Who"s Next? Venezuela"s Collapse Puts These Nations At Risk

"It"s a wake-up call for a lot of people who will say ‘Look, the stuff I own is actually very risky"..." warns Ray Jian, who oversees about $6 billion at Pioneer Investment Management Ltd. in London. "People have been ignoring risks in places like Lebanon for a long time," and the official default of Venezuela this week has emerging-market money managers are looking to identify countries that might run into trouble down the road.

While Bloomberg reports that while none are nearly as badly off as Venezuela - where a combination of low oil prices, economic mismanagement and U.S. sanctions did the country in -  traders are scouting for credit risk, from Lebanon, where Prime Minister Saad Hariri’s sudden resignation has once again thrust the nation into a Saudi-Iran proxy war, to Ecuador, where recently elected President Lenin Moreno continues to expand the debt load in a country with a history as a serial defaulter.

1. Lebanon:

One of the world’s most indebted countries, Lebanon may hit a debt-to-gross domestic product ratio of 152 percent this year, according to International Monetary Fund forecasts. That’s coming at a time when political tension is rising. Hariri’s abrupt resignation, announced from Riyadh on Nov. 4, triggered about $800 million of withdrawals from the country as investors speculated that the nation would be in the crosshairs of a regional feud between the Saudis and Iranians. While the central bank says the worst may be over, credit-default swaps have hit a nine-year high.

2. Ecuador:

After a borrowing spree, the Andean nation’s external debt obligations over the next 12 months ballooned to a nine-year high relative to the size of its GDP. Ecuador probably has the highest default risk after Venezuela, according to Robert Koenigsberger, the chief investment officer of Gramercy Funds Management. The country will be vulnerable “when the liquidity environment changes and they can no longer go to the market to get $2.5 billion to plug the hole," he said. Finance Minister Carlos de la Torre told Bloomberg in an email on Thursday that there is "no default risk" for any of Ecuador’s debt commitments and the nation’s indebtedness is nowhere near "critical" levels.

3. Ukraine:

While the Eastern European nation’s credit-default swaps have declined from their 2015 highs, persistent economic struggles are giving traders reason for caution. GDP expansion has slowed for three consecutive quarters and the World Bank warns that the economy is at risk of falling into a low-growth trap. Ukraine’s parliament approved next year’s budget on Tuesday as it eyes a $17.5 billion international bailout.

4. Egypt:

Egypt’s credit-default swaps are hovering near the highest since September. The cost for protection surged in June as regional tensions heated up amid a push by the Saudis to isolate Qatar. While Egypt has been able to boost foreign-currency reserves and is on course to repay $14 billion in principal and interest in 2018, its foreign debt has climbed to $79 billion from $55.8 billion a year earlier.

5. Pakistan:

Pakistan’s credit-default swaps surged in late October and linger near their highest level since June. South Asia’s second-largest economy faces challenges as it struggles with dwindling foreign reserves, rising debt payments and a ballooning current account deficit. Pakistan is mulling a potential $2 billion debt sale later this year. Speaking at the Bloomberg Pakistan Economic Forum last week, central bank Deputy Governor Jameel Ahmad played down concerns over the country’s widening twin deficits.

6. Bahrain:

Bahrain’s spread rose dramatically in late October to the highest since January after it was said to ask Gulf allies for aid. The nation is seeking to replenish international reserves and avert a currency devaluation as oil prices batter the six Gulf Cooperation Council oil producers. Although its neighbors are likely to help, Bahrain could still be left with the highest budget deficit in the region, according to the IMF.

7. Turkey:

Despite high yields, investors are still reluctant to buy Turkish bonds. The nation has been caught up in a blur of political crises, driving spreads on credit-default swaps to their highest level since May. Turkey was the only holdover on S&P Global Ratings’s latest “Fragile Five” list of countries most vulnerable to normalization in global monetary conditions.

Sweden: The World"s Biggest Housing Bubble Cracks

Sweden’s property bubble is probably the world’s biggest, despite which it gets relatively little coverage in the mainstream financial media - although that might be about to change. Warnings about this bubble are not new. In March 2016, Moody’s issued a very explicit warning that Sweden’s negative interest rates were propagating an unsustainable housing bubble.

The central banks of Switzerland, Denmark and Sweden (all rated Aaa stable) have been among the first to push policy rates into negative territory. A year into this novel experience, Moody"s Investors Service concludes that, from among the three countries, Sweden is most at risk of an - ultimately unsustainable - asset bubble…

 

"The Riksbank has not been successful in engineering higher inflation, while Sweden"s GDP growth continues to be among the strongest in the advanced economies," says Kathrin Muehlbronner, a Senior Vice President at Moody"s.

 

"At the same time, the unintended consequences of the ultra-loose monetary policy are becoming increasingly apparent - in the form of rapidly rising house prices and persistently strong growth in mortgage credit", adds Ms Muehlbronner. In Moody"s view, these trends will likely continue as interest rates will remain low, raising the risk of a house price bubble, with potentially adverse effects on financial stability as and when house prices reverse trends.

In October 2016, the Riksbank’s Governor, Stefan Ingves, spoke in grave terms to the FT about the impact of negative rates on house prices.

But despite a lack of drama so far, Mr Ingves remains worried about a bad ending due to risks over financial stability.

 

He said: “It remains an issue because we are mismanaging our housing market. Our housing market isn’t under control, in my view.” The ratio of household debt to disposable income in Sweden is one of the highest in the world at more than 180 per cent and the Riksbank estimates it will continue to rise in the coming years.

Last month, we revisited Sweden’s housing bubble (see here) pointing out.

…nowhere would the bursting of Sweden"s unprecedented asset bubble be more concerning than in the country"s home prices.

 

And to get a sense of just how bad it could get, here is a chart from Nordea"s Andreas Wallstrom, showing nearly 140 years of real house prices in Sweden"s capital, Stockholm, with an emphasis on the exponential surge in the past 2 decades. As Wallstromg sarcastically points out, the big irony in this is that "the current monetary policy regime, which aims for "price stability", started in 1995." Ah yes, presenting "price stability", aka the world"s biggest housing bubble.

On Monday, Reuters reported that SEB’s Housing Price Indicator suffered its second biggest ever drop this month.

Swedes turned less optimistic on the housing market in November, a report showed, after figures suggesting a long run of price rises may be coming to an end amid signals that authorities will squeeze mortgage borrowers to reduce the risk of a crash.

 

Monday’s Housing Price Indicator from banking group SEB posted its second biggest drop ever, declining by 39 points and lagging only a steeper fall 10 years ago. According to SEB, 43 percent of households expect prices to rise over the coming year, down from 66 percent the previous month. The number expecting prices to decline doubled to 32 percent.

The Reuters piece quoted SEB saying that the indicator signaled a slowdown but “does not yet signal outright declines”. A day later and we have clear evidence of outright declines. Here is a summary of the key prices changes for October 2017 versus the previous month in the NASDAQ OMX Valueguard-KTH Housing Index - known as the HOX.

• Prices for housing prices in Sweden as a whole declined by 3.0% versus September;


• House prices in Sweden fell by 3.2% and apartment prices by 2.8%;


• Stockholm house prices fell 4.0% in October and apartment prices by 3.4%; and


• Gothenburg house prices fell by 1.6% and apartment prices by 1.2%.

With the market starting to crack, we can rely on the regulators, as usual, to take action after the fact. From a Reuters report yesterday.

Sweden’s financial watchdog has proposed a further tightening of mortgage repayment rules to keep a lid on spiralling debt that could spell danger for the cooling property market and the wider economy. A surge in building and tougher mortgage rules have put the brakes on a 20-year bull run in the Swedish property market, but authorities remain concerned that debt levels among the highest in Europe are still rising. The country’s Financial Supervisory Authority (FSA) on Monday proposed new rules to force the biggest borrowers to make larger mortgage repayments in an effort to reduce risks.

 

“Prices have risen more than 30 percent in the past three years and the risk level is elevated,” FSA chief economist Henrik Braconier told reporters.

Reuters reported this comment from Braconier.

“It is not a catastrophe if prices fall a little.”

And we agree…but what if they fall a lot.
 

Greece Plans 30 Billion Euro Debt Swap As It Prepares For The End Of Bailouts

Greece is planning a 30 billion euros debt swap which will convert 20 existing bonds into 5 (or less) new issues in the next few weeks (although the exact timing remains uncertain). The bonds are expected to have similar maturities to the existing notes from 2023-2042.

According to Bloomberg, the Greek government is planning an unprecedented debt swap worth 29.7 billion euros ($34.5 billion) aimed at boosting the liquidity of its paper and easing the sale of new bonds in the future. Under a project that could be launched in mid-November, the government plans to swap 20 bonds issued after a restructuring of Greek debt held by private investors in 2012 with as many as five new fixed-coupon bonds, according to two senior bankers with knowledge of the swap plan. The bank officials requested anonymity as the plan has yet to be made public.

Markets have responded well to the news as Bloomberg reported.

• Greek 10-Year Yield Drops to Lowest Since July on Debt-Swap Plan

• Greek 5-yr bond yield drops by 10bps to 4.345%, its lowest level since the nation issued the new note in July.


• Demand spurred by optimism that the third bailout review will be completed in time; news that government is planning a debt-swap plan is also boosting sentiment

While we struggle to believe that the Greek debt crisis is anywhere near close to being solved, at least the country seems to have been touched by Europe’s recovery.

Furthermore, the European Council announced on 25 September 2017 that Greece’s finances have stabilised and it was closing the excessive debt procedure. It sounded good anyway...

"After many years of severe difficulties, Greece"s finances are in much better shape. Today"s decision is therefore welcome", said Toomas Tõniste, minister for finance of Estonia, which currently holds the Council presidency.

 

"We are now in the last year of the financial support programme, and progress is being made to enable Greece to again raise money on the financial markets at sustainable rates." 

 

From a deficit of 15.1% of GDP reached in 2009, Greece"s fiscal balance has steadily improved, turning into a 0.7% of GDP surplus in 2016. Although a small deficit is projected for 2017, the fiscal outlook is expected to improve again thereafter…In the light of this, the Council found that Greece fulfils the conditions for closing the excessive deficit procedure. Greece will now be subject to the preventive arm of the EU"s fiscal rulebook, the Stability and Growth Pact. Monitoring will continue until August 2018 under its macroeconomic adjustment programme.

Meanwhile, the planned debt swap is a step in the Greek government’s preparations for August 2018 when, excuse our cynicism, Greece will essentially look to borrow more money to buffer its debt mountain. Bloomberg comments. 

“The move aims to address the current illiquidity of the Greek bond market,” according to analysts at Pantelakis Securities SA in Athens.

 

It will also “establish a decent yield curve, thus facilitating the country’s return to public debt markets.”

 

The move comes as Greece prepares for life after the end of its current bailout program in August 2018. The debt swap is a step toward the country’s full return to markets required to avoid a new bailout program. The government plans to tap the bond market in 2018 to raise at least 6 billion euros to create an adequate buffer to honor debt obligations, according to a government official…

 

Finance Minister Euclid Tsakalotos said in October that tapping markets soon wouldn’t be aimed at getting fresh money so much as to better manage the country’s debt and make its bonds more attractive. The new bonds, following the swap, are expected to have the same value as the old ones and will have a fixed coupon, one of the people with knowledge of the matter said.

Talking of cynicism, Goldman Sachs role in this transaction remains uncertain.

The challenge for Greece is to be in a sufficiently strong financial position to refinance more than 17 billion euros of debt in 2019 as Bloomberg explains, Greece returned to markets in July for the first time since 2014, raising 3 billion euros through new 5-year bonds. Now, with the swap plan, the government wants to ensure it can tap the market for enough funds to refinance its debt obligations in 2019, which originally amounted to 19 billion euros. The government managed to reduce this number by 1.6 billion euros with the July bond issuance.

While the timing of the debt swap transaction is uncertain, the government is aiming to complete it in time for the return of representatives of the country’s creditors in the last week of this month. No doubt they will be overjoyed by what they find.

There"s just one thing...

Schäuble: Another Financial Crisis Is Coming Due To Spiraling Global Debt, "New Bubbles"

Following the disappointing for Angela Merkel and her CDU German election results, which propelled the populist AfD into Germany"s political establishment with 92 members of parliament, the first casualty was Germany"s finance minister, Wolfgang Schäuble, who in a few days will relinquish his long-held post and move on to the ceremonial role of Bundestag president. As part of his farewell tour, Schäuble - like so many other former members of the establishment- took a parting shot at the system he helped create and warned that "spiraling levels of global debt and liquidity", as well as "new bubbles" present a major risk to the world economy.

Speaking to the FT, the Europhile beloved in Germany for successfully steering one of the world’s largest economies for the past eight years, and who nearly led to Grexit in the summer of 2005, said there was a danger of “new bubbles” forming due to the trillions of dollars that central banks have pumped into markets. Confirming another fear widely propagated by the Putin propaganda alternative media, Schäuble also warned of risks to stability in the eurozone, particularly those posed by bank balance sheets burdened by the post-crisis legacy of non-performing loans, something we have warned about since 2012, and an issue which remains largely unresolved.

A strong advocate of fiscal rectitude and debt reduction, Mr Schäuble dominated Europe’s policy response to the eurozone debt crisis and has been vilified in countries such as Greece as an architect of austerity. But he will mainly be remembered as the most ardently pro-European politician in German chancellor Angela Merkel’s cabinet, skilled at selling the benefits of the euro and of deeper European integration to an often sceptical German public.

To underscore his point, Schäuble said that the Brexit vote last year had demonstrated how “foolish” it was to listen to “demagogues who say . . . we’re paying too much for Europe”. “In that respect they made a great contribution to European integration,” he said. “Though in the short term that doesn’t really help Britain.”

Ahead of his last finance minister meeting on Monday, Schauble "sought to reassure Germany’s allies that the AfD’s surprise success would not in any way affect the country’s commitment to liberal democracy."

“There’s no chance Germany will ever relapse into nationalism,” he said. The AfD’s voters were dissatisfied, felt excluded, were angry about perceived injustice and worried about how the world was changing. “But there’s no reason to believe that democracy and the rule of law are in danger,” he said.

However, taking a broader swipe at the current financial regime, Schauble warned that the world was in danger of “encouraging new bubbles to form”.

"Economists all over the world are concerned about the increased risks arising from the accumulation of more and more liquidity and the growth of public and private debt. I myself am concerned about this, too," he said echoing the concern voiced just one day earlier by IMF head Christine Lagarde, said the world was enjoying its best growth spurt since the start of the decade, but warned of “threats on the horizon” from “high levels of debt in many countries to rapid credit expansion in China, to excessive risk-taking in financial markets”.

Schäuble also echoed the latest warning from the BIS, which last month said that the world had become so used to cheap credit that higher interest rates could derail the global economic recovery.

Meanwhile, Schäuble defended austerity, saying the word was, “strictly speaking, an Anglo-Saxon way of describing a solid financial policy which doesn’t necessarily see more, or higher deficits as a good thing." The soon to be former finance minister also took a pot shot at the UK:

“The UK always made fun of Rhineland capitalism,” he said, contrasting Germany’s consensus-driven, social market model with Anglo-American free markets and deregulation. “[But] we have seen that the tools of the social market economy were more effective at dealing with the [financial] crisis . . . than in the places where the crisis arose.”

Of course, Germany"s success - almost entirely a function of the common currency which has effectively kept the Deutsche Mark from soaring - has come at the expense of crisis after crisis among Europe"s southern states. Unfortunately it has resulted in an entire generation of unemployed youth in countries like Greece, Italy and Spain.

Still, in keeping with his dour image, Schäuble"s last words were pessimistic:

“We have to ensure that we will be resilient enough if we ever face a new economic crisis,” he added. “We won’t always have such positive economic times as we have now” concluded the jolly 75-year-old.

Perhaps Wolfi is worrying too much: after all, according to Janet Yellen, "we will not see another crisis in our lifetime." And if we do, well central banks are primed and ready to injects trillions more to keep the artificial "recovery" and market "all time highs" can kicked just a little bit further.

New York Fed, Atlanta Fed, & Goldman Slash Q3 GDP Forecasts

As "hard" economic data in America crashes to its weakest since Feb 2009, so The New York Fed has slashed its economic growth forecasts for Q3 and Q4 dramatically.

The drivers of the collapse are hurricane-impacted data from Industrial production and Retail Sales this morning...

For those hoping for a "broken window fallacy" rebound in Q4, forget it!

source: NYFed

And now The Atlanta Fed has joined the downgrade party...

The GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2017 is 2.2 percent on September 15, down from 3.0 percent on September 8. The forecasts of real consumer spending growth and real private fixed investment growth fell from 2.7 percent and 2.6 percent, respectively, to 2.0 percent and 1.4 percent, respectively, after this morning"s retail sales release from the U.S. Census Bureau and this morning"s report on industrial production and capacity utilization from the Federal Reserve Board of Governors.

From 4% a month ago to just 2.2% now!!

source: AtlantaFed

Putting the recent data in context, here is the "Hard" economic data surprise index.

And then, the cherry on top came from Goldman Sachs which just slashed its hurricane-impacted Q3 GDP forecast from 2.0% (it was 2.8% just one week ago) to 1.6%. To wit:

Industrial production fell sharply in August, but the report explicitly indicated that Hurricane Harvey likely contributed the bulk of the decline. University of Michigan consumer sentiment declined a bit less than expected in the preliminary September report, and the survey’s measure of longer-run inflation expectations moved back up to 2.6%. Taken together, today’s real activity data represents strong evidence that hurricanes have significantly reduced the pace of US growth in the third quarter. Accordingly, we revised down our Q3 GDP tracking estimate by four tenths to +1.6% (qoq ar), on top of the -0.8pp revision we made last week. 

We believe today’s weaker-than-expected retail sales and industrial production data increase the likelihood of a meaningful drag on August economic activity from Hurricane Harvey. And given the possibility of sustained weakness in September due to Hurricane Irma, we now expect an even larger drag on growth in the third quarter. We are reducing our tracking estimate for Q3 GDP by four tenths to +1.6% (qoq ar), on top of the -0.8pp revision we made last week in anticipation of Hurricane effects. We expect some of this weakness to reverse in the fourth quarter as economic activity rebounds in storm-affected regions.

So - NY Fed Staff Nowcast Q3 2017: 1.34% (Prev. 2.1%); Q4 2017 at 1.83% (Prev 2.6%)

Which means that, if NY Fed is correct, and one adds the actual GDPs of 1.2% in Q1 and 3.0% in Q2, full year 2017 GDP Growth wil be just 1.8%! 

Just blame it on the hurricanes.

Former BIS Chief Economist Warns "More Dangers Now Than In 2007"

Having warned in the past that "the system is dangerously unacnhored," former chief economist of the Bank for International Settlements, William White, told Bloomberg TV overnight that the current situation "looks very similar to 2008," adding that OECD sees "more dangers" today than in 2007.

The chairman of Economic and Development Review Committee at OECD, warned that prices are very high - in particular for high yield assets, VIX is very low, house prices are rising strongly, equity markets rising, and all these are a source of concern.

Additionally, White noted:

• India’s debt problems go back a long way, and there are significant governance issues, including at state-owned banks.


• China’s debt situation isn’t a lot different to India’s, but the acceleration of loans and credit growth in China is very fast


• It’s not just the debt level in China that is worrisome, but the speed that it’s accumulating; maybe some of these loans won’t be repaid or serviced.


• We don’t have a liquidity problem that central banks can solve - if we have too much debt, we have a debt resolution or insolvency problem and only governments can address problems like that.


• World needs more fiscal expansion, structural reforms, and also have to look closely at debt write-off some of it and maybe recapitalize financial institutions.


• We have got the mix of income that goes to capital versus labor wrong in many countries, and we need to look at that.


• Central bank tightening is inevitable, but have to be careful.

As White concluded previously,

"it is every man for himself. And we do not know what the long-term consequences of this will be,"

and it appears to be getting worse.

Emerging Market Debt: Dumb, Dumber, And Dumbest

Authored by Jonathan Rochford via Narrow Road Capital,

One of the classic signs that the credit cycle is nearing the end is that borrowers that shouldn’t be getting financed not only get funded, but get it at terms that seem crazy. I’ve recently written about the silly things happening in global high yield debt, Chinese debt and the global attitude to sovereign debt. Continuing this theme are recent examples of emerging market sovereign debt; Greece, Argentina and Iraq. Each of these shouldn’t have been funded, but the desperation for yield saw all three get funded on terms that seem crazy. Here’s the detail on each.

Argentina

In June, Argentina sold $2.75 billion of US dollar denominated 100 year bonds at a yield of 7.92%. At the time, this was a mere 5.18% yield pick-up over 30 year US treasuries. Argentina has a long history of defaulting on its government debt, including 4 defaults in the last 35 years. The 2001 default took 15 years of negotiation and litigation to resolve, with most bondholders losing their shirts and a few who bought late and fought hard getting extraordinary returns.

 The current outlook shows that not much has changed for Argentina. Inflation is running at over 20% and the government is aiming to cut the deficit this year to 4.2% of GDP, hoping to stimulate the economy out of recession. Investors are banking on the recent change in government to increased foreign investment and see sound economic management implemented. The need to reduce politically popular subsidies will be a major hurdle to that. S&P’s rating of “B” and Moody’s at “B3” reflect the country’s weak credit profile. Taking all of this into account, Argentina is unlikely to get through a decade without defaulting let alone 100 years.

Greece

In July, Greece sold €3 billion of 5 year bonds at 4.63%, a 4.78% yield pick-up relative to 5 year German government bonds. Investors have particularly short memories on Greece’s debt, with the 2012 default seeing bondholders take losses of around 75%. The 2014 issue of 5 year bonds traded as low 56% of face value, a horrible ride for those who bought into it. The constant negotiations for further bailouts always come with the threat that Greece won’t make further concessions and this time the Europeans and the IMF might have had enough.

Greece’s position remains precarious, debt to GDP currently stands at 179%. The economy has been stagnant for years as its government continues to resist the structural reforms proposed by the IMF and Europeans. Some are optimistic as Greece recorded a primary surplus (before interest expenses) in 2016. However, to achieve a fulsome surplus Greece needs to be funded at around 1%, well below the 4.78% yield it is paying bond investors. Unlike the buyers of the recent bond issue, S&P (B-) and Moody’s (Caa2) don’t see good prospects for Greece paying back its creditors.

Iraq

In early August, Iraq sold $1 billion of 5 year bonds at 6.75%, a 4.93% premium to US treasuries. Iraq faces three major medium term issues; the ongoing war, export revenues reliant on upon oil prices and dependence upon military and financial support from the US government. Each of these is out of its control. The 2016 deficit at 14% of GDP shows Iraq clearly cannot service its debts without a substantial financial turnaround. By buying the bonds, investors have effectively banked the equity case of the war ending and oil prices improving. The credit ratings from S&P (B-) and Moody’s (Caa1) are a better reflection of Iraq’s economic prospects.

Conclusion

In considering emerging market debt, investors have to be careful to consider each country on its own merits. In the examples of Argentina, Greece and Iraq, bond buyers have suspended sceptical analysis. They’ve banked the equity case, hoping for a substantial change from historical precedents, even though they won’t get a share of the upside if the rosy scenario occurs.

The examples aren’t unusual; as shown in the graph below from Bloomberg Belarus, Mongolia and Ukraine are all CCC+ rated but have bonds yielding less than 6%.

These examples point to the greater fool theory playing out in many credit markets. We’ve now reached the point in the credit cycle where further gains seem dependent upon more dumb money arriving and pushing spreads even tighter.

How much longer can this farce contiunue?

Calling the top of any cycle is nearly impossible, but calling out the current higher risk/lower return environment is simply common sense.

S&P Raises Outlook On Greece Ahead Of Bond Sale, Keeps B- Rating

Consider it a kiss to the bond investors who are expected to oversubscribe the upcoming latest "triumphal" Greek return to the bond markets, as soon as next week. Moments ago, rather unexpectedly, S&P raised its outlook on Greece from Stable to Positive, but reaffirmed the Greek rating at B-. The rating agency, said it believes that "recovering economic growth, alongside legislated fiscal reforms and further debt relief, should enable Greece to reduce its general government debt-to-GDP ratio and debt servicing costs through 2020."

We have therefore revised the outlook on Greece to positive from stable while affirming our "B-" long-term foreign and local currency sovereign credit ratings.

The positive outlook indicates our view that, over the next 12 months, there is at least a one-in-three probability that we could raise the ratings.

In other words, buy the Greek bonds, but beware a repeat of what happened in 2014.

Full S&P note below (link):

Outlook On Greece Ratings Revised To Positive; "B-" Long-Term Ratings
Affirmed

RATING ACTION

On July 21, 2017, S&P Global Ratings revised the outlook on the Hellenic
Republic (Greece) to positive from stable. We affirmed the "B-/B" long- and
short-term foreign and local currency sovereign credit ratings.

RATIONALE

The outlook revision reflects our expectation that Greece"s general government
debt and debt servicing costs will gradually decline, supported by economic
recovery, legislated fiscal measures through 2020, and a commitment from
Greece"s creditors, specifically from the Eurogroup, to further improve the
sustainability of its sovereign debt burden.

The Eurogroup, in its statement on June 15, 2017, has agreed to facilitate
market access for Greece through the creation of a cash buffer via
disbursements over and above the amount needed for the Greek government to
meet debt servicing obligations and pay down domestic arrears. In our opinion,
this support is likely to pave the way for Greece to successfully reenter
sovereign bond markets this year.

We also understand that the Eurogroup has reiterated its intention to provide
Greece with further extensions on loans from the European Financial Stability
Facility, as well as deferrals on debt service at the conclusion of the
European Stability Mechanism (ESM) program in August of next year. These
loans, contracted during Greece"s second program, constitute the largest chunk
of Greek government debt. Such additional measures, once put into effect, will
further lengthen Greece"s debt maturity profile--from more than 18 years
presently--and reduce its annual gross financing needs. The amortization of
Greek debt will peak in 2019 at about €13.5 billion, an estimated 7% of GDP; however, we expect the government to issue market debt to smooth upcoming
redemptions, including the 2019 maturities. In every other year from 2018
until 2023, we estimate that repayment obligations will be less than 4% of
GDP.

There are as yet no specifics on the precise form of further financial
assistance to Greece, if any, after the current ESM program is concluded next
year. However, given the considerable financial assistance and political
capital invested in Greece by its European creditors since the start of the
crisis, we believe that support--in the form of technical assistance and
further measures toward long-term debt relief--is likely to remain strong in
the years to come, albeit tied to conditionality.

Moreover, we consider it to be significant that euro-area governments are in
broad agreement on the outlines of a plan to link debt relief for Greece to
any divergence of actual nominal GDP growth from growth assumptions in the ESM
program"s debt sustainability analysis.

We note that the implementation of this plan, once finalized, is conditional
on Greece"s compliance with its ongoing loan program. While Greece is expected
to exit the current program in 2018, its policymakers have legislated measures
until 2020, including cuts to pensions and the income tax allowance, as well
as structural reforms, such as changes to facilitate out-of-court debt
workouts. This allowed Greece"s creditors to conclude the second review of the
current ESM program and to sanction a disbursement of €8.5 billion (about 4%
of GDP).

We believe that implementation challenges of further fiscal measures and other
potentially unpopular reforms--such as those related to the product and labor
markets, public administration, and privatization--remain significant. Most of
Greece"s tax burden falls upon a subsection of the private sector under
pressure from difficult credit conditions, an unpredictable business
environment, and a challenging macroeconomic setting. Tax evasion remains
widespread. Progress on privatizing state assets has been limited in
comparison to the long-term privatization target of €50 billion (about 30% of
GDP). Finally, the liquidity positions of key government-related entities,
including electric utility the Public Power Corporation, remain precarious due
to payment arrears in the public and private sector.

Even so, we anticipate broad compliance with the current program"s targets
until it ends in August next year. The recovering economy, boosted by July"s
ESM disbursement of €0.8 billion (0.4% of GDP) for arrears clearance, will
help authorities meet most of the fiscal conditionality, as indirect tax
receipts (particularly VAT) should perform well. Incentives for the government
to comply with the program remain considerable. The European Central Bank
(ECB), which lends to Greece subject to program compliance, will continue to
be a critical source of funding for Greece"s banks until deposits return to
the Greek financial system. The future return of deposits into the domestic
financial system will, in turn, depend upon policy stability and further
economic recovery. We therefore think Greece is likely to comply with the
program"s stipulations--albeit with delays--because the reversal of previously
legislated reforms could render ineligible the pool of Greek government bonds
that Greek banks use as collateral to access liquidity from the ECB. Another
reason is that the prospect of additional debt relief, which also lowers the
government"s gross financing needs, could further encourage Greece to stay the
course.

Accordingly, we project that over 2017-2020 Greece will report general
government primary surpluses of about 3% of GDP annually on average, alongside
average nominal GDP growth of 2.8%, which should allow general government debt
to decline to 158% of GDP in 2020 from 179% in 2016. Our debt-to-GDP
projections are highly contingent on an acceleration of real and nominal GDP,
though we do note that recent fiscal performance has been encouraging.
Moreover, we do not exclude the possibility of a more flexible approach from
Greece"s creditors toward its compliance with the highly ambitious and
potentially self-defeating medium-term primary surplus target of 3.5% of GDP.
In 2016, the general government primary surplus was 3.9% of GDP, well above
the program"s target of 0.5%. While much of the fiscal outperformance during
the year came from expenditure restraint, which weighed on growth, some of the
adjustment was also on the revenue side. General government revenues increased
by 3%, reflecting higher revenues from indirect taxes and higher personal
income taxes.

The Greek banking system remains impaired, though we do not view as imminent
the risk of another round of recapitalization by the sovereign. Nonperforming
exposures (NPEs) still constitute nearly half of systemwide loans. Initiatives
to tackle the high stock of NPEs are underway, including for instance
legislation to facilitate out-of-court restructuring, the development of a
secondary market, and electronic auctions.

The ratings are constrained by Greece"s high general government debt, which
translates into the second highest debt-to-GDP ratio of all the sovereigns we
rate; low economic growth rates that have eroded income levels over the past
decade and caused price and wage trends to diverge markedly from the rest of
the euro area; the highest unemployment rate in the euro area; and
considerable structural challenges, such as adverse demographics, large social
security deficits, and an impaired banking system that challenges the
transmission of the ECB"s monetary policy into Greece. The ratings are
supported by the low cost of servicing much of Greece"s general government
debt burden; primary surpluses, which if sustained could gradually lower
Greece"s debt relative to GDP; ongoing support from creditors in the form of
very long-dated concessional loans; and a new commitment to facilitate market
access via the creation of liquidity buffers and further debt relief.

We project that the ratio of net general government debt to GDP will continue
declining, after reaching 170% in 2016, but will not be below 150% of GDP
until 2021. Greece"s net general government debt remains the second highest of
the 130 sovereigns we rate. However, the cost of new loans for Greece, under
the current program, is significantly lower than the average cost of
refinancing for the majority of sovereigns rated in the "B" category. We
anticipate that even with the Greek sovereign"s reentry into commercial bond
markets, the proportion of commercial debt will remain less than 15% of total
general government debt through to the end of 2020. We therefore expect a
gradual reduction in interest costs relative to government revenues. The
average remaining term of Greece"s debt is an estimated 18 years, which is one
of the longest among rated sovereigns. For this reason, Greece"s official
creditors as well as the International Monetary Fund have benchmarked the
ratio of Greece"s annual general government gross financing needs to GDP as a
metric for debt sustainability, alongside the debt-to-GDP ratio.

OUTLOOK

The positive outlook indicates our view that, over the next 12 months, there
is at least a one out of three probability that we could raise our "B-"
ratings on Greece.

We could consider an upgrade if commitments from the Eurogroup to provide
further debt relief were approved, allowing for a further reduction in the
costs of sovereign debt servicing and a further terming out of the government
debt profile. Rating upside could also stem from a period of stable economic
growth and a recovery of the labor market. We could also consider an upgrade
if the banking sector further reduces its reliance on official funding,
reflecting a gradual return of confidence and deposits to the system or access
to market financing.

We could revise the outlook back to stable if legislated reforms, critical to
ongoing creditor support, are reversed, endangering further debt relief
measures; or if growth outcomes are significantly weaker than our
expectations, thereby restricting Greece"s ability to continue fiscal
consolidation and debt reduction.

Greece Progressing For Upgrade to Investment Grade and Markets Should Follow - by Michael Carino

Greece should be about to get a credit upgrade to investment
grade from non-investment grade and the markets seem ill prepared for this
positive development.

Greek stock and bond markets have been on a negative
trajectory since the sovereign financial crisis of 2008/ 2009.  After such a long negative stretch, positive
investors seem to be a rarity. The investment landscape is filled with short
sellers and traders who have been attacking the markets on every negative
headline.  With a lack of positive investors,
the markets positive moves have been limited. Greece has made substantial
progress in moving its economy forward with the required adjustments of its
creditors.  As a benchmark of the limited
positive progress in the Greek markets, the main Greek stock market index, the
ASE, is down 85% from its peak in 2007.  Yet
the outlook for the Greek economy is positively poised with a long term upward
trajectory. This leaves the market susceptible to positive asymmetric skews to
its return profile.

Greece has now overcome its financial difficulties and
passed all the laws necessary to complete its financial assistance from the
international community.  This Thursday there
is a Eurozone finance ministers and Greek creditor meeting that will discuss
and most likely agree on a path forward that allows Greece to tap the public
debt markets, become self-sufficient in its funding and have its bonds accepted
as collateral for the ECB’s sovereign debt quantitative easing purchases. Once
this happens, Greece’s credit rating should soon follow to investment grade.
This will force and allow investors to access Greece’s markets again after a
protracted period of being non-investment grade and off limits.

When markets are depressed for such a protracted period and
the economic climate improving but not acknowledged in financial markets, the
potential for significant upside exists. If Thursday’s meeting continues to
show progress, investors will eventually catch on.  It should not take heavy inflows into the
markets to propel assets higher since the base is so low and investors so few.  Therefore, there should be a great focus on
Thursday and any positive developments should be felt instantly in the
marketplace. But it appears that the markets are prepared for no positive
developments.  This discounts all of the
positive steps taken so far.  It ignores
that Greece has been set on a healthy path to prosperity and all necessary developments
will be forthcoming, whether today, tomorrow or down the road.  It’s time to stop being hyper-focused on the
negatives and acknowledge the substantial positives in Greece.

 

by Michael Carino, 6/12/17

Michael Carino is the CEO of Greenwich Endeavors, a
financial service firm, and has been a fund manager and owner for more than 20
years.  He is optimistically invested in
Greek equities.

 

 

    

Joe Biden Claims He Was "Personally Involved" In 'Saving' Greece From Grexit

The Obama administration played an important role to make sure Greece remains in the eurozone, former Vice President Joe Biden said. As KeepTalkingGreece.com reports, in an interview to newspaper Kathimerini, Biden said that he was personally involved in the issue and described the efforts and difficulties he faced to avoid the financial collapse of Greece.

The Obama administration and you personally also played an important role in making sure that Greece remained a part of the eurozone. Could you describe for us these efforts and the difficulties you faced? Was there a close call when you got very concerned about a Grexit and a destabilized Greece? Do you believe that the risk of a Grexit is gone?

President Obama and I were engaged with all parties in the Greek financial crisis, because we wanted to prevent Greece from experiencing financial collapse. Grexit would have had very serious long-term consequences for Greece and Europe – and could potentially have triggered a wider crisis of confidence in the global economy.

We were concerned that in the high-stakes negotiation between Greece and its creditors, failure to reach a sensible agreement would have made all parties much worse off in the end. But because of each side’s desire to secure the best possible terms, this worst-case scenario was a real possibility.

While the ultimate decision was up to the leaders of Greece, the IMF, and the eurozone countries, I think we helped steer the conversation in a more pragmatic direction because of the credibility we had in Athens, Brussels and Berlin.

We argued with the creditor countries that Greece had been saddled with an unsustainably high debt burden and that reform would only go so far with such a large debt overhang. At the same time, we encouraged the Greek leadership to think about how to demonstrate to its creditors that it had a credible roadmap for systemic economic reform, which was necessary.

While a deal was reached and the worst of the crisis is behind us, we are not yet completely out of the woods. I believe the United States continues to have a role to play in supporting the parties as they move forward with discussions on Greece’s economic future.

So that"s who the Greeks have to blame thank for record unemployment, record suicide rates, record poverty, and record taxes.

Biden spoke also of the importance of “energy diplomacy” after the discovery of natural gas in Cyprus, Israel and Egypt – and the potential for discoveries in Greece and Lebanon.

"This is an exciting development that could bring about not only economic prosperity, but also enhance regional security through cooperation, collaboration and integration,” Biden stressing the necessity for a solution of the Cyprus issue.

Full interview here.

We look forward to Jucker"s response to Biden"s claims of saving the world...

Euro Slides After Greece Hints At Default

EURUSD is sliding in early Asian trading after Greece"s government is reportedly planning to forego its next bailout payment (of around EUR7bn) if no debt relief is offered by creditors (thus leaving it likely to default on its next round of repayments).

Bloomberg reports, Greece’s government preparing to possibly go without next bailout payment if creditors don’t agree on debt relief for the country according to German newspaper Bild (without saying where it obtained the information).

While probably just another negotiating step, it is weighing on EURUSD.

9 Years Later... Greece Is Still In A Debt Crisis!

Authored by Simon Black via SovereignMan.com,

Sometimes you have to marvel at the absurdity of the financial universe in which we live.

On one side of the Atlantic, we have the United States of America, which triggered yet another debt ceiling disaster last Thursday when the US government’s maximum allowable debt reset to just over $20 trillion.

Of course, the US national debt is pretty much already at $20 trillion.

(That’s roughly $166,000 per taxpayer in the Land of the Free.)

This means that Uncle Sam is legally prohibited from ‘officially’ borrowing any more money.

But far be it from the US government to start living within its means. Sacrilege!

These guys have zero chance of making ends meet without going into debt.

Just last year, according to the government’s own financial report, their annual net loss totaled $1 TRILLION, and the national debt increased by $1.4 trillion.

And that was in a relatively stable year. There was no major war or financial crisis to fight. It was just business as usual.

This year isn’t going to be any different.

So, cut off from their normal debt supply (the bond market), the Treasury Department is resorting to what they call “extraordinary measures.”

They’re basically pillaging government employee retirement funds, and will continue to do so until Congress raises the debt ceiling.

It’s a repeat of what happened in 2015. And 2013. And 2011.

Pretty amazing to consider that the “richest” country in the world has to plunder retirement funds in order to keep the lights on.

Former US Treasury Secretary Larry Summers said it perfectly when he quipped “How long can the world’s biggest borrower remain the world’s biggest power?”

Then, of course, on the other side of the Atlantic, we have Greece, which is now in its NINTH YEAR of a major debt crisis.

Incredible.

Greece has had nine different governments since 2009. At least thirteen austerity measures. Multiple bailouts. Severe capital controls. And a full-out debt restructuring in which creditors accepted a 50% loss.

Yet despite all these measures GREECE IS STILL IN A DEBT CRISIS.

Right now, in fact, Greece is careening towards another major chapter in its never-ending debt drama.

Just like the United States, the Greek government is set to run out of money (yet again) in a few months and is in need of a fresh bailout from the IMF and EU.

(The EU is code for “Germany”…)

Without another bailout, Greece will go bust in July– this is basic arithmetic, not some wild theory.

And this matters.

If Greece defaults, everyone dumb enough to have loaned them money will take a BIG hit.

This includes a multitude of banks across Germany, Austria, France, and the rest of Europe.

Many of those banks already have extremely low levels of capital and simply cannot afford a major loss.

(Last year, for example, the IMF specifically singled out Germany’s Deutsche Bank as being the top contributor to systemic risk in the global financial system.)

So a Greek default poses as major risk to a number of those banks.

More importantly, due to the interconnectedness of the financial system, a Greek default poses a major risk to anyone with exposure to those banks.

Think about it like this: if Greece defaults and Bank A goes down, then Bank A will no longer be able to meet its obligations to Bank B. Bank B will suffer a loss as well.

A single event can set off a chain reaction, what’s called ‘contagion’ in finance.

And it’s possible that Greece could be that event.

This is what European officials have been so desperate to prevent for the last nine years, and why they’ve always come to the rescue with a bailout.

It has nothing to do with community or generosity. They’re hopelessly trying to prevent another 2008-style meltdown of the financial system.

But their measures have limits.

How much longer do Greek citizens accept being vassals of Germany, suffering through debilitating capital controls and austerity measures?

How much longer do German taxpayers continue forking over their hard-earned wages to bail out Greek retirees?

After all, they’ve spent nine years trying to ‘fix’ Greece, and the situation has only become worse.

For a continent that has been at war with itself for 10 centuries and only managed to play nice for the last 30 or so years, it’s foolish to expect these bailouts to last forever.

And whether it’s this July or some date in the future, Greece could end up being the catalyst which sets off a chain reaction on both sides of the Atlantic.

Do you have a Plan B?

"Who Hit The Brakes?" - Bank Loan Creation Suddenly Tumbles To Five Year Low

While the overall economy appears to be humming along, at least according to the Fed which on Wednesday is expected (with 100% certainty according to the market) to hike rates by 25bps for the second time in three months on concerns it has fallen behind the inflationary curve, with last week"s payrolls report providing some validation despite prevailing weakness within "hard data" in recent months offset by soaring "soft" sentiment reports, one area of material concern has emerged: a sudden collapse in loan growth in general, and the all important Commercial and Industrial Loan segment in particular, a drop which the WSJ recently dubbed an "ominous economic signal" and blamed policy uncertainty under Trump for the collapse in growth.

While the jury is out on whether Trump is at fault - after all the same Trump has managed to reportedly spark a historic "animal spirits" rally in the S&P, while prompting a record number of people to re-enter the labor force in the past two months -  here are facts: total loans and leases by U.S. commercial banks are currently rising at an annual pace of about 4.6%, based on weekly Fed data. That is down from a 6.4% pace for all of last year and peak rates of around 8% in mid-2016. This is the slowest pace of debt creation since the spring of 2014.

While the deceleration has been broad-based across business, real estate and consumer lending and, as the WSJ notes, "is at odds with the idea of a stronger economy and rising sentiment."

But the slowdown has been especially acute in the all important for growth Commercial and Industrial loan category, which after growing at a pace of 10% in the first half of 2016, has suddenly and unexpectedly tumbled to just 4.0% as of the latest week, nearly 50% lower than the 7% growth notched at the start of the year.  This was the lowest pace of loan growth since July of 2011.

There has been no definitive explanation for this sudden phenomenon, prompting the WSJ to inquire "who hit the brakes?" which is ironic because just as troubling as the big drop in C&I loans is the relentless grind lower in auto loans, which are likewise growing at a pace that is half what it was as recently as last September.

Two potential ideas have been put forth to explain the sharp slowdown: according to Barclays analyst Jason Goldberg it is possible that companies have shifted from the loan to the bond market, and are selling more bonds to lock in cheap financing before rates rise, while not encumbering assets with issuing unsecured debt. To be sure, corporate debt issuance in January soared by 43% from a year earlier, however the number may be misleading as it comes from a low base in the year-earlier period, when global markets were in turmoil.

The other, more troubling explanation is that either political uncertainty is causing companies and banks to put off big decisions until the outlook for trade and tax policy is clearer, or that consumer demand for loans has plunged, forcing a sharp slowing in loan demand, as the underlying economy suffering a steep slowdown perhaps on the back of surging interest rates. The lending slowdown began showing up clearly just before the election last year, which also coincided with the sharp jump in interest rates.

If it is uncertainty, and should it persist, caution on the part of lenders and borrowers could become a growing drag on the economy. Alternatively, if the slowdown is rate-dependent, any future Fed rate hikes will only further pressure loan growth: 3M Libor has continued its relentless rise higher, and with every passing day makes new 8 year highs.

At this pace, C&I loan growth may turn negative Y/Y within a few months, and since historically US economic growth has been a function of easy bank credit, should the recent drop not be arrested, it is likely that the Fed will have no choice but to reverse its tightening course in the very near future.

Greece versus its creditors: Who will blink first?

The Greek debt crisis has been around for a long time, probably raising its head just around the time that the U.S housing and loan crisis unfolded in 2009; when the country acknowledged that it piled up debt to the tune of 113% of its GDP. 

Since then, through endless turmoil and stress, the country has been battling with its creditors to “give it a break” and write-off a large chunk of its owing. That story still continues till this day!

A RAY OF HOPE?

A review of Greece’s financial performance in mid February, by the European Commission (EC), shone a ray of hope on the battered nation’s economy. The Commission had earlier predicted that the country’s GDP would see a decline of 0.3% in 2016. That forecast was revised upward – noting a growth (instead of a decrease) of 0.3%.

The review also concluded that there was hope of a continued recovery through 2017 with a 2.7% increase, and a 3.1% GDP rise in 2018. However, this was predicated with a very important proviso: That the soon to be held review (planned for February 20th) of Greece’s dept relief package concludes quickly; and that Greece may need to embrace additional austerity measures as a result.

And that sent dark clouds to cover the tiny ray of hope!

Greek prime minister’s leftist coalition government was quick to dismiss any suggestions of yet more austerity measures. Hardliners within the coalition believe that the Hellenic nation is being asked to tighten its belt more than what was previously agreed – without anything substantial to show in return.

Digital Policy Minister Nikos Pappas minced no words in telling his supporters what he thought of the ECs comments: In Pappas’ words, there would be “…no more austerity measures” accepted by the Greek government. Period. 

The dark clouds overshadowing the ray of hope just got even darker!

THE RACE IS ON

With the next installment (of €86B) of bailout funds hanging in the balance, Greece is desperate to find a resolution to its predicament – as are its creditors. In July this year, the Greeks have to make €7B in debt repayments to the European Central Bank (ECB). As a result of the latest crisis, there’s renewed talk of a Greek default, which has sent interest rates for Greek debt rising, while badly hitting the country’s already struggling stock market.

Meanwhile, in an effort to resolve the deadlock, EU Finance Commissioner Pierre Moscovici met with Mr. Tsipras in Athens on February 15th.  The urgent session really had just one agenda item: To try and convince the Greeks that further austerity measures would be the only way that the next tranche of bailout funds, amounting to around €86B, would be released.

THE REAL “STORY”?

Despite all the wrangling and raucous flurry of activity – both behind and on the scenes – Greece-watchers might be wondering what the “real story” here is. A central party to the Greek bailout talks, the International Monetary Fund (IMF), seems to be sending out mixed signals. 

At a recent press event, its Managing Director, Christine Lagarde, said that the IMF “…cannot cut a sweet deal for a particular country”; meaning Greece should not expect “special treatment” from the world’s lender. Simultaneously though, she indicated that Greece’s creditors should brace themselves for a “haircut” as a means to resolve the latest standoff.

So, what’s the real story here? And who will blink first? Will it be the lenders throwing in the towel, or will Greece have to bow to international pressure – again! – and swallow yet another bitter pill of unpopular economic belt-tightening? Time will tell!

German Minister Calls For 'Plan B': "Greece Should Pledge Gold, Real Estate For New Loans"

Bavaria"s 50-year-old finance minister Markus Soeder was previously named by German weekly Der Spiegel as one of the Ten Most Dangerous European Politicians (defined as "every politician who is resorting to cheap populism in order to rack up domestic political points").

For the Greeks, this may well be true.

During the Greek government-debt crisis, Soeder was among the most vocal in calling for Greece to leave the Eurozone. By 2012, he said in an interview: "Athens must stand as an example that this Eurozone can also show teeth."

And now, according to an interview with Bild, the CSU politician said that:

...new billions should only flow when Athens implemented all the reforms.

Even then, however, aid should only be given against a pledge "in the form of cash, gold or real estate".

Soeder added, "We need a plan B."

One wonders if this was Germany"s end-game all along?

Notably Greek gold reserves stand around EUR4 billion while the supposed "cost" to leaving the EU - according to TARGET2 balances - is around EUR72 billion...

Greek Bank Run Re-accelerates: Massive Deposit Withdrawals Despite Capital Controls

Delays in the talks between Greece and its lenders have brought back the ghost of Grexit.

The grave disagreement between the International Monetary Fund and the European lenders, Grexit bombshells flying around and Greece’s reluctance to accept additional austerity measures have increase uncertainty among citizens – for one more time.

And so, as KeepTalkingGreece.com notes, what do citizens do when they feel political and economical insecurity? The run to banks and withdraw deposits.

2.5 billion euros left Greek banks in the last 45 days.

And this despite the capital controls that allow Greeks to withdraw a maximum of just 1,800 euro per month.

However, in better situation are those who brought back cash to the banks. Cash that was largely withdrawn before the capital controls were imposed in July 2015 as a result of a major bank run from November 2014 until end of June 2015. Those who pulled the cash from under the mattress and brought it to bank are allowed to withdraw money above the 1800-euro cap.

According to newspaper Eidiseis, the cash withdrawal in the last 45 days has set bankers in alert.

In addition to cash withdrawals, business loans and mortgage, amounting a total of 500 million euros, turned red. A sign that the delay in the conclusion of the second review has increased uncertainty among the Greeks, as the daily notes.

Speaking to the daily, sources from the Union of Greek Banks said that “time is not working in our favor.”

They stressed that the government and the lenders should reach a compromise.

Beginning of February, Greek websites for economic news had reported that more than one billion euros was withdrawn in January 2017.

According to a report of November 2015, more than 120 billion euros left the Greek banks during the years of the crisis. 45 billion euro left the banks during November 2014 – 2015. Eighty percent of this amount, that is some €36 billion are been kept in homes, company safes or in bank lockers.

* * *

Time to increase capital controls once again!!??

Dear IMF, Please Put Greece Out Of Its Misery

Submitted by Michael Shedlock via MishTalk.com,

For the umpteenth time, the IMF has warned that Greece cannot meet fiscal targets set by its creditors. And once again, the IMF insists that it will not be a part of the “Troika” unless the goals on Greece are realistic.

History suggests the IMF will cave in to Germany and agree to some half-baked plan (make that 1/8th baked plan) that will supposedly put Greece back on track. Such nonsense has been going on for years.

Mercy, Please!

[It"s worse than the Great Depression...]

h/t @MehreenKhn

Here we go again: IMF warns Greece Won’t Meet Fiscal Surplus Targets Set By Europe.

Greece’s primary budget surplus will rise to 1.5 percent over the long run from about 1 percent last year, amid a modest recovery, the IMF said Monday after executive directors met to discuss the fund’s annual assessment of the nation’s economy. Still, the projected surplus falls short of the 3.1 percent forecast by the country’s European creditors.

The fund reiterated its view that Greece’s debt is unsustainable. Most of the executive directors don’t believe the economy needs more fiscal consolidation, the IMF said.

The IMF has said it would consider giving Greece a new loan to supplement the 86 billion euros ($92 billion) it’s receiving from euro-area countries, but only if the nation’s debt-reduction plans are credible. [Mish comment: How many times have we heard that?]

Greece’s government debt will reach 275 percent of its gross domestic product by 2060, when its financing needs will represent 62 percent of GDP. Public debt will reach 181 percent of GDP this year, the IMF projected Monday.

Time for Greece to Break the Deal

The Failed Revolution notes Yanis Varoufakis, the former finance minister of prime minister Tsipras, calls on Tsipras to Break the Destructive Agreements.

The following as translated and explained by the Failed Revolution, from http://www.efsyn.gr/arthro/rixi-me-tis-pseydaisthiseis.

Varoufakis wrote among other things:

The night of the Greek referendum, I tried hard to explain to the Greek PM that the submission of Greece to the third memorandum was Schäuble’s real plan (not Grexit).

In reality, there was no hope that the 3rd toxic “program” for Greece would be rationalized progressively through the support of the European Commission to Athens. Meaning, there was no hope that IMF’s austerity and anti-social measures could be soften. The fact that Moscovici, Juncker, Sapin and others gave such promises, is no excuse because the Greek government knew since May 2015 that these people know how to tell lies, or, they are unable to keep their promises when they don’t lie.

Suddenly, the Schäuble-IMF-ECB attacked on Greece, demanding exhausting measures, while Merkel-Hollande-Commission didn’t do anything. Tsipras then retreated for one more time in order to “save” Greece. This was Schäuble’s plan.

Tsipras promises, one more time, that he will not retreat (this time!) by legislating new austerity even after 2018. If he means it, I remind him what we had agreed that is necessary and which – even today – is the only thing that may prevent the worst things to come.

Prepare for unilateral restructuring of Greek bonds held by the ECB, which must be repaid in July (and after).

Prepare the electronic system of transactions through Taxisnet which I had designed, I had started building it and even announced it to the new Minister of Finance, Euclid Tsakalotos, when I delivered the Ministry.

Therefore, if indeed the Greek PM means it this time that he will not retreat, he should prepare for breaking the deal with the creditors, so that to prevent it. The design of a parallel system for payments is ready since 2014, as he knows.

No Reason to Act Now

I offer one significant improvement to the plan: Stall for 3 months.

Wait for the IMF to do what they say. If the IMF acts first and backs out of the deal, it will put extreme pressure on Germany to provide relief.

Schäuble has stated Greece will not provide any more credit relief. So why act now?

Instead of acting in advance, Greece can blame Germany and the IMF unless there is significant relief. And as a side bonus, Merkel will take the hit for having a country exit the Eurozone on her watch.

Won’t that be fun?

Another Greek WTF Showdown Moment Explained

I wrote about much of this a few days ago in Another Greek WTF Showdown Moment Explained.

The IMF has once again threatened to pull out of the Troika following a warning that Eurogroup Loan Measures Not Enough for Greek Debt.

Perpetual Nonsense

The IMF argues correctly that Greek debt is unsustainable. Previously the IMF correctly argued Greece could not maintain a primary account surplus of 3.5 percent.

Yet the IMF now demands Greece automatically implement rules forcing it to have a primary account surplus of 3.5 percent of GDP as far as the eye can see.

Last week Eurointelligence reported that Greek officials were elated the much-despised IMF might exit the program. Although Greece hates the IMF, the IMF has at least been partially on Greece’s side, arguing for debt reductions.

Were the IMF to actually pull out to happen, Schaeuble wants Greece out of the Eurozone.

Meanwhile, Eurozone officials pretend the program is working when they know full well its not.

WTF Moments

This is one of those WTF moments where statements from Greece, from the IMF, and also the Eurozone make no apparent sense.

Yet, despite the obviously apparent nonsense, it’s possible to piece together what’s happening.

1. Neither Germany nor the Netherlands is willing to throw Greece the smallest of bones for fear of election consequences. It’s far easier for Eurozone nannycrats to pretend things are running smoothly.


2. Schaeuble has long wanted Greece out of the Eurozone. But Germany does not want to take the blame. Instead, Schaeuble wants the IMF or Greece to take the blame.


3. The IMF does not want the blame either, so it takes a preposterous stance that the debt is not sustainable but a 3.5% primary account surplus for as far as the eye can see is sustainable. The IMF takes this view despite having argued many times that 3.5% is not sustainable.


4. By pretending to now be in favor of 3.5% perpetually, the IMF can argue it is not one-sided to Greece.


5. Despite the fact the IMF is more on Greece’s side than Germany or the Eurozone nannycrats, Greece hates the IMF so much that its position of not wanting the IMF involved overrides common sense.


6. As an alternative to point 5, consider the possibility that Greece wants outs of the Eurozone, but none of the politicians want to take the blame. Instead, the politicians want to blame the IMF or Germany and are just itching for the IMF to get the hell out so they could do what they wanted to years ago (exit the eurozone). In this possibility, Greece looks to place the blame elsewhere and is waiting for the right moment.

Troika Blame Game Theory

Points 1-4 are certain. Points 5-6 are pick one. Despite the apparent absurdity of conflicting views and the IMF’s changing stance, blame game theory explains all you need to know. Here is a shorter synopsis.

1. Greece wants to blame the IMF and Germany


2. Germany wants to blame Greece and the IMF


3. The IMF wants to blame Greece and Germany

Make the IMF and Germany Commit First

Greece has four reasons to stall, making the IMF and Germany act first.

1. If the IMF does not insist on debt relief, Greece can blame the IMF and Germany.


2. If the IMF does insist on debt relief and Germany will not go along, then Greece can blame Germany.


3. If the IMF and Germany do not provide enough debt relief, then Greece can blame both of them.


4. If the IMF and Germany provide enough debt relief, then Greece wins as well.

Greece is in a no-lose setup if it stalls long enough to get the IMF and Germany to play their cards first.

Expect Trump to Pressure IMF

Greece should get out of the euro & go back to their own currency--they are just wasting time.

— Donald J. Trump (@realDonaldTrump) October 9, 2012

Trump has stated Greece should abandon the Euro, and Germany is a currency manipulator.

Thus, it is reasonable to believe Trump may threaten to pull funds from the IMF unless they cooperate.

Cooperation in this case means backing out of the Troika deal.

Related Articles

1. Trump Drives a Wedge in the EU


2. Trump Accuses Germany of “Currency Exploitation”: Merkel vs. Trump, Is Either Side Telling the Truth?

Another Greek WTF Showdown Moment Explained

Submitted by Michael Shedlock via MishTalk.com,

The IMF has once again threatened to pull out of the Troika following a warning that Eurogroup Loan Measures Not Enough for Greek Debt.

Greek debt yields had already been rising and spiked on the news.

Let’s take a look at what’s happening, culminating with an explanation of seemingly preposterous positions from all involved.

In the IMF’s baseline scenario, Greece’s government debt will reach 275 percent of its gross domestic product by 2060, when its financing needs will represent 62 percent of GDP, the report obtained by Bloomberg says. The government estimates public debt around 180 percent of GDP at present.

Europe Responds

The IMF board is set to discuss Greece’s ability to service its debt on Feb. 6. The fund has resisted pressure from countries including Germany and the Netherlands to contribute to the bailout program, seeing it as doomed unless Greece takes further steps to rein in spending or euro-area governments ease the terms of the loans.

Europe’s aid program for Greece is credible and backed by contingency measures to handle unforeseen events, a spokesman for the European Stability Mechanism, an EU agency that provides bailout loans to Greece, said in e-mailed statement Sunday.

IMF Proposals

As in the past, the IMF is proposing that Europe extend grace periods and maturity dates on the loans. The document also calls for further deferral of interest payments and to lock in interest rates.

Greek debt is “highly unsustainable” and “even with the full implementation of policies agreed under the European Stability Mechanism program, public debt and financing needs will become explosive in the long run,” the document says. A “substantial restructuring” of European loans to Greece is required to restore debt sustainability, it says.

The IMF agrees with Greece’s euro-area creditors on one point. Both want Greece to introduce a law triggering austerity measures if the country fails to maintain a budget surplus before interest payments of 3.5 percent of GDP. Greek Finance Minister Euclid Tsakalotos last week rejected that demand as “unacceptable.”

Greek Bond Yields Soar

Reuters reports Greek Bond Yields Soar on Worries about IMF role in Bailout.

Yields on short-dated bonds spiked 300 basis points, on track for their biggest one-day jump since July 2015, while 10-year bond yields rose to their highest in almost three months.

Germany said on Monday it believed the IMF would participate and that it was too early to start thinking about other possible scenarios.

But concerns were heightened after a leaked report that the Fund expects Greek debt to explode to 275 percent of GDP by 2060, analysts said.

“There’s a bit of disquiet regarding the IMF’s role…,” said Orlando Green, European fixed income strategist at Credit Agricole.

“The bottom line is that the IMF wants debt relief for Greece and the EU has taken baby steps towards this, but it is not what the IMF is looking for long-term. When there are divisions between the EU and IMF, that arouses concerns about Greece.”

He was answering a question about a report in the Bild newspaper that said Finance Minister Wolfgang Schaeuble would argue for a Greek exit from the euro zone should the IMF withdraw from the third bailout programme.

Short-dated government bond yields in Greece rose as far as 9.98 percent, their highest level in about seven months.

Five and 10-year Greek bond yields also rose sharply, with 10-year yields climbing 50 bps to around 7.76 percent – their highest since early November.

Perpetual Nonsense

The IMF argues correctly that Greek debt is unsustainable. Previously the IMF correctly argued Greece could not maintain a primary account surplus of 3.5 percent.

Yet the IMF now demands Greece automatically implement rules forcing it to have a primary account surplus of 3.5 percent of GDP as far as the eye can see.

Last week Eurointelligence reported that Greek officials were elated the much-despised IMF might exit the program. Although Greece hates the IMF, the IMF has at least been partially on Greece’s side, arguing for debt reductions.

Were the IMF to actually pull out to happen, Schaeuble wants Greece out of the Eurozone.

Meanwhile, Eurozone officials pretend the program is working when they know full well its not.

WTF Moments

This is one of those WTF moments where statements from Greece, from the IMF, and also the Eurozone make no apparent sense.

Yet, despite the obviously apparent nonsense, it’s possible to piece together what’s happening.

1. Neither Germany nor the Netherlands is willing to throw Greece the smallest of bones for fear of election consequences. It’s far easier for Eurozone nannycrats to pretend things are running smoothly.


2. Schaeuble has long wanted Greece out of the Eurozone. But Germany does not want to take the blame. Instead, Schaeuble wants the IMF or Greece to take the blame.


3. The IMF does not want the blame either, so it takes a preposterous stance that the debt is not sustainable but a 3.5% primary account surplus for as far as the eye can see is sustainable. The IMF takes this view despite having argued many times that 3.5% is not sustainable.


4. By pretending to now be in favor of 3.5% perpetually, the IMF can argue it is not one-sided to Greece.


5. Despite the fact the IMF is more on Greece’s side than Germany or the Eurozone nannycrats, Greece hates the IMF so much that its position of not wanting the IMF involved overrides common sense.


6. As an alternative to point 5, consider the possibility that Greece wants outs of the Eurozone, but none of the politicians want to take the blame. Instead, the politicians want to blame the IMF or Germany and are just itching for the IMF to get the hell out so they could do what they wanted to years ago (exit the eurozone). In this possibility, Greece looks to place the blame elsewhere and is waiting for the right moment.

Troika Blame Game Theory

Points 1-4 are certain. Points 5-6 are pick one. Despite the apparent absurdity of conflicting views and the IMF’s changing stance, blame game theory explains all you need to know. Here is a shorter synopsis.

1. Greece wants to blame the IMF and Germany


2. Germany wants to blame Greece and the IMF


3. The IMF wants to blame Greece and Germany