King or republic; óchi or naí? That is the question…

BoG Claims vs deposit

The last time Greeks went to the ballot box for a referendum was December 8th 1974 and the question was simply whether the people wanted to be governed in a republic or by a monarch. The result was overwhelmingly in favour of a republic with almost 70 per cent of casted votes opting for a less dictatorial form of government. The military junta was clearly still fresh in peoples mind.

On July 5th 2015 they will once again have to answer the same question, but this time stated in a far more bureaucratic language.

“Should the draft deal that was put forward by the European Commission, the European Central Bank and the International Monetary Fund in the Eurogroup of June 25, 2015, and consists of two parts, that together form a unified proposal, be accepted? The first document is titled “Reforms for the Completion of the Current Program and Beyond” and the second “Preliminary Debt Sustainability Analysis.”

In plain English the question is just as in 1974; whether the Greek people will be ruled by the monarchical fascists from the House of Brussels or by the people of Greece.

Tsipras and his lackeys sees it a bit differently though. They tell the Greek people negotiations will resume Monday morning no matter the outcome of the referendum. Tsipras maintain that if the Greeks dare vote óchi to the European proposal they will have a democratic mandate to ask for, no demand rather, money from their euro-partners without any conditions attached.

Tsipras believe that going for the nuclear option of referendum will give more clout to his claim that the Europeans trample all over democratic principles with their demand for structural reforms. The propaganda war, which the Greeks are currently losing, can be turned only by depicting the Troika as heartless fascists with no regards for the will of the people.

That the Greek strategy makes a mockery out of democracy seems lost on the socialists though. Democracy was never about cynically swindling your own neighbours in the name of some divine collective voice that can never be questioned, but about self-rule.

Just because the collective voice demand ‘bread and circus’ for everybody does not mean they are entitled to it. The Germans could obviously play the same game and push through a referendum by asking the German people whether they are willing to send more of their hard-earned money to Greeks in early retirement without strings attached, and then proceed to negotiate with Greek socialists with the weight of a democratic mandate to be hard-nosed.

All obviously smoke and mirror. Bottom line, it is realpolitik in its crudest form. We are witnessing two corrupt regimes in desperate death throes throwing other-peoples-money around as they see fit to extend their parasitical existence just one more day. Nothing more, nothing less.

Whatever outcome that might come from the referendum on Sunday it is largely irrelevant. The real question is still, and always will be, how the Greek consumption and debt repayments will be funded. It certainly won’t come from domestic production of valuable goods and services. The Greek system is institutionally bankrupt, both literally and figuratively.

That said, Greece does not need to face up to honest market pricing and strictly in terms of cash-flow dynamics it does not look as bad as the media portray it to be.

EFSF loans are pushed out to 2023, when the IMF loans are scheduled to be paid back. The only hurdle in the medium term is the repayment of the outstanding SMP bonds that “saved” Greece in 2010. Full debt repayment according to schedule would mean a budget surplus of 3 per cent of GDP up to 2020. Excluding SMP this drops to less than half.

GDP and repayment

Source: IMF WEO April 2015, Wall Street Journal,

It is true over the longer term Greek public debt looks like a tough burden to bear, but if the IMF is right (they never are) and the Greeks can enjoy sustained high (euro) inflation rates the burden of debt repayment should ease through higher nominal GDP. As a matter of fact, assuming 4.5 per cent nominal GDP growth in the indefinite future makes Greek debt repayment quite easy with an average annual repayment of only 1.6 per cent of NGDP.

Gr Repayment

Source: Wall Street Journal,

And it is not like the Greeks are overburdened with high interest rates. On the contrary, the implied interest rate paid on Greek debt is even lower than that of Germany. Lenient conditions on outstanding bail-out loans was effectively used to turn over the stock of debt in rapid order benefiting the Greek public sector disproportionally relatively to other euro zone countries where the debt stock is refinanced at lower rates over a much longer time.

Gr Interest Rate

Source: Eurostat,

Despite all the leniency of can-kicking from its Europartners Greece are unable to service its debt, as witnessed by the latest default on IMF bonds. Tax revenues are collapsing and the entrenched corruption at all levels of government make the average citizen loath to pay anything into a system they know benefit the cronies more than anyone. In other words, the Greeks are unwilling to pay back the debt taken on in their name because it was issued under false pretence mainly to bail out European banks that made the immoral act of lending to a kleptocracy in the first place; Greek public debt is thus odious and void.

The Germans, French and IMF alike reluctantly admit so much, but they cannot give the Greeks any debt relief because as soon as Greece starts to default on their obligations on the off-balance sheet guarantees extended by the euro countries the whole system could fall like dominoes. The table below show the explicit and implicit exposure every country has to Greece.

Exposure to Grexit

Source: Eurostat, EFSF, ECB, Central Bank of Greece, IMF, Bawerk.netNotes                                                                 What would happen if Italy suddenly got an extra funding requirement of more than €60bn? Every euro apologist point to Italy’s primary surplus, but what good does that do when your debt is over 130 per cent of GDP and rising? The interest payment on that gargantuan debt load means Italy must cough up more than €75bn a year just to service liabilities already incurred. A primary surplus is a useless concept in a situation like the one Italy finds itself in. Adding another €60bn to Italy’s balance sheet could very well be the straw that breaks the Italian camel.

The French would be on the hook for around €70bn just when they have agreed with the European Commission to “slash” spending to get within the Maastricht goal of 3 per cent, in 2017!

Imagine the German peoples wrath when they learn that Merkel defied their sacrosanct constitution; a constitution that clearly state that the German people, through its Bundestag, is the sole arbiter of any act that have fiscal implications regarding the German people. The Bundestag did not approve the €42bn of ECB programs that have funded the Greek states excessive consumption.

So how can a morally and financially bankrupt state continue its operations? The answer to that question gets us to the very crux of the problem. ECB has provided the liquidity to maintain the status quo in some sort of limbo where it does not collapse, but it does not recover either. First through refinancing the Greek banking system via its main refinancing operation (MRO) and then, when the Greeks decided to opt out of the economic adjustment program enforced by the Troika, through its emergency lending assistance (ELA).

BoG Fundng of MFI

Source: Bank of Greece,

Note that the chart of funding vehicles for Greek MFIs is presented at face value, but it clearly shows what’s going on in the Greek banking system. The opaque ELA has now become the sole source of extra funding. From media reports we know that the cash-value of ELA is €89bn, which implies a hair-cut of approximately 49 per cent.

This program has been the only reason why the Greek bank jog didn’t turn into a full blown bank run until very recently. Every euro withdrawn from a Greek deposit account was replenished with an ELA created euro.

By end of June BoG claims on Greek MFIs was probably larger than the deposit base which means the rotten collateral Greek banks has managed to post, with a Greek sovereign guarantee, for ELA funding more or less assure hefty bail-ins for the hapless depositor that has not yet managed to get his money out.

BoG Claims vs deposit

Source: Bank of Greece,

So the real question we need to pose ahead of the referendum is whether the ECB will maintain the current ELA cap of €89bn! If the Greeks opt for óchi and reject the bail-out program the so-called rule based ECB will be forced to pull the plug. The Greeks with some deposits left will be bailed in and probably denominated to drachmas and hence be the ones that pay for years of folly.

The parasitical political class, the cronies and oligarchs, the banks and the lazy public employees will once again have managed to steal and plunder, all in the name of the common good.