"Last Try" in Greece
For years we have heard phrases like down to the last hour, one minute before
midnight, now or never, etc. But on every previous occasion, the Troika
negotiators pulled an agreement rabbit out of the hat.
So, when we read Greece Locked in ‘Last Try’ Talks with Bailout Negotiators
it's easy to be more than a bit skeptical of the serious "final"
mature of it all.
Talks between Athens and its international bailout
creditors were expected to resume late on Sunday after Greek government
officials were told to submit a final list of economic reforms in order to
secure €7.2bn in desperately needed rescue aid.
A spokesman for Mr Juncker would only say that talks would continue on
Sunday. But others briefed on the talks said the meeting had been “difficult”
and that senior eurozone officials were concerned whether a deal could be
reached in time for Greece to access the aid before its bailout expires at
the end of the month.
“Positions are still far apart,” said one EU diplomat. “It’s not
certain there will be an outcome.” Another senior eurozone official said the
Greek team returned to Brussels on Saturday without new proposals and that
Sunday’s evening session would be a “last try.”
“Greek movement [is] not discernible,” said the official. “I think they do
not want a solution.”
Mr Pappas, the Greek minister of state and a longtime political ally of Mr
Tsipras’, took to Twitter to push for politicians to become engaged in the
negotiations rather than technocrats who normally hammer out such agreements.
“A political solution is needed to permanently exit from the crisis,” Mr
Pappas wrote.
“A credible proposal needs to be tabled by the Greeks in the next 24 or so
hours,” said Mujtaba Rahman, head of European analysis at the Eurasia
Group risk consultancy. “Otherwise it’s looking like game over for Athens.”
Under the creditors’ plan, Athens would need to find measures to hit a
primary budget surplus — revenues less expenses when interest on sovereign
debt is not counted — of 1 per cent of gross domestic product this year,
rising to 2 per cent next year and 3 per cent in 2017. By 2018, the primary
surplus would need to hit 3.5 per cent.
“1.2 per cent was utterly feasible in late March,” Yanis Varoufakis,
the Greek finance minister, wrote on Twitter over the weekend of this year’s
target. “1 per cent infeasible after three more months of induced
asphyxiation.”
Primary Surplus Infeasible?
The creditors targets for a primary surplus are not infeasible, but they
would amount to "induced asphyxiation”.
And for what?
Every bit of that surplus would go to pay creditors. If Greece could get a
primary surplus, it's best strategy is simply to default, and use that
surplus for internal use rather than to pay back absurd "bailout"
loans that should never have been granted in the first place.
Grexit might have cost perhaps €30 to €60 billion euros up front had the
nannycrats just let Greece go when the problems first arose years ago. Two
bailouts and growing Target2 imbalances ever since have turned this into a
€330 billion problem, minimum.
Capital Controls Coming?
The Financial Times reports Greece Running Out of Options to Avoid Capital Controls.
Just a few months ago, the possibility that capital
controls would be imposed in Greece still seemed distant.
But with the government fast running out of money — and nervous depositors
pulling cash from the country’s banks — talk of such extraordinary measures
is widespread and analysts are warning Athens may soon be forced to employ
them
“We are four to six weeks away from the possible imposition of capital
controls,” said Daniel Gros, director of the Centre for European Policy
Studies think-tank in Brussels. “There is always some temporary solution
[eurozone politicians] can pull out of thin air, but now we are getting
really close.”
Four to Six Weeks Away?
Four weeks is a long time. Is it a minute before midnight or not?
This is what happened in Cyprus, and it happened in a take-it-or-leave-it
offer in a matter of hours, not weeks.
Under pressure from its EU partners, Nicosia [capital of
Cyprus] agreed to a deep restructuring of its banking sector and a “bail-in”
of large depositors — forcing them to accept bank shares for some of their
cash — in exchange for a €10bn loan.
The measures took a heavy toll on ordinary citizens: under government orders,
Cypriot banks were closed for nearly two weeks. When they reopened, there
were tough restrictions on domestic and external payments, including a
domestic cash withdrawal limit of €300 per day, a €5,000 limit on credit card
payments abroad, and a requirement of central bank permission for any
transfer of more than €5,000.
But the measures were ultimately credited with preventing a full-fledged
meltdown of Cyprus’ banks and therefore helping to keep the country in the
eurozone.
Bank Meltdown
Nonsense. There was a bank meltdown and capital controls are proof of it.
To bail out the banks and the bondholders, depositors suffered massively, all
for a €10 billion loan that still has to be paid back.
Capital Controls, Then What?
Here's a link I picked up from ZeroHedge. Open Europe discusses The how, what, when and why of Greek capital controls.
How would Greek capital
controls be implemented and what form might they take?
It’s likely that such controls would need to be brought in over the course of
a weekend, though I expect they may also need to be combined with some bank
holidays anyway.
- Cash/ATM withdrawal limits: This would be a vital
control in order to halt the huge outflow of deposits which has been
taking place and which will pick up if a deal isn’t struck soon. In
Cyprus the limit was set at €300 per person per day. However, I suspect
ones in Greece may go even lower. This is because Greece is suffering
from serious domestic withdrawals while the primary concern in Cyprus
was foreign outflows.
- Foreign transfer controls: The aim here would be
to limit the amount that people can transfer abroad from Greece in one
go and also over a set period. Obviously some transfers are needed for
businesses to function so there would need to be a process by which
businesses related (and other verified) transactions could still go
through.
- Time requirements or taxes: Other options or
versions of the above include taxing certain withdrawals or foreign
transactions heavily. This has the advantage of potentially creating a
revenue stream for the government, though it may come at a very high
cost. The government could also decree time limits on certain deposits
or investments in an attempt to limit withdrawals indirectly.
- Physical controls: Obviously with free movement
within the EU it would be quite easy for people to move large amounts of
cash or assets across borders. As such there will need to be checks and
limits on the amount of cash people can take abroad with them. This may
also have to extend to assets. For example, someone could purchase a car
and then try and drive across a border and sell it on. This is tricky to
police but some attempts may well be made.
What's the Aim Capital Controls?
The more interesting discussion is the "What's the Aim?" question.
I generally agree with the Open Europe writer Raoul Ruparel on this one.
Why would Greece go for capital controls?
This seems an obvious answer given all of the above – to halt bank runs and
stop money flowing out of the economy. But there is a wider question that
needs to be answered. What would be the aim and end goal of capital
controls? Ultimately, capital controls are only really of use when it
comes to buying to time or pushing through some tough policies. In Cyprus and
Iceland the controls were needed to impose tough write downs on foreign
depositors/investors but stop huge outflows of money. But the actual write
down was over fairly quickly. But in Greece the problem is a long term
malaise and huge uncertainty over its future position in the Eurozone – not a
singular one off event for which time needs to be bought.
In the end then, I find it hard to see why the Greek government would want
to go for capital controls. They would only be of use if we got to the
stage where a deal was close but couldn’t be struck in time. But if we get to
that it will be because the differences between Greece and its creditors
could not be solved over the past 6 months. It’s not clear that a few extra
days, weeks or months under capital controls would drive an agreement. It’s
also not clear why the government would want to put the economy and people
through the pain of such controls to then just agree a deal. Why not just
agree one now? Surely, it doesn’t seem likely that Greece’s negotiating hand
would be stronger under such controls?
So, while capital controls are technically possible, I have failed to see any
clear answer as to why they would actually desirable, especially from the
Greek perspective.
That is why I believe that capital controls would most likely be a prelude
to a Grexit. At least here they would serve a clear purpose – allowing
time for the transition to a new currency to be organised and negotiated.
They would likely need to be even more stringent and probably involve longer
term bank holidays. Therefore, when capital controls start to become
seriously discussed, it is probably quite a negative sign.
Aim of Dragging Out the Talks
My disagreement is the last sentence. I find it hard to believe capital controls
are not already seriously discussed - by four groups: Greece, Germany, IMF,
ECB.
Greece and the ECB are the important ones. If the ECB shuts off Emergency
Liquidity Assistance (ELA), Greeks will not be able to withdraw cash.
I propose it's likely that Greek Prime Minister Tspiras purposely dragged out
the talks for the express reason of giving people time and reason to withdraw
cash. While the negotiations were underway, all to no avail, Greeks pulled
money.
Unless there is a disorderly mad dash for the exit, the ECB may allow
this to continue. We will find out soon enough tonight. But at some point
(and I expect far sooner than four weeks from now), Greece will be forced to
impose them as soon as ELA is shut down.
Bottom line: If you still have money in Greek banks, you are begging for a
haircut.
By the way, capital controls are in violation of EU rules. Then again, what
nannycrats cares about rules?
Best Case Scenario for Greece?
I outlined the "best case scenario" for Greece in "Air of Unreality"; "Do You Feel Lucky,
Punk?"; Who Has the Gun?
Best Case Scenario
- Greece defaults.
- Greece sheds €330 billion worth of debt.
- Greece opens up trade with Russia, killing EU sanctions
once and for all (and exposing the stupidity of the unanimous nature of
EU rules in the process).
- Greece threatens to yank US access to the US military
base in Crete.
- Russia builds pipeline through Greece. In turn, Greece
collects shipment and storage fees.
- Russia provides interim funding for Greece until Greece
runs a primary account surplus.
- The interim agreement from Russia requires Greece to
initiate some market reforms that will pay big dividends down the road.
- Greece reforms and does very well in a relatively short
time frame.
- Italy, Spain, Portugal, get some clever thoughts of
their own.
Default the Best Option
Whether or not Greece chooses to quickly get to a primary account surplus
position so that it can stay in the eurozone, it's best option is to default.
And if it defaults, capital controls will come as soon as the ECB shuts off
ELA (if not before). That discussion has to be going on at the ECB right now.
Meanwhile every day that passes by without capital controls is another day
Greek citizens have to get their money out of the banks.
Why there has not been a mad dash for the exit instead of a slow bleed of
cash remains a mystery.
Finally, the real fear of the nannycrats has to be that the best case
scenario for Greece does indeed happen, proving what any sensible person knew
all along: Exit is possible, and there is life after the eurozone.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
