Mish's Global Economic Trend Analysis

Greece Needs New Constitutional Provision Imposed by the Troika; Slight Problem, Constitutionally It Can't Do it
Hillary Clinton's New Role as Secretary of Job Creation
9 Day Race to Ecstasy; Only Way Greece Can Win Is To Lose
Mardi Gras Political Floats in Germany an Absolute Riot
Deal "Really" Finalized? Will Greece Survive the Ides of March? Disastrous Piecemeal Breakup of Eurozone Likely in the Cards

Greece Needs New Constitutional Provision Imposed by the Troika; Slight Problem, Constitutionally It Can't Do it

Posted: 21 Feb 2012 10:09 PM PST

The sad saga of unending, even impossible demands by the Troika on Greece continues. For example, please consider this set of paragraphs listed in a Eurogroup Statement of conditions placed on Greece.

The Eurogroup also welcomes Greece's intention to put in place a mechanism that allows better tracing and monitoring of the official borrowing and internally-generated funds destined to service Greece's debt by, under monitoring of the troika, paying an amount corresponding to the coming quarter's debt service directly to a segregated account of Greece's paying agent.

Finally, the Eurogroup in this context welcomes the intention of the Greek authorities to introduce over the next two months in the Greek legal framework a provision ensuring that priority is granted to debt servicing payments. This provision will be introduced in the Greek constitution as soon as possible. ....

We reiterate our commitment to provide adequate support to Greece during the life of the programme and beyond until it has regained market access, provided that Greece fully complies with the requirements and objectives of the adjustment programme.

Lovely, isn't it? The Troika now wants Greece to pass constitutional amendments to meet its demands to bail out ~~Greece~~ French and German bondholders, the IMF, and the ECB.

How likely is that? The answer is "not very" given it cannot be done constitutionally until 2013 at the earliest according to Keep Talking Greece.

Please consider Greece Needs New Parliament to Pass Constitutional Provision Imposed by the Troika

Conditions for Constitutional Amendment

According to Greek constitution, an amendment of the constitution can take place after two consecutive legislation terms and not before five years have past from the latest amendment. As the Greek parliament passed an amendment in May 27, 2008, a new amendment before 2013 is hardly achievable.

Procedures

50 MPs have to propose the need for a Constitutional Amendment. The amendment proposal has to be approved at two parliament votings, which will take place in one month form each other. The approval needs 'enhanced majority' i.e. 3/5 of the MPs or 180 MPs have to vote in favor, although some provisions can pass with the 'absolute majority' of 151 votes in the parliament fo 300. With the parliament voting, the provisions to be amended will be determined.

The proposal for a constitutional amendments can be voted by the current parliament, but a new parliament that will come into force after elections is needed to pass the amendment.

The new parliament can pass the amendment during its first session after the elections. An enhanced majority of 3/5 is needed for the amendment to pass, that is: 180 votes in favor.

No new amendment is allowed before five years have passed after the latest one.

The current Parliament could pass the amendment proposal within 1 to 1.5 month as Papademos coalition government partners have an enhanced majority of at least 184 votes (PASOK 130 seats, ND 64 seats). Should the elections take place towards end of April or beginning of May, the new parliament will have to wait for almost a year to pass the Eurogroup imposed provision. However as the Greek voters are angry at the two big parties that ruled the country for almost four decades, who can say in advance what will the political balances in the new parliament?

Only Way to Win is to Lose

Technically, 2013 is "as soon as possible" but I highly doubt that is what the Troika meant.

As I said in 9 Day Race to Ecstasy; Only Way Greece Can Win Is To Lose:

Hold your horses on that "finalized" deal. There are still numerous austerity measures to implement, details to wrap up, ribbons to cut, and bows to tie. ...

Things have deteriorated so badly, the deal is in no one's best interest.

Germany clearly understands that simple fact and has put up roadblock after roadblock hoping to find the right set of conditions that Greece would not accept or fail to meet if they did accept them.

At this point, no statements by Greek politicians or the Troika are credible. Rather, I suggest statements are made by everyone to prevent further capital flight. If Greece was working on a plan to return to the Drachma they could not say so.

Likewise, if Germany was attempting to force Greece to return to the Drachma, Germany too would have to deny it. And Chancellor Merkel has, as noted in Merkel's Official Denial "I will have no part in forcing Greece out of the euro"; Schäuble Starts Salami Tactics on German Participation, Calls for Vote

The perpetual placement of roadblocks suggests that Greece will not survive the Ides of March. If by some miracle Greece does make the March 20 payment, I still stick with Disastrous Piecemeal Breakup of Eurozone Likely in the Cards because nothing has been solved.

The deal is in no one's best interest and cannot last.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Hillary Clinton's New Role as Secretary of Job Creation

Posted: 21 Feb 2012 07:25 PM PST

The Fiscal Times suggests Hillary Clinton is Now Secretary of Job Creation.

The State Department may become the nation's human resources department by adding job creation to its already bulging portfolio.

Secretary of State Hillary Clinton invited U.S. companies to call on Foggy Bottom experts for guidance on increasing their exports, safeguarding intellectual property abroad, and increasing foreign direct investment in the U.S. as part of a new administration effort to promote domestic jobs.

Speaking on Tuesday before more than 200 major U.S. executives operating in more than 120 countries, Clinton laid out the State Department's plans through a concept Clinton coined "Jobs Diplomacy." Under this approach, U.S. diplomats will take a more active role in looking out for U.S. business interests abroad, making a stronger effort to share their knowledge of foreign markets with U.S. multinationals.

Although it's unclear what the exact structure of the State Department-private sector relationship will be, the concept could potentially be a boon to the U.S. economy, said Ted Alden, a senior fellow at the Council on Foreign Relations. "You've got in the embassies abroad what really amounts to market intelligence—people on the ground who are familiar with the business environments in the countries in which they are working and companies are looking to break into," he said.

Farcical Idea

The suggestion that Hillary Clinton is going to be a boon to jobs creation in the US is farcical. The only way government can create jobs is for government to get the hell out of the way. That means less government not more of it.

Indeed, the idea of an actual "Secretary of Job Creation" position is so ridiculous that Obama is likely to embrace it, wasting still more money we do not have on foolish ideas that should easily be discarded.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

9 Day Race to Ecstasy; Only Way Greece Can Win Is To Lose

Posted: 21 Feb 2012 04:10 PM PST

Hold your horses on that "finalized" deal. There are still numerous austerity measures to implement, details to wrap up, ribbons to cut, and bows to tie. Thus, the Greek Race to Unlock Bail-Out is on.

The Greek government is racing to complete a lengthy checklist of reforms demanded by international lenders before the end of February to unlock a €130bn bail-out agreed in the early hours of Tuesday morning after months of high-stakes bargaining.

The latest demands include dozens of "prior actions" that Greece must deliver as a condition of the rescue – from sacking underperforming tax collectors to passing legislation to liberalise the country's closed professions, tightening rules against bribery and readying at least two large state-controlled companies for sale by June.

Andrew Balls, head of European portfolio management at Pimco, one of the world's largest bond investors, said: "It is all an exercise in make-believe. Does anybody really believe any of the Greek debt sustainability numbers?"

In addition to the sheer volume of legislation the Greek government needs to pass, it will also be working against a backdrop of social unrest that has brought thousands of demonstrators on to the streets of Athens. Leftwing politicians, who have risen in the polls, have already vowed to challenge the deal ahead of expected April elections.

In what could set a precedent for future European Union rescues, the new deal gives the lenders extraordinary powers to monitor Greece's policies and ringfence its revenues to ensure that foreign creditors are paid first.

Only Way Greece Can Win Is To Lose

The irony to this mad dash to hell is the only way Greece can win is to lose. To understand why please read Why Greece Must Exit the Eurozone, How it Will Happen (and Why Portugal and Spain Will Follow); Does the Euro Act Like a Gold Standard?

For an alternative angle with the same conclusion please consider Greek Bailout Or Deliverance? by Peter Tchir.

The Greek government has been a complete failure. They are represented in these negotiations [by someone] who owes his job to the people he is negotiating with. His job was not to represent the Greek people, but to force a deal down their throats. No work was done on alternatives to the bailout (until recently). He didn't explore what options Greece had other than the bailout. All he did was create fear that without a bailout Greece would fall into total chaos and used that to get his job done – passing austerity measures imposed on the people by the Troika. The situation in Greece seems awful. The economy is collapsing. The human toll is growing, yet the puppet didn't spend time looking for alternatives, looking for paths that might be good for Greece, but instead tried to promote irrational fear and get his job done.

Any attempt by Greeks to explore alternatives has been shut down. Remember when the last Greek leader had the silly idea of a referendum? Samaras mentioned that the April elections could change things, which led to some demands that the elections be changed, but ended (so far) with him just groveling for forgiveness. And that is a trend that is growing. This is no longer any attempt by one nation to help another, this is now about creating a pecking order. Too many things have been said that cannot be unsaid that hurt the dignity of the Greeks. If they had a leadership that had worked on alternatives to the bailout, maybe the PSI talks would already be over. Instead, there is a real risk they accept a deal and allow their dignity and sovereignty to be stripped away, all for a deal that probably isn't in their best interests. The deal is in the best interest of the Troika – not Greece.

Deal In No One's Best Interest

The last line in the snip above is "The deal is in the best interest of the Troika – not Greece." Actually, that's not quite right. Although that statement was true at one point, it no longer is.

Things have deteriorated so badly, the deal is in no one's best interest.

Germany clearly understands that simple fact and has put up roadblock after roadblock hoping to find the right set of conditions that Greece would not accept or fail to meet if they did accept them.

At this point, no statements by Greek politicians or the Troika are credible. Rather, I suggest statements are made by everyone to prevent further capital flight. If Greece was working on a plan to return to the Drachma they could not say so.

Likewise, if Germany was attempting to force Greece to return to the Drachma, Germany too would have to deny it. And Chancellor Merkel has, as noted in Merkel's Official Denial "I will have no part in forcing Greece out of the euro"; Schäuble Starts Salami Tactics on German Participation, Calls for Vote

Humiliating Greece

Germany originally asked Greece to Cede Sovereignty to Eurozone "Budget Commissioner".

When France objected, the German proposal was watered down to "I will Give You Money If You Give It Right Back" a Mathematical Scam to Prevent CDS Triggers

When Greece reluctantly agreed to that demand, the German Finance minister Wolfgang Schaeuble then asked Greece to suspend elections. The Greek president responded with an Attack on German Minister's "Insults"

"I cannot accept Mr Schaeuble insulting my country," said Papoulias, an 82-year-old veteran of Greece's resistance struggle against the Nazi occupation of World War Two.

"Who is Mr Schaeuble to insult Greece? Who are the Dutch? Who are the Finnish?" he said in a speech at the Defense Ministry.

His comments marked a highly unusual foray into international controversy for Papoulias, who normally steers clear of daily political debate.

Resentment of the tough German stand on Greece's failure to meet targets set by the EU and IMF in return for financial aid has become widespread in recent months.

Protesters burned a German flag last week and newspapers have run computer-generated pictures of Chancellor Angela Merkel in a Nazi uniform.

New Roadblocks at Every Turn

Imagine the outcry if someone proposed Germany to suspend elections or to dump Merkel in the first place for a puppet appointed chancellor.

Regardless, every time Greece agrees to anything, new demands are put in place. Thus, in spite of an announced deal, Greece still has a basket of items to complete and Germany is doing everything it can so that Greece will fail.

The perpetual placement of roadblocks suggests that Greece will not survive the Ides of March. If by some miracle Greece does make the March 20 payment, I still stick with Disastrous Piecemeal Breakup of Eurozone Likely in the Cards because nothing has been solved.

To answer the question posed by Andrew Balls, head of European portfolio management at Pimco, who said: "It is all an exercise in make-believe. Does anybody really believe any of the Greek debt sustainability numbers?"

The answer is: No, not even the Troika, and especially not Germany. The deal then is in no one's best interest and cannot last.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Mardi Gras Political Floats in Germany an Absolute Riot

Posted: 21 Feb 2012 10:48 AM PST

Der Spiegel has an interesting and frequently humorous look at politics in a 22 slide-show presentation on Mardi Gras.

German carnival culminated on Rose Monday with huge parades in the cities of Cologne, Düsseldorf and Mainz. Hundreds of thousands lined the streets to catch sweets and watch the marching bands and satirical floats, one of which illustrated the close relationship between Angela Merkel and Nicolas Sarkozy.

German carnival started in earnest last Thursday, Old Wives' Day, when women went around storming town halls and committing symbolic mass castration by cutting off the ties of all the men they come across in their rampage.

The festival reached its height on Rose Monday with the big processions. But the partying will continue on Tuesday. Parades and fancy dress balls have been going on in scores of towns and villages across the predominantly Catholic Rhineland and south-west of the country, which have come to a virtual standstill for the best part of a week.

Sadly, it will all end on Ash Wednesday, the start of Lent, the Christian fasting season before Easter, when order and discipline will be restored on German streets for another year.

Carnival Images

The carnival processions in Cologne, Düsseldorf and Mainz are famous for their satirical floats as Germany's Catholic regions celebrate the country's version of Mardi Gras. This one in Düsseldorf purports to illustrate the close political relationship between French President Nicolas Sarkozy and Chancellor Angela Merkel.

Ballerina Angela Merkel shielding Europe from the euro crisis with her ample tutu. The term "Rettungsschirm" on her tutu is the German expression for "bailout package".

Christian Wulff, who resigned as president on Friday following months of criticism for accepting discounts and taking free vacations with the rich and famous, gets a serious pasting. This one in Düsseldorf portrays him as a fallen, plucked eagle.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Deal "Really" Finalized? Will Greece Survive the Ides of March? Disastrous Piecemeal Breakup of Eurozone Likely in the Cards

Posted: 21 Feb 2012 09:16 AM PST

As a point of curiosity, the Greek 1-Year Bond Yield touched 682% today, now down to a mere 666%. Bloomberg quotes the open as 566%, if correct, the one year yield soared 116 percentage points from the open to the high.

Deal "Really" Finalized?

Open Europe says Many questions around the second Greek bailout remain unanswered

We finally have an agreement on the second Greek bailout…in principle. It only took eight months. If you're of the belief that a disorderly Greek default would have triggered Armageddon, the deal that was agreed (as ever 'agreed' is used loosely) by Euro finance ministers in the early hours of this morning is broadly good news.

Below we outline a few key issues (not exhaustive by any means, there are many more) and give our take on how they could play out.

Greater losses for private sector bondholders: Reports suggest the Greek government was sent back to the negotiating table with bondholders at least four times during last night's meeting. Nominal write downs for bond holders now top 53.5% (or around 74% net present value). The leaked Greek debt sustainability analysis (DSA) assumes a participation rate of 95%.

Open Europe take: 95%, really? We weren't convinced the previous threshold of 90% with a lower write down would be reached and that was while potential ECB participation was still on the table. Although this target may have been agreed with the lead negotiators for the private sector, it is far from a cohesive group, diminishing the value of the agreement. It will be interesting to see how bondholders respond to the plan but we think that hold outs could well be more than 5%.

Greek 'prior actions': The deal includes a list of requirements which Greece must meet in the next week to get final approval for the bailout. These include: passing a supplementary budget with €3.3bn in cuts this year, cuts to minimum wage, increase labour market flexibility and reforms opening up numerous professions to greater competition.

Open Europe take: The now infamous €325m in cuts still needs to be specified. The huge adjustments to labour markets and protected professions mark a cultural shift in Greece – pushing these through will not be painless and could result in further riots.

Fundamental tensions in objectives of the programme: The DSA notes that the prospect achieving a return to competitiveness while also reducing debt is very small – the massive austerity could induce a further recession.

Open Europe take: As we have noted all along the assumption that Greece can impose massive levels of austerity and then return to growth in the next two years is a big leap and almost inherently contradictory. We'd also note that the cuts in expenditure in Greece are larger than have been attempted anywhere in recent memory (successful or failed). Likely to be substantial slippages in the austerity programme while the growth programme remains almost non-existent, essentially closing the book on Greek debt sustainability.

Further favourable treatment for the ECB: ECB and national central banks avoid taking losses on their holdings of Greek bonds but promise to redistribute 'profits' from these holdings so that they can be used in Greece.

Open Europe take: See our previous post for a full discussion of this issue. Markets still don't seem too worried by suddenly being subordinated by central banks in Europe – they should be. This raises questions of the basic premise that all bonds are treated the same, based on who issued them not who holds them. As we've noted before, the whole concept of 'profits' is misleading, while any distribution would happen anyway – this is not a commitment from central banks but a further fiscal commitment by the eurozone (should really be included in total bailout funding).

Greece may not be able to return to the market even after three years: The DSA points out that any new debt issue will essentially be junior to existing debt, hampering the chances of Greece issuing new debt in 2014/2015.

Open Europe take: This point isn't too clear but given that the eurozone, IMF and ECB will own such a larger percentage of Greek debt in 2014 any new private sector debt will be massively subordinated and at risk of taking losses if anything goes wrong with the Greek programme. Additionally after the restructuring the remaining private sector debt will be governed under English law and will have the EFSF sweetener – further subordinating any new debt issued to the market. Why would anyone want to purchase Greek debt in this situation (especially given the other concerns above)?

EFSF funding requirements: The EFSF will have to raise €70.5bn ahead of the bond swap – €30bn in sweeteners for the private sector, €5.5bn to pay off interest and €35bn to provide Greek banks with assets to use to gain liquidity from the ECB.

Open Europe take: We've already questioned whether raising these funds so quickly can be done and whether the approval from national parliaments will be forthcoming. Even if it is the €35bn is said to fall outside of the €130bn meaning it is expected to be returned swiftly – given the uncertainty over how long banks will need these assets (as long as Greece as declared as in selective default by the rating agencies) this may be a generous assumption.

There is also no talk of the money to recapitalise banks. This is a risky strategy given that Greek banks' main source of capital (government bonds) will have just been wiped out significantly. The needs were previously specified at €23bn, although reports now suggest they could top €50bn. It's not clear where this money will come from or when it will be raised. The bond restructuring will be like dancing through a minefield for Greek banks.

We're still trawling through the responses, analysis and documents to come out of the meeting – meaning there are likely to be plenty more questions and uncertainties to come.

The one thing that is clear is that even if this bailout is 'successful', it will set Greece up for a decade of painful austerity and low growth leading to social unrest, while the eurozone will have to provide on-going transfers to help it keep its head above water.

Sorry to be killjoys but as Dutch Finance Minister Jan Kees de Jager put it, the deal isn't "something to cheer about".

Open Europe Offers excellent analysis of the issues.

On the ECB Swap: Decoding the ECB bond swap
On a Continually Insolvent Greece: Take III: Don't bore me with the details

The Improbable Greece Plan

Felix Salmon chimes in with The Improbable Greece Plan.

Greece is now officially a ward of the international community. It has no real independence when it comes to fiscal policy any more, and if everything goes according to plan, it's not going to have any independence for many, many years to come.

The problem, of course, is that all the observers and "segregated accounts" in the world can't turn Greece's economy around when it's burdened with an overvalued currency and has no ability to implement any kind of stimulus. Quite the opposite: in order to get this deal done, Greece had to find yet another €325 million in "structural expenditure reductions", and promise a huge amount of front-loaded austerity to boot.

The effect of all this fiscal tightening? Magic growth! A huge amount of heavy lifting, in terms of making the numbers work, is done by the debt sustainability analysis, and specifically the assumptions it makes. Greece is five years into a gruesome recession with the worst effects of austerity yet to hit. But somehow the Eurozone expects that Greece will bounce back to zero real GDP growth in 2013, and positive real GDP growth from 2014 onwards. Here's the chart:

Note that the downside, here, still looks astonishingly optimistic: where's all this economic growth meant to be coming from, in a country suffering from massive wage deflation? And under this pretty upbeat downside scenario, Greece gets nowhere near the required 120% debt-to-GDP level by 2020: instead, it only gets to 159%. And to make things worse for the Eurozone, the report explicitly says that under the terms of this deal, "any new debt will be junior to all existing debt" — in other words, there's no way at all that Greece is going to be able to borrow on the private markets for the foreseeable future, so long as this plan is in place.

As in all bankruptcies, the person providing new money gets to call the shots. And it's pretty clear that the Troika is going to have to continue providing new money long through 2020 and beyond. Under the optimistic scenario, Greece's financing need doesn't drop below 7% of GDP through 2020. Under the more pessimistic scenario, it's 8.8%. And here's the kicker: all of that money is being lent to Greece at very low interest rates of just 210bp over the risk-free rate. Much higher, and Greece's debt dynamics get even worse. But of course even with well-below-market interest rates, Greece is still never going to pay that money back.

The cost of this plan is €130 billion right now, and €170 billion over three years, through the end of 2014; it just continues going up from there, with no end in sight. Remember that total Greek GDP, right now, is only about €220 billion and falling.

Oh, and in case you forgot, this whole plan is also contingent on a bunch of things which are outside the Troika's control, including a successful bond exchange. The terms of the deal, for Greek bondholders, are tough: there's a nominal haircut of 53.5%, which means that you get 46.5 cents of new debt for every dollar of existing bonds that you hold. The new debt will be a mixture of EFSF obligations and new Greek bonds; the new Greek debt will pay just 3% interest through 2020, and 3.75% until maturity in 2042.

Incorrect Conclusion

Salmon has this nailed except for his conclusion.

Europe's politicians know this, of course. But at the very least they're buying time: this deal might well delay catastrophic capital flight from Greece, and give the Europeans more time to work out how to shore up Portugal if and when that happens. Will they make good use of the time that they're buying? I hope so. Because once the Greek domino falls, it's going to take a huge amount of money, statesmanship, and luck to prevent further dominoes from toppling.

Simply a Prelude for Return to the Drachma?

By now, and at long last European politicians do realize Greece is hopeless, so on that score Salmon is correct. However, I still think there is a very good chance this deal was done only to protect the ECB as a prelude to pulling the plug on Greece funding sometime between now and March 20 when the next bond payment is due. If I am correct, at some point between now and then, most likely a Friday or Saturday, Greece will declare a bank holiday.

Please see Germany Draws Up Plans for Greece to Leave Euro; Athens Rehearses the Nightmare of Default; Merkel's Denial Rings Hollow for further discussion.

The sooner Greece exits the euro, the more likely Greece will be able to prevent still more capital flight. The smart money has already left.

We are only discussing the dumb money now, and the best way to convince the masses that all is well is to reach a deal. Yes this borders on the conspiratorial side, but the ducks are lined up and squawking loudly.

Further delays serve absolutely no purpose and will only encourage more capital flight, especially if there is more protests and panic in the streets. If so, Salmon is incorrect on preventing capital flight.

Then again, perhaps I am overly optimistic that the EU finally does the right thing with Greece.

Regardless, Salmon is overly optimistic for sure, because there is virtually no chance to shore up Portugal, Spain, or Ireland. The dominoes will topple, the only question is "how disorderly?"

Disastrous Piecemeal Breakup of Eurozone Likely in the Cards

The best solution would be for Germany to exit the Eurozone first, but that is not going to happen.

The next best option would be for a simultaneous bank holiday involving all Greece, Portugal. Spain, and Ireland at the same time as noted in Why Greece Must Exit the Eurozone, How it Will Happen (and Why Portugal and Spain Will Follow); Does the Euro Act Like a Gold Standard?

That too is highly unlikely. Thus the odds of a protracted, one-by-one, and very costly breakup of the eurozone is the most likely outcome whether or not Greece survives the Ides of March.

For further discussion including an analysis of why it would be best for Germany to exit the Eurozone, please see Eurozone Breakup Logistics (Never Believe Anything Until It's Officially Denied).

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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