The Grand Greek Paradox: Bankrupt but embraced by the money markets – On the BBC World Service

Greece (listen to the first story; first 15′)

Greece is about to issue 5 year bonds again. Berlin, Brussels, Frankfurt and Athens are celebrating Greece’s recovery.  For my part, I think (and tell the BBC World Service) that this is a sad day for Greece and it is a sad day for Europe. Why do I refuse to be impressed and join in the celebrations? It is because the Greek state and the Greek banks remain deeply insolvent. And, their return to the money markets is a harbinger of the next terrible phase of Greece’s crisis, rather than a cause for celebration.

But, I hear you ask, how is it that (if I am right that the Greek state and the Greek banks remain bankrupt) international investors are prepared to buy the new Greek bonds and the fresh shares issued by Greek banks? There are two explanations: One is the extraordinary demand for subprime assets internationally, due to the ultra low interest rates that investors are facing. Junk bonds are indeed having a renaissance these days, globally. And Greece’s assets are Europe’s new, revivified subprime market. But why the Greek assets in particular? The second reason behind the Grand Greek Paradox (of heavy demand for the paper issued by the insolvent duo of Greek banks and the Greek state) is that Berlin has, at last, ditched well and truly the idea of chucking Greece out of the euro. Greek assets reached their nadir when fear of Grexit heightened, in mid 2012. Once that fear lifted (due to Berlin’s political decision to keep Greece inside the euro pen) these assets rebounded – a kind of ‘dead cat bounce’. Moreover, Berlin’s ironclad determination to declare victory in the case of the Greek crisis between now and the May European Parliament Election has increased the magnitude of the rebound. Put bluntly, Berlin and Frankfurt are essentially signalling to the money markets that it is safe to buy Greek subprime assets, indicating two things: That the official sector will stand by Greek bonds, with a new program, and that the ECB will turn a blind eye to the black holes in the Greek banks. And all this while the real economy of Greece is continuing its incredible decline – as documented recently here. By the time the bond and equity markets realise that it has all been fool’s gold, the May European elections will be over, the European Establishment will have been returned to Brussels, and the editorials about Greece’s remarkable comeback will be a distant memory.

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  • Yanni,

    Very well said – bankrupt but embraced by the markets. Or 27% unemployed 4th year of recession but embraced by the markets.
    We live in a paradoxical world where there is no logic. This is dangerous because it leads to tremendous tremendous inequalities.

    Yellen says 6.5% unemployment is too high for American, we will continue to be soft. 2.5% growth is not enough either, easing lives for ever. Stock markets rejoice and embrace risk. Embrace global risk not just in the US. Price Earnings ratios of 20/30/40/50 – not a problem. Keep pumping equities, keep pumping real estate. Some idiot will pay the price but it might be from a still much higher point than we are today. For now Yellen plays the music and everyone is dancing. Later when they realize the inequalities and the bubbles they create the will all claim innocence.

    Soimble on the other hand says 27% unemployment in Greece is fine for Greece, we will continue to be austere. 4th year recession is fine for Greece austerity lives. Yellen is doing our job pushing everyone to embrace European risk, we Germans will stick to our austerity guns pushing Greeks to their limits.

    How can two currency zones take such divergent approaches and why are Greeks and other Southern and Eastern European countries placed in such a tough position?

    Now if you are not impressed by the two extremes: Yellen (super loose money is worthless anyway) / Soimble (super cold minded Germany) then take a minute to ponder Greece.

    What did Greece do all in a period of 2 weeks? As European elections are approaching Greece had to cut a deal with the Troika to get a trance of 8 Billion Euros. But they wanted to also offer a bonus to poor people to get better election results. That is 1 Billion in bonuses as they also included public workers. They also did not want to agree to any further measures or to reduce the public work force. So Troika said show me the money. So Greece readily agreed to sell an area of 7000 acres right in the city where the old airport was to the ONE AND ONLY ONE PARTY interested. They did not ask for more time or more bids. NO.
    They did not think of splitting it up to gather more interest and spread the opportunity. No, they had to get 300 Million in cash to partly pay for their bonus to the poor and to the public workers. For the rest they would go to MR. MARKET for 5-5.5% interest over 5 years. This is what we are celebrating today.

    To go back to the loose Fed and German ECB, the poor people that are paying for all this and are left out are the southern and eastern Europeans that embraced the Euro in the hope of gaining stability. They have discovered that they are gaining unemployment, poverty and a second class status. And Germany does not care and America goes about its own business of staying competitive with the giant of China increasingly with a USD that is 40% less valuable than the Euro.

  • Sad and depressing day indeed. The crime against our nation has no end. Private conversations with even immediate family are confirming that any non euphoric attitude is an anathema. Greece is merely a ‘lifer’ that is giving an one week off his incarceration. Is our nation ever going to break ‘bail’ ? Does our nation have what it takes to chance its course? How can we possibly accept this mockery and on top of that be thankful and celebratory about it ?

  • “… the global neoliberal dictatorship rushed to support Samaras administration through the announcement that Greece is returning to markets and the Angela Merkel’s visit to Athens on Friday, as a reward to government officials who adopt every part of the IMF neoliberal agenda. It’s an attempt to reverse the negative climate against government.”

  • I, too, fail to see the commercial logic of this bond issue. My understanding is that Greece got 3 BEUR at roughly 3% over the average borrowing rate of the Troika. That translates into 90 MEUR unnecessary interest expense annually. My understanding is that about 80% of Greece’s debt is owed to official lenders which means that both sides are totally dependent on one another. The lenders cannot hurt Greece without hurting themselves and vice versa. In case of trouble, they are forced to negotiate solutions. A bondholder is not forced to do anything; he just holds on to his bond and if there is an event of default, that’s it. Since the bondholder knows that, with cross-defaults, he can bring down the whole financing structure, he has absolutely no incentive to negotiate knowing that he will be bailed out. And when he is paid out, he has recorded a yield 3% higher than those would have had who bail him out. And the bill for this is footed by Greece.

    One could, of course, argue that a journey around the world begins with one step and this bond was that first step. That might be worth a premium of 3% annually but if the journey is interrupted after a couple of years, that premium was for nothing.

    • Not just Greece now but generally speaking, government borrowing of any sort makes no sense and only serves one purpose.

      Governments do not meet any of the criteria needed by a borrower. 1. Able to pay back the principle & 2. Able to achieve a return on investment or 3. Done for pleasure ie the people servicing the loan and people issuing the loan both entering contract voluntarily.

      Either conditions 1 & 2 need to fulfilled or number 3 needs to fulfilled and ideally all three.

      Governments meet none of these conditions which means in a free society they would not be able to borrow, at least nowhere near on the scale we see today.

      Simple as that, end of conversation. And all the points Klaus and Yanis made.

    • “1. Able to pay back the principle”

      1)As long as the debt is denominated in the currency the gvt issues it surely can pay back the principle.
      2)The private sector in aggregate can pay down its debt if only the public and external sectors are increasing theirs.In other words the gvt and foreign sectors must run a combined deficit in order for the prv.sector to be able to run a surplus and reduce its indebtedness.

      “2. Able to achieve a return on investment”
      A fiscal multiplier above 1 can be thought of as positive RoI since it enlarges the tax pool.

    • “I, too, fail to see the commercial logic of this bond issue”

      Why it is very obvous. the principle will not be paif back as usual…

    • Is there a single example in the last 40 years when a government has paid down its debt in any meaningful way? Defaults excluded.

    • Plenty of examples when growth has shrunk the debt to GDP ratio. Bonds get redeemed by the issue of new ones but if GDP and tax takes grow faster than the rate of new debt issuance, debt shrinks. At the level of individual bondholders they all get paid back while new ones lend the government. They, in turn, get repaid etc.

    • Every year that a government runs a budget surplus it actually pays down debt.
      But you really have to realize what that means.Government debt is a financial asset for the non government sector.Outstanding government debt equals non government net savings to the penny.

      You might wanna check what Clinton did to the economy by “paying down” debt.
      The Untold Story Of How Clinton’s Budget Destroyed The American Economy

    • Government debt is a liability for the private sector (non-government sector/non bankers/non bond holders). It is the private sector that has to service the debt.

      About Clinton, the damage was caused by Fannie and Freddie (lower private savings/increased private debt) and also the trade deficit. If and when interest rates in the USA rise, people are going to be wishing the government debt was at Clinton levels (or less, or zero!).

    • “Government debt is a liability for the private sector (non-government sector/non bankers/non bond holders). It is the private sector that has to service the debt.”

      As if the government that is the issuer of the currency will even run out of it?

      “the damage was caused by Fannie and Freddie (lower private savings/increased private debt) and also the trade deficit.”
      Lower pritave savings were a result of more money getting sucked out of the private sector from 2 sides: 1 the government surplus, 2 the trade deficit.That means the private sector was running a deficit which by definition means it was increasing its debt.
      Expecting the private sector to be in suruplus (thus not increasing its debt) while there is a budget surplus and a trade deficit is by definition impossible.

      “If and when interest rates in the USA rise, people are going to be wishing the government debt was at Clinton levels (or less, or zero!).”

      If and when interest rates rise it will be a decision of the government (Central Bank) any way.Again, its not like the government will run out of the currency it can issue.

      “A government that reduces debt while increasing taxation is a distinction without a difference, at least from the point of view of the people picking up the tab!”

      A government in order to reduce its debt must spend less than what it taxes.This is achieved either by cutting spending or by increasing taxation or by a combination.The end result is the same.It’s not like you’re going to be richer if you will pay 500 less in taxes instead of receiving a 500 pay check with constant taxes.

    • Government does not issue/create currency, banks do. Around 90% of the money in circulation is created by the high street banks the rest by the central bank.

      Lower private savings was the result of more people taking out a mortgage/another mortgage/re-mortgaging/paying inflated prices for a house.

      Governments have zero say in interest rates. At least that is what they claim.

      Less debt today means smaller interest payments tomorrow

    • “Government does not issue/create currency, banks do. Around 90% of the money in circulation is created by the high street banks the rest by the central bank.”

      I have already provided you with a link where you can examine the currency mechanics in detail.
      What you call “bank money” Is simply loan expansion.That’s both an asset and a liability for the private sector in aggregate.Government deficit spending is the only way to create net financial assets for the private sector.
      You don’t agree with this you simply don’t understand basic national accounting identities.

      “Lower private savings was the result of more people taking out a mortgage/another mortgage/re-mortgaging/paying inflated prices for a house”
      Which proves my point.The private sector was in DEFICIT.By definition you’re not increasing your debt when you’re in surplus.

      “Governments have zero say in interest rates. At least that is what they claim.”
      The CB is part of the government.Read the Federal Reserve Act.
      And also check the correlation between government debt yields and the interest rate set by the CB.

      “Less debt today means smaller interest payments tomorrow”
      Less government debt today (in absolute terms) means less net savings for the non government sector today.All financial assets (currency,bonds,deposits etc) have corresponding financial liabilities.It is important for the economy that there exist NET financial assets for the private sector.

    • A side note:

      “Around 90% of the money in circulation is created by the high street banks the rest by the central bank.”

      I misunderstood.You are correct however what you are referring to is: all types of bank deposits, bank cheques etc in other words M1,M2,M3 .

      This is indeed bank money and it is indeed the majority of money in the economy, however they represent CLAIMS on base money coming from the gvt/cb.
      All final settlements are conducted with base money, either via reserves or cash.Reserves and cash is not bank money.

  • to be complete: “Bankrupt but embraced by the money markets and hated by EU taxpayers.”

  • This is moral hazard in its purest form. The Greek administration doesn’t bother whether the borrowing rate is 5%, 10% or 25%, they know it will be the eurozone that will pay the liability in the end, so they think let’s tap as much as they can. The party of the Greek elite and Greek oligarchs can go on, and on and on. And still the greek people in it’s majority doesn’t seem to want to chase them away and to accept that Greece has no chance to to survive with an (undervalued) German currency.

    • The Greek people want the stability of the Euro. They have no understanding of how the global economic forces work and how the Euro coupled with oligarchs in politics is resulting in 27% unemployment. The worse thing here is that the politicians in Greece and in Germany that realize the effect of the Euro are complacent and do nothing about it. To not know and suffer is one thing, to knowingly create suffering is another. Germany is in the wrong side of history one more time and this time the effects are economical devastation.

  • Well, as far as the 5% rate goes and the 150 million a year for five years, I am confused as it seems that we already are borrowing with short term γραμματια which cost us a lot more per year. It was said that we will gain about 200 million ( not clear whether per year or in the five years) over not having to get this 3billion by γραμματια. These short term promissory notes have been necessary over these four years because of the delays in getting the tranches from the troika , I believe..

    It was also said that in five years when this bond matures there are no other maturing bonds and this will be the only one that needs to be payed and that is why there was such a large demand. You say it is the politics, but since when do the markets trust politicians?

    • The 6 month notes had a rate of 3.5% at the time of issuance of the 5 year ones.

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