, the ECB/BIS intends to withdraw from IMF and to suddenly revalue gold to some huge figure (€30–40k oz is what I hear) Target2 imbalances etc are then not such a big deal.

Maybe the Germans will send in their tanks again. There's a lot of basements in the country.

Back when I was a speed bump on the Fulda Gap, I often saw German Leopards training exercises. I bet a dozen Leopards with combat engineer support could tow the Acropolis to a nice hill in Munich.

Greeks have Leopards, too.

Not as many?

Rahul, you know what's funny, and speak a lot of this crisis? The Greeks have MORE leopard tanks then the Germans.... 353 leo2's total for Greece, 232 leo2's for Germany, though more are planed to be upgraded:

https://en.wikipedia.org/wiki/List_of_equipment_of_the_Hellenic_Army#Main_Battle_Tanks
https://en.wikipedia.org/wiki/List_of_modern_equipment_of_the_German_Army#Vehicles

Check the basements.

There aren't many hills in Munich. And many of those that do exist are made of WWII rubble.

I'm sure there would be deep and frightenning symbolism in erecting the Acropolis on the Trümmerberg in Olympiapark; although I can't actually figure out what it symbolises.

The model appears to be the Treuhand system by which the industrial assets of the GDR were privatized after transfer to holding companies set up by Bonn.

Had it been left to East Berlin to do it, most of east Germany's factories might have been "sold" for a fraction of their value to, or simply stolen by former managers, most of whom were SED. (In Russia, not long after, that's exactly what happened.)

I'd prefer that villas of Greek oligarchs that might easily be converted into boutique hotels be used as collateral instead, but the Acropolis doesn't HAVE to be owned and maintained by Greek nationals.

Heck, Greece itself doesn't have to be. The former Greek royal family were of German origin.

Danish, actually, although it is often hard to tell the difference in the incestuous thicket of European royal houses.

First a German (Otto I), then a Dane (George I). George's sisters ended up as queen of the UK and czarina of Russia. George and all his descendants kept a title as Prince/Princess of Denmark.

Having one or more islands directly administered by the ECB (presumably they would contract this out) with any excess revenues used to retire the debt. It might also satisfy the Finns and Germans' desire to show that they were getting something tangible for their money. They might even give discounted vacations to pensioners from the creditor nations. If the administration was extremely successful it might serve as a model for the rest of Greece to follow. Not that this is expected to be a resounding success, but it might focus the minds of the Italians, Spanish and Portuguese on avoiding a similar folly and the Greeks from repeating it.

Of course a more limited use could be that they would only revert to foreign control until major reforms are passed. (It seems to me that labor market and promoting more competition between businesses would be more effective than another billion in taxes or spending cuts.)

Posturing.

They're not serious yet. When Greece comes back next time, having broken all its promises again... with Italy and Spain in tow, whistling and trying to look inconspicuous... then they'll start getting serious.

Wow.

Incredibly harsh terms.

And to think Deco thinks incentives are a bad idea.

"either the government submits to drastic measures such as placing €50bn of its assets in a trust fund to pay off its debts, "

Is that serious? It seems bizarre and unlikely. Have these negotiations jumped the shark as it were?

I thought they had jumped the shark when Greece started threatening to send ISIS to Berlin. But, as ever with these negotiations, I am prepared to be wrong and make more popcorn.

A time out? Here in the U S of A, that would be considered insulting

Oh, their feelings are hurt? That's horrible. They should stay out then. The rest of the Eurozone, other than perhaps France, doesn't care.

When/if they are prepared to act like adults the rest of the eurozone will consider letting them back in. They are lucky that Germany is feeling generous and will give them humanitarian aid, even though there are far more worthy recipients.

Germany is generous? loool

MK,

Laugh on. Germany devotes 0.38% of GDP to development assistance. Germany is ranked 12th in the world (see https://en.wikipedia.org/wiki/List_of_governments_by_development_aid#Official_development_assistance_by_country_as_a_percentage_of_Gross_National_Income_in_2013). Germany ranks higher than Canada (15th, 0.27%), Japan (18th, 0.23%), and the USA (20th, 0.19%). Nor is German generosity limited to the public sector.

This purely anecdotal but some number of years ago I spent some time in Russia. Russians told me that sick people went to Germany for free (and excellent) treatment. The German government paid all of the (vast) medical bills, but didn't provide any help with living expenses. However, a network of German families provided places for the Russians to live (for free) while be treated.

Five years? If Athens have to start paying soldiers in California-style IOUs, they won't have five weeks.

Yes, this is an ultimatum. Basically Greek kleptocrats are being told that the German government will no longer guarantee their safety, much less loans, unless they are willing to cough up hard collateral, in cash or in kind.

I imagine many Greek politicians have villas on the islands that will make lovely boutique hotels for well-heeled German tourists some day, on which they never paid a cent in taxes. Many of those that don't have relatives who do. If they have to flee Greece one step ahead of whatever replaces Syriza, their villas will be worthless to them anyway.

Insisting that bailout loans be secured by hard collateral actually would have been a good idea in 2010.

As it is, EUR50 billion could buy most of Greece's publicly traded firms, if the exchange were still open.
Basically the Germans have concluded that the Hellenic Republic is no more able or willing to reform itself than was the GDR, and now insist Greece be treated like the GDR was when the GDR ran out of money. East Berlin's assets were transferred to a privatization agency organized by Bonn. All civil servants in the New Provinces were obliged to re-apply for their jobs, to make it easier to forcibly retire SED hacks at all levels. And, of course, the New Provinces had to make do with no more discretion over policy than the "Old Provinces" in the west.

Because the SED's only other option was to find a way to force East Germans to accept cuts in real consumption of 40 per cent without the benefit of the Wall, they took the deal.

No, it's not clear how seriously the Germans expect the Greek political leadership to be tempted by Option 1. Many are clearly as deluded as Erich Honecker was in 1989, waiting for the Russian cavalry to save them, without even having dementia as an excuse. Those in Athens serious about their future in Greek politics (or in Greece, period), on the other hand, had better start asking for details about what Option 1 would involve. This morning.

So Germany is seeking re-unification with Greece, then ?

It's pretty clear that Germany doesn't want a deal, but finds it preferable to humiliate the Greeks into saying no rather than stating as much.

It has nothing do to with humiliation, but other countries (not only Germany) are simply fed up with financing Greece and with the amount of time and attention that the Greek problem takes up within the EU.
Imagine what could have been achieved with all that money in Eastern Europe!

Greek sucks. But what about German banks?

The last 5 years they have scammed your taxpayers out of billions too. Fooling you into thinking that that bailout money was all going to Greece.

Please update your priors on "German" banks.

https://www.db.com/ir/en/content/shareholder_structure.htm
https://www.commerzbank.com/en/hauptnavigation/aktionaere/aktie/die_290_000_aktion_re_der_commerzbank/aktionaere.html

American taxpayers had no interest in bailing out Deutsche Bank by rescuing AIG in 2008 (and by giving them access to hundreds of billions of dollars in short-term lending by the Fed), but we still did it, saving German taxpayers many many billions of dollars that they otherwise would have had to spend to keep DB in business. Imagine what could have been achieved in America's inner cities with the $12 billion we paid DB!

The self-righteousness of the Germans on these matters has become utterly unbearable.

Imagine what could have been achieved in America’s inner cities with the $12 billion we paid DB!

Hilarious! I don't think I would use that hypothetical. I would be imagining nothing being achieved.

Deutsche Bank received $2.8 bn from AIG to close out derivatives contracts, a grand total of 1.6% of the funding AIG received from the Federal Reserve and the Treasury. Total losses on the Maiden Lane and TARP components of the AIG rescue amounted to somewhat north of $20 bn, so you think a $3 tn bank was kept in business by what amounts to an intermediated gift a a few hundred million from the Treasury and Federal Reserve..

Imagine what could have been achieved in America’s inner cities with the $12 billion we paid DB!
--

Well, the market value of commercial and residential real estate in this country is around about $20 tn. In my home town, just north of 15% of the population lives in dubious neighborhoods, the core of which are city slums. About 60% of the population lives in densely settled metropolitan tracts, so you're looking at just north of a tenth of the population living in dubious inner-city zone (perhaps) with income levels about 60% below metropolitan means. So, that leaves you with somewhat north of $800 bn worth of real estate to be found in seedy inner-city neighborhoods. With $12 bn, you could purchase 1.5% of it and do what I do not know.

You might invest the $12 bn and draw rents from it. Let's say you've a return of 4.4%, that'll allow you an income stream of $500 mn a year. Given administrative costs, that'll allow you to put another 1,700 patrolman on the street coast-to-coast, for sorosphere rent-a-crowd to libel in a double act with Ben Carson.

Excuse me, Ben Crump (and his svengali, Ryan Julison).

Imagine what could have been achieved in America’s inner cities with the $12 billion we paid DB!

That's a lot more liquor stores that could have been repeatedly robbed and then later burned to the ground when one of the robbers was injured by police.

Seriously, you might be surprised how much has already been spent, $12B would maybe cover one year's operating deficit for the education sector, and probably doesn't come close to the annual cost of policing those areas. Throwing money at them doesn't cause people to make better decisions.

Imagine what could have been achieved with all that money in Eastern Europe!

Agreed. I'm thinking Ukraine immediately after the Maidan revolution. $50 billion worth of aid to the new government could have rewritten a bit of history there. Maybe not forstalled the seizure of Crimea, but possibly have made Eastern Ukraine a less hospitable place for Russian insurgents.

Pride is an expensive luxury at the best of times. Right now, it's a luxury only affordable by those Greeks lucky enough to have second passports and connections abroad, and the ability to leave at the first sign of real trouble. I fail to see why salving their egos should be a priority.

By all accounts, most Greeks whose marginal product is positive but are unable to leave do not relish more austerity, but are likely to accept one at almost any price. I dare say living in a Middle Eastern failed state or under the Golden Dawn will be far more humiliating than anything the Germans have in mind.

These Europeans remind me of my own family, which could have a long on-board argument about who put the hole in the hull and so who is responsible for fixing it.
Gadzooks, the Greek economy is dying. Tourism is dying.
ECB and the Federal Reserve Board should print out about a hundred fifty billion each and pay off Greek debts with fresh money. Greece should go back to the drachma, and lender beware end of story

"The German Travel Association (DRV) revealed on Monday that despite Greece’s current financial uncertainty, German tourists continue to vote for the Greek earthily paradise for their summer holidays this year. - See more at: http://greece.greekreporter.com/2015/07/06/german-tourists-not-affected-by-greek-debt-crisis-headlines/#sthash.r8QRyimo.dpuf

Since it joined the predecessor of the EU, the European Economic Community in 1981, Greece received in total about 505 billion Euro (in todays buying power). About 230 billion via the standard redistribution mechanisms of the EU, subsidies which create no debt at all. They just make some nations net payers, and some net receivers of this re-distribution of taxpayer's money. The rest of the 505 bn are Target 2 balance and the various credits -bilateral or via EFSM, ESM, IMF.

It is a safe bet that this huge transfers are the main cause that Greece still has no working tax collection system, no working ground registration system, no taxation of shipping operator, and a hugely oversized and completely underperforming public sector - why restructure your country if you can get a free lunch? And of course this generous transfers are the real reason why Greece wants to remain in the EU and the eurozone. The country wants to get more of it, forever.

Greece is by European standards a failed state, and this will probably not change as long as Greece is run by Greeks. No matter how much more foreign money is poured into this bottomless pit.

I misspoke when I accused Hugh Dixon of having s for brains. But, Wunxch, you are just in la la land. Under Syriza tax collections have been up, and Greece was running a primary surplus up until probably about now, when things really went to hell with the ECB stopping supporting the Greek banks. As for the "hugely oversized public sector," Greece has a lower percentage of its workforce working for government than, ahem, Germany, Herr Wunsch.

Germany seems to have become a nation of screaming hypocrites, and the point made above about the Fed bailing out the German banks in 2008, which few people know about, and probably not most Germans, is completely relevant, although they seem to be being egged on by these characters in Finland and Slovakia.

Talk about having shit for brains. Rosser, you are king here.

When he was hired at Madison it was a teachers' college with some extras and had about 6,000 students while Harrisonburg had about 18,000 residents. I'm there several x a year and have never had a bad day or heard a cross word. I'm trying to imagine the other faculty or the local burgesses navigating through his outbursts....

BR,

In real life, Greece was doing quite poorly (from a purely fiscal standpoint) before the current crisis. The primary surplus never came close to covering the interest on Greece's debts (even after massive debt write-offs and concessionary interest rate agreements). The number below are from the Greek government. Note that the Greek government has continued to run large deficits, and revenues were well below target levels (before the current crisis).

"The Greek budget showed a primary surplus of 1.506 billion euros in the January-May period this year, from a surplus of 707 million euros in the corresponding period in 2014 and a budget target for a primary surplus of 556 million euros.

State budget figures, on an amended cash basis, showed a deficit of 1.399 billion euros in the five-month period, from a deficit of 1.990 billion last year and a budget target for a shortfall of 3.481 billion euros. Net budget revenue totaled 18.626 billion euros in the first five months of 2015, down 2.8 pct from targets, while regular budget net revenue totaled 17.048 billion euros, down 5.4 pct from targets. This development was attributed to a 94.5 pct fall in corporate income tax revenue and a 6.4 pct decline in VAT revenue.

On the other hand, property taxes surpassed targets by 18.4 pct and other non-tax revenue were up 22.3 pct in the January-May period. Public Investment Program revenue reached 1.577 billion euros, up 417 million from targets. In May, state budget net revenue fell short of targets by 24.6 pct, while regular budget net revenue were down 24 pct from monthly targets. This development was attributed partly to the non collection of the first installment of corporate taxes (555 million euros) and the non collection of ANFAs (132 million euros).

State budget spending totaled 20.025 billion euros in the five-month period, down 2.628 billion euros from targets, while regular budget spending totaled 19.053 billion euros, down 1.939 billion from targets. Regular budget spending was down 3.8 pct from the same period last year.

Public Investment Program spending reached 971 million euros, down 689 million from targets and down 809 million euros from the same period last year. In May, state budget spending reached 3.7 billion euros, down 591 million from targets, while regular budget spending totaled 3.55 billion euros, down 311 million from targets."

I tried explaining to "Shit for Brains" Rosser earlier that the Greek government, during the first half of the year, was still spending, it just wasn't paying all of its bills to the providers of goods and services within its own borders.

He still goes on about how Greece's fiscal state improved a lot during 2015.

Germany seems to have become a nation of screaming hypocrites, and the point made above about the Fed bailing out the German banks in 2008, which few people know about,

Except the people who read about it in Forbes...

The primary surplus is an accounting fiction. Only by excluding several one time costs, do you get to a primary surplus (additional exclusions on top of no debt financing). They were about 10% deficit. Greece has a long, long, and up to the most recent times, history of these accounting games.

See here: http://econbrowser.com/archives/2015/06/renegotiating-greeks-debt

If you really think you are in surplus, just default. No need to crawl. It is clear with the cratering banks and with Tsiprias desparate for any deal, that the Greeks are NOT in primary surplus. He is not freaking out because he missed paying the IMF. He is freaking out because the government does not run a primary surplus.

Well, the bail-in worked in Cyprus, why no try it on Greece?

Is that you, Chicollini?

Devaluing the currency would be such a boon to the Greek economy that if there was a way both to do so and have a guaranteed re-entry to the euro after conditions improve, the Greeks should jump at the chance, however humiliating. It's eating their cake and having it too. Transitioning currencies twice would not be without downsides, but then no course open to Greece isn't some degree of bad. If Germany is really willing to offer five years of devalued currency with a mechanism for later re-adopting to the euro, Tsipras should take a page from Mr. Rabbit in "Uncle Remus": Oh please, Brer Fox, do anything you like but please oh please don't fling me in that briar patch!....

All harsh for the 'system' but will it precipitate change in the attitude, work ethic, and duty-dedication of the Greek people to rich-world values?
Perhaps work agreements (or extended work-education commitments) for 10% of the population to move temporarily throughout the EU, with a percentage of wages going back to the fund with academic/experience credit.
The problem is that the last 5-6 years have created a mob-mind that is defensive to compromise, long-term sacrifice, and work-duty values. The country-workplace has become toxic, as it were.
Desperate times call for innovative measures, though it may conflict with what it means to be free-moving throughout the EU.

"Work ethic"? Those Greeks who have jobs work much longer hours than those Germans who have jobs. This is more whining hypocrisy from Germans. That 25% unemployment rate in Greece (over 50%) is not due to a failure of work ethic, even if Mulligan and some others think that the jump in the US unemployment rate 2007-09 was due to workers suddenly deciding to consume leisure today rather than goods tomorrow.

BR,

German LFP (male and female) is considerably higher than Greece and German's are notably more productive. A recent book ("The Full Catastrophe: Travels Among the New Greek Ruins ") discusses the nature of Greek society at some length. The Greek "work ethic" isn't much in evidence and no one in Greece (in the book) tries to claim otherwise. The author speaks fluent Greek (he grew up in a Greek-American family on Long Island) and knows the place all too well.

Tsipras is executing a classic strategy used by rogues and scoundrels. First, offer a terrible deal or no deal at all. Then improve your offer, but not up to normal standards, just enough to progress against the low benchmark you have initially provided. Bloviate about how far you have come and how the other side has not budged from its perfectly defensible position. Get sympathy from uninformed outside observers for this dramatic change in your position. Have the uninformed outside observers put bogus moral pressure on the other side as unreasonable since they haven't moved off of that perfectly reasonable position. Sadly, this strategy often works. It is frequently used by children with weak or divorced parents. If the EU and Germany hold tough here it is a sign of courage and character.

Los Ranchos,

You seem to be badly misinformed about how these negotations have gone. The Greeks have made enormous movement from their initial position. Many view what Tsipras just offered as essentially violating what the Greek people said they wanted in a referendum held a week ago, it is so close to the last offer from the troika. But certain members of the troika simply will not budge an inch.

Just who are the rogues and scoundrels here? I think there is a very ugly hypocricital man in a wheelchair in Germany who is a rogue and scoundrel of the first order.

Mr. Rosser, perhaps a course in reading comprehension is in order for you. Please re-read my post. It explains the strategy of a large movement from an unreasonable position. Seems like you are the uniformed weak minded observer in this game, as explained in the post.

I said it in the other thread, but I shall say it here. I should not have made the remark I did about Hugh Dixon, although I remain thoroughly unimpressed with his analysis.

Also, looks like I was wrong that "muddle through" would triumph. I do not know what is going to happen, but at least it looks like the ECB might restart supporting Greek banks again within a few days, its cutoff of support being the main trigger for the most recent severe round of crisis that Dixon was blaming the Greeks for.

I hope the Germans are ready to finally pull the band-aid off, and quickly. The new proposal from the creditors seems to be designed to force the Greek government to make the final call on Grexit. I suppose the Greek government may choose to not choose, but that is still a choice that rational people will see as choosing Grexit.

In the end, Grexit is the only real way forward. Greece won't reform within the Eurozone while still receiving subsidies, so try letting them see what life is like outside of it. Who knows- maybe the Greeks will get their act together. At least they won't be carrying the burden of the old debt service any longer.

Greece could have gotten a better deal from a German chancellor 74 years ago.

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