The cost of our own blind folly

What a difference a year makes! 12 months ago we were contemplating "exodus" to the markets and now we hope to avoid "exodus" from the Eurozone ...

Here follows an exercise of numbers. It is an analyses of cost of debt based on real market yields and a simple allocation between bonds and t-bills. This exercise was prepared to depict the true implications of (our own blind folly as Homer would put it):

a) the failure of former government to close the review and secure the return to normalcy (access to money markets) and/or an auxiliary funding source through the transformation of the unused HFSF funds into a precautionary funding line (ECCL), and of

b) the failure of the new government to come in terms with the realities of 21st century politics and economics in the fragile environment of an economy that has just undergone a cruel but necessary fiscal adjustment, has lost over 25% of its GDP in the process of doing so and has acquired, as a result, a third world-like-unemployment situation.

Meddling government tasks, the newly elected coalition, muddles through awkwardness and disambiguation with institutions, symbols, ideal-isms, accounting practices, foreign affairs, Laws, and The People.

The result is an absolute disaster that makes Grecovery impossible! 

Much like in Homer's Odyssey, we must now muddle through another epic journey to the unknown.

[1] Tell me, O Muse, of the man of many devices, who wandered full many ways after he had sacked the sacred citadel of Troy. Many were the men whose cities he saw and whose mind he learned, aye, and many the woes he suffered in his heart upon the sea, [5] seeking to win his own life and the return of his comrades. Yet even so he saved not his comrades, though he desired it sore, for through their own blind folly they perished—fools, who devoured the kine of Helios Hyperion; but he took from them the day of their returning.

[30] ....... (Zeus) "Look you now, how ready mortals are to blame the gods. It is from us, they say, that evils come, but they even of themselves, through their own blind folly, have sorrows beyond that which is ordained."

To continue in Homer's Odyssey, book 1 to 24, please go to http://www.perseus.tufts.edu/hopper/text?doc=Perseus:text:1999.01.0136

The "Wirtschaftswunder"

Deutsche Welle (DW), Germany's international broadcaster carries a piece (http://www.dw.de/german-economic-miracle-thanks-to-debt-relief/a-16630511) in celebration of 60 years since the chain of events that allowed Germany to perform its "Wirtschaftswunder" and resurrect from the dead.

We read: Many Germans are still proud of the so-called "economic miracle." Post-war growth was extraordinary - the new Federal Republic's economic output doubled between 1953 and 1963 alone. Generations of schoolchildren have since be taught that the Germans are simply unbelievably hardworking people who were supported by US money after the war.

"That is a very regrettable part of the suppression of history in this country," says Joachim Kaiser of erlassjahr.de, an alliance that campaigns for the cancellation of debts in the developing world. He believes that the Germans have forgotten that they were hopelessly in debt after World War II, not unlike Greece today.

What! The German economic miracle was thank's to a debt relief? A selective default, as we would call it today?

The London Debt Agreement of 1953 established a framework whereby Germany would repay debts on which she had defaulted prior to the WWII, and repay obligations arising out of postwar assistance from the United States and Britain. The Agreement wrote down the total outstanding debt by about 50 percent and established a repayment schedule that spread payments over 30 years. Germany’s obligations in any one year were fixed so as not to exceed her ability to make transfers abroad. The agreement delayed part of the back interest due on the debt until such time as Germany reunified. With unification in 1990, Germany issued a new set of bonds that when retired will have paid off all the debts from the 1920s, 1930s, and immediate post-World War II era.

One important motivation for the debt settlement was to strengthen the German economy. Demanding that the Germans service an enormous debt was incompatible with that goal. The London Debt Agreement covers a number of different types of debt from before and after the second World War. Some of them arose directly out of the efforts to finance the reparations system (WWI), while others reflect extensive lending mostly by U.S. investors to German firms and governments i.e. "The Dawes and Young Loans", business loans between WWI and WWII, loans to German governments including Prussia and Austria -during the period of Anschluss. The agreement specifically excluded several other types of obligations, including claims for damages arising out of the Second World War and any other loan and/or obligation or "expropriation" made by the Nazi lead German government in occupied territories, i.e. Greece.

As historian Albrech Ritschl of London School of Economics points out in a 2011 interview to Spiegel On-line:

(Ritschl) - Yes, then-Chancellor Helmut Kohl (1990) refused at the time to implement changes to the London Agreement on German External Debts of 1953. Under the terms of the agreement, in the event of a reunification, the issue of German reparations payments from World War II would be newly regulated. The only demand made was that a small remaining sum be paid, but we're talking about minimal sums here. With the exception of compensation paid out to forced laborers, Germany did not pay any reparations after 1990 -- and neither did it pay off the loans and occupation costs it pressed out of the countries it had occupied during World War II. Not to the Greeks, either.

And he continues: "If the mood in the country turns, old claims for reparations could be raised, from other European nations as well. And if Germany ever had to honor them, we would all be taken the cleaners".

The London Debt Agreement deferred settlement of the reparations question, including the repayment of war debts and contributions imposed by Germany during the war, to a conference to be held after unification. This conference, however, never took place as the German government has refused to reopen this issue. The only such compensation paid has been mostly to forced workers. Only Greece, from time to time, has challenged this openly but to no avail.

The issue is not going to go down easily as "bankrupt" Greece battles to avoid social unrest, before even trying to repay a humongous public debt that is getting bigger and bigger (instead of smaller) because of the inappropriate treatment by its creditors, the mighty "Troika" (IMF, ECB, European Commission). Unlike Germany in 1950's, the current Greek plan's motivation was not to strengthen the Greek economy but rather to punish it. For spending "beyond its means" funding an exploding trade deficit (to EU partners, mostly due to the Euro) and an uncontrollable budget deficit that has derailed in the post-Lehman era (2009).

The London Debt Agreement laid the foundation for the birth of an export nation. West Germany's export strength was boosted, as the country could only service its debts as long as it earned money through foreign trade. That, as Joachim Kaiser points out, meant creditors had an incentive to buy German products. In his opinion, a similar agreement today would help highly indebted Greece - particularly as the country spent billions on German tanks shortly before the debt crisis began.

"If we said: the Germans will only get their money if they agreed to a Greek trade balance surplus - then the Greeks could export for a long time and bring in German tourists, until they had finally paid for these damned tanks," says Kaiser.

Historian Ursula Rombeck-Jaschinski of Stuttgart University says the situation 60 years ago cannot be transferred to today's problems so easily, but she does think the Germans shouldn't forget that their own country was once hopelessly indebted and dependent on foreign help.

It’s also good to remember that on top of all this, the emergence of the EEC, the EU and the common currency - the EURO – has helped Germany solidify that “export nation” status and also helped it adsorb the unification costs, themselves.

Other Sources: Timothy W. Guinnane, "Financial Vergangenheitsbewältigung: The 1953 London Debt Agreement" (Economic Growth Center, Yale University, 2004)

Staring into The Abyss



Felix Baumgartner staring the Abyss,
momments before his record
stagging jump, Oct. 14th, 2012.



Staring into the abyss, it’s a long way down. So we have learned. Like Felix Baumgartner, we have leaped into the Abyss some three years now but the surface or the bottom if you like is nowhere to be seen. Unlike him, we have been totally unprepared and unwilling to do so. None the less we leaped.  But staring into the abyss long enough the abyss looks back at you!

We are all, by choice or definition, free to care about whatever we want. Exercising this freedom of choice is what harnesses the subjective moral meaning in life. However, sometimes our choices have unintended natural consequences: so there are limits on freedom. So we have learned, or haven’t we?

This means that former partners in the Union have become too punitive, we have become too dismissive and the world has become too unstable. The situation may be described as unsustainable. What started as a markets’ test of Euro’s strength has been evolving into a whirlpool that threatens to take down the Eurozone, Europe and the World at large.

Homer, the ancient lyric poet, knew about those dilemmas and when he wrote Odyssey he tried to warn us. He tried to teach us that when faced with a dilemma of such repercussions, caught between Scylla and Charybdis, there is one thing to do. Accept to sacrifice a few by navigating close to Scylla so that the ship can move on instead of playing it all or nothing by choosing to pass through the Charybdis whirlpool. That had been the ethical dilemma facing the Greek authorities so far. But staring into the Abyss for too long they have become part of the problem. Now the choice lies with the EU/Troika. It’s their dilemma now. Now they are caught between a rock and a hard place. Sacrifice Greece and save the Eurozone or play their own version of all or nothing dice. So far it’s not looking well.

There must be an abort lever somewhere, an emergency parachute to open.

Greece Expiring on the Ruins
of Missolonghi (Delacroix 1827,
Musée des Beaux-Arts, Bordeaux)

Or maybe, we the Greeks should engage in another heroic act of sacrifice, like the infamous Souliotisses (Suliot women) with their Zalongo Dance (1803) or like the Free Besieged of Missolonghi and their desperate Exodus (1826). Do as Rhigas Pheraeos wrote in his “Thurios” war song: "It's better for an hour we live our life free, than living forty years in bondage and in jail … and everyone should hear that, brave we will be".  A heroic Exodus from the Euro area is what we cognitively know we can do best.

All these glorious moments will go down in history as yet another heroic act of self destruction. Because we, the modern Greeks cannot crack down on tax evasion cannot curtail the public sector and must always rely on foreign assistance! Because unlike Rhigas, we never aspired “the equality of the citizens against the law, the private and national freedom, freedom of the press, the security of citizens, the right of ownership, the opposition to violence and inequity, e. t. c.” all the basic principles of the Greek Constitution that originate from the French Constitution of 1793. Greece, being the first of the modern European States to be established with a modern Constitution based on the values of humanism of the French Revolution, is yet the last to become one. A modern European State.

So, let us do what our Eastern/Orthodox culture dictates: suffer the Crucifixion in light of a Resurrection.    

The real fear for the impending decision by the German Constitutional Court

Author: Kiron Sarkar, posted @ The Big Picture (http://www.ritholtz.com/blog/)
Edited by GL

The real fear is German Constitutional Court (GCC), while allowing the German President to sign off on the ESM, (thereby making it effective), may impose some restrictive conditions too. It should be noted that, in the past, the GCC has imposed conditions, which has set a precedent for all to see. The main reason for this concern is as follows. The ESM, which will have a max capital of E500bn at best, has insufficient firepower to undertake its task. Its resources must be increased. The EZ countries will not/can’t, in a number of cases, contribute more. As a result, the ESM must leverage itself, either through obtaining a banking license and then borrowing cheaply from the ECB (as is the case with the European Investment bank, which, by the way lends directly to governments), or through the issue of bonds which is purchased by the market, though possibly by the ECB as well. The German’s have steadfastly opposed this idea, though it is “clear” (to the author) that Merkel, privately, will not oppose such a measure. To date, her opposition has been for domestic public consumption, rather than otherwise. The judges at the GCC will surely know that and may, for example, force Germany to seek prior approval from the Bundestag, God forbid the consent of the Bundesbank or limit Germany’s exposure in some way, unless approved by the Bundestag/Bundebank/the people, etc. If this or something similar is the decision by the GCC, uncertainty will prevail. Medium to longer term bond yields of the peripheral EZ countries will rise (soar?) and unless resolved, these countries will be forced, yet again, to borrow at the short end (given ECB support), which clearly is untenable.

http://www.ritholtz.com/blog/2012/09/september-is-looking-particularly-uncertain/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%253A+TheBigPicture+%2528The+Big+Picture%2529

On "universals" and "particulars"

"Greece should just get out of the Eurozone" but instead of saying that he (former Bundesbanker Otmar Issing) speaks of the universal form - struggling countries, instead of the particular, i.e. Greece.

We gave them Aristotle, they gave us Issing ... (LOL)! For more, pls read:

http://ftalphaville.ft.com/blog/2012/08/10/1114131/on-greece-and-spilt-milk/
or directly go to:
http://www.cnbc.com/id/48605025

for more on Aristotle (384-322 BC) you can start at: http://en.wikipedia.org/wiki/Aristotle

Grexit Risk; The Day After

In the fallout after May 6, Elections in Greece and Government formation stalemate, SYRIZA posed a serious tail event risk for an uncontrolled “Grexit” (Greece exit from the Eurozone). Thus, the recent Election result of June 17^th, has removed that risk.

However, even before the last Election, a possible weak Government implied a far more serious tail-event risk in the medium term (3-6 months ahead) compared to the imminent risk posed by SYRIZA's proclamations.

Probabilities before June 17^th:                                                                          Pi      Pii       

a)      ND/PASOK form a strong pro-Europe Government                           45%   25%

b)      SYRIZA wins the Election and orchestrates its plan                         40%   75%

c)      A weak government is formed and a third Election is required        15%   90%

Pi = probability of outcome, Pii = probability of Grexit

Tail-Event Risk before = (45%x25%) + (40%x75%) + (15%x90%) = 54.75%

After the Election and although the result was in line with scenario (a) above, the three parties of the pro-European front failed to form a strong Government. PASOK & Democratic Left (DEMAR) support the new Samara's Government but don’t participate in it, not in any meaningful manner anyway. That is perceived by many analysts as a weak support that may break at any time under either pressure from the TROIKA or from the populist opposition party’s rhetoric.

Thus, scenario (c) is back in the play (see scenario 2 hereafter).

New probabilities after June 17^th:                                                                     Pi      Pii       

1)      The new Government gains momentum and support                       50%   25% (a)

2)      The weak government formed falls in 3-6months                            50%   90% (c)

Pi = probability of outcome, Pii = probability of Grexit

Tail-Event Risk after = (50%x25%) + (50%x90%) = 57.5%

(And this can become even worse if Pi1 is 40% and Pi2 is 60%, thus the new probability of a Tail-Event Risk rises to 64%)

και στο Ευρώ και στο EURO

Συνεχίζουμε και στο Ευρώ και στο EURO. Καραγκούνης, Σάντος, Σαμαράς μας οδηγούνε.

Μέρκελ ετοιμάσου έρχεται η σειρά σου!

Another Way to Look at Things

An Abstract (by GL) based on Stephen King’s “Germany is in clover thanks to this crisis”.

(read full article)

Stephen King writes in a post dated May 24th.

[ Germany is in clover thanks to this crisis. Low interest rates and booming property prices are down to southern pain, not hard work.

Greece has become a convenient scapegoat. Yet to blame Greece alone for the eurozone's woes is absurd. Plenty of other nations have broken the fiscal rules. And there has been no shortage of sins of omission. One of the biggest such sinners is Germany.

With more and more people fearing the euro's demise, they've taken their funds north. German long-term interest rates have plunged to a ridiculously low 1.46 per cent, below the two "safe havens" of the US and the UK. Pre-euro, this capital flight would have led to rapid appreciation of the German mark.

To fix the eurozone's problems, Germany demands that southern Europeans put their financial houses in order, as if it has no responsibilities itself. The prescription is austerity, the financial equivalent of medieval leeching. Austerity is not the answer. Successful monetary unions are, in one form or another, successful fiscal unions too - which means national sovereignty is sacrificed for the greater good.

The alternative is to head back to economic conditions last seen before the industrial revolution. Then countries got richer only at the expense of others. War, colonisation and slavery were all neat ways of expropriating wealth from other parts of the world. None of that is now taking place in the eurozone, thank goodness, but capital flight is delivering a similar outcome.

This is unsustainable. Germany must declare whether it is prepared to make the necessary sacrifices to save the euro. Otherwise, when the history is written, Germany's sins of omission will surely be seen as one of the key reasons for the euro's eventual collapse. ]

(read full article)

I agree. In the past, I have written in response to a post in FT/Alphaville (FT blog):

My Title: Tectonic plate movement; collusion within the EU

The problem, with most complex problems is that there is no one clear issue to resolve. I would be the last Greek to assume the position that others are to blame. I just try to make a point that the problem Greece is facing is not because of a DNA issue. None the less, the causes of the disease have definitely social, cultural and political roots and much of them have both a Greek origin and name. However, the notion of “non-tax paying Greeks” that don’t work and need a wimp is questionable, if not utterly unjust. Most Greek citizens do pay their taxes and do work hard as indicated by data.

A more radical proof can be witnessed in modern Germany. Just consider that it was Gastarbeiters from the devastated south along with hard working Germans that helped rebuilt this great state out of the wreckage of WWII. (I don’t think we can blame the Greeks for WWI & II too). However, even this great state (of Germany) has had to adjust its international debt obligations, restructure or extent it twice in the 20th century, in order to succeed. The issue, however questionable in some respects, it is sadly true. The London Debt Agreement negotiations lasted from February 27 to August 8, 1953. Greece was among the creditor countries that participated in the Debt relief. I don’t think you think Greece was a financial superpower in 1953, do you?

“For during much of the 20th century, the situation was radically different: after the First World War and again after the Second World War, Germany was the world's largest debtor, and in both cases owed its economic recovery to large-scale debt relief.” Albrecht Ritschl (Professor of Economic History, LSE)

The basic issue today is whether this or any other problem is a European Union one that requires an EU solution. Already, there is a split between the Eurozone and non-Euro EU members, not to mention between the Eurogroup itself. This will resemble the divergent tectonic plate movement unless there is a complete and functional fiscal and monetary union. So far, the convergence theory has not worked properly and this (imo) because convergence, as in tectonic plate movement theory, is collusive in nature.

The cost of Grexit

Well, for those that wonder what the cost of Grexit will be for others:

According to this table, the maximum total direct cost is ca. € 304 bn. That represents something between 1.8% to 4.3% of their GDP. It may be painfull but it's managable.
For more on this: http://ftalphaville.ft.com/blog/2012/05/22/1010951/eurozone-exposures-charted-a-k-a-maltas-sorrow/


And for those that would like to contemplate what it would mean for Greece, that is after a unilateral break away from the memorandum (MOU) the consequent stop in financing from the TROIKA, a default on all public debt and thus cancel of all debt and interest payments and thus a return to a New Drachma? Follow me to the blackboard:

Tourism argument explained here: “Thomas Cook and TUI slash prices for Greek holidays and prepare contingency plans in case of a ‘Grexit’, while Ryanair’s Michael O’Leary is praying for one. On Tuesday he was reported saying a return to the drachma could result in resort prices dropping up to 80 per cent, and lead to an ‘invasion’ of bargain-seeking British tourists.» for more: http://ftalphaville.ft.com/blog/2012/05/22/1011101/tourist-trapped-in-the-greek-bailout/

All these of course assuming a can opener! A further 30% decline in GDP is a conservative scenario. Have a nice day Mr "Cheap_Rush"!