Greek bonds and shares: What does their decline mean for Europe? – Interview with Jorge Nascimento Rodrigues for EXPRESSO

euro crisisThe spectre of Greek contagion seems to be returning to the Eurozone. At least this is the fear that I sense by talking to financial journalists across Europe. In this interview with Jorge Nascimento Rodrigues (for EXPRESSO) I argue that: “The Euro Crisis never went away. What happened was that Mr Draghi’s skillful interventions in the summer of 2012 suppressed the crisis in the bond markets but, at the same time, pushed it deeper into the foundations of the real economy. It was inevitable that, as the crisis was wrecking these foundations (with deflationary forces, desperately low levels of private and public investment and increasing debt to GDP ratios in the Periphery), it would resurface in the bond and equity markets. It does not matter whether the trigger was Greece, Portugal or Italy. What matters is its inevitability.”

You can read the interview as published in Portuguese here, or in its original (and longer) version below.

Greek 10 year bond soars to near 9% this week, from a 5,48% low in September. The sovereign bond 52 week return index from Bloomberg went down from 60% end of august to 8.96% Thursday. The compound probability of default climb do 30-40%, with the cost of CDS 5 years above 700 basis points. What went wrong in Greece for this shift in two months?

Back in April, when the Greek state re-entered the money markets for the first time in four years, with the over-subscribed issue of 5yr bonds at a relatively low interest rate of 4.9%, I wrote an article entitled “Greece’s Grand Decoupling” with which I explained that a short-term decoupling between (i) the value Greek paper assets (bonds and equities) and (ii) Greece’s real economy was being engineered by Berlin, Frankfurt and Athens purely for propaganda purposes; to support the fiction of ‘Greek-covery’.

In short, Berlin Frankfurt and Athens were attempting to create a semblance of ‘Greek-covery’ by inflating two bubbles at once: a bubble in the market for Greece’s debt (which they created signalling to investors that Berlin and Frankfurt were standing behind these new bonds) and one in the market of the Greek banks’ shares (caused by the Central Bank of Greece’s signalling that regulators, including the ECB, would continue to turn a blind eye to the black holes on the banks’ asset books). All that has now happened is that these two bubbles burst.

The first bubble to burst was that of the Greek banks’ shares. The prick that occasioned the bursting of this bubble was the ECB’s announcement that it will not consider the Greek state’s guarantees of the banks’ deferred tax liabilities (amounting to €9 billion) as Tier 1 capital. Bank share prices collapsed, dragging down with them all equities. Soon after, the government let it be known that it is prepared to issue T-bills so as to inject these €9 billions into the banks. Markets considered this a desperate move, as an insolvent state was about to add another €9 billion to its debts on behalf of defunct banks. Meanwhile, the government’s fiction that it was about to exit its Bailout Memoramdum was put to rest by Ms Lagarde statement in Washington, and particularly her decision to speak to a Greek delegation, comprising the Finance Minister and the Governor of the Greek Central Bank, for no more than 20 minutes. These developments helped knock the stuffing out of the government’s strategy to reclaim the lead in opinion polls, especially in view of recent findings that the leftist SYRIZA party is widening its lead over the ruling conservative New Democracy.

It was this combination of events that popped Greece’s twin bubbles.

The change in the investors’ mood regarding Greece is due to a growing domestic political risk, or it is engineered by investors’ global perception of the Euro area risks regarding deflation, triple-dip recession, and “excessive optimism” in the bond market in the first nine months as the IMF said two weeks ago?

The Greek ‘dive’ must, naturally, be seen in the context of the overall, bleak situation in Europe as well as the overinflated, QE-primed, equities on the other side of the Atlantic. But, while all stock exchanges had a bad week, and pessimism has spread out far and wide, Greece is a special case in the sense that it is the only country whose bond yields are rising, while equities are plummeting. Why? Because Greek bonds had been inflated purposely by Berlin and Frankfurt in a bid to declare ‘victory’ over the Greek crisis, so as to argue that “if even insolvent Greece is doing better, the Euro Crisis must be over”.

As for “growing domestic political risk”, I suppose you mean the increased probability of a SYRIZA-led government. First, let me note that there is something amiss when the rise of a legitimate, Europeanist political party in the polls is described as “growing domestic risk”. In reality what SYRIZA’s rise presents is a “growing risk to an unsustainable bailout agreement and to the bubbles that Europe’s leadership has been creating in order to remain in denial…” Secondly, I think that the second part of your question gets the direction of causality wrong: It is not that the rise of SYRIZA is causing panic in investors and leads to a collapse of the government’s Greek-covery strategy. It is, rather, the other way round: The bursting of the Greek-covery bubble has wrecked the government’s strategy, panicked investors and, as a result, given SYRIZA a boost.

Can we talk of a current or near future “Greek contagion” in the Euro area as happened at the end of 2011?

Yes and no. The Euro Crisis never went away. What happened was that Mr Draghi’s skillful interventions in the summer of 2012 suppressed the crisis in the bond markets but, at the same time, pushed it deeper into the foundations of the real economy. It was inevitable that, as the crisis was wrecking these foundations (with deflationary forces, desperately low levels of private and public investment and increasing debt to GDP ratios in the Periphery), it would resurface in the bond and equity markets. It does not matter whether the trigger was Greece, Portugal or Italy. What matters is its inevitability.

How are the probabilities for early parliamentary elections in the first quarter of 2015? What could be the political consequences of snap elections?

I will be utterly surprised if this Parliament manages to elect a President of the Republic by next February (180 votes are needed out of 300), in which case a Parliamentary election will be called. In such an election, SYRIZA will, most probably, secure the largest number of votes but is unlikely to achieve a working majority. The worst outcome would be a protracted period of negotiations leading to a second election (which is, let me remind you, what happened in May/June 2012). My personal view on the optimal outcome is that the sooner SYRIZA forms a government, and the sooner that government re-negotiates Greece’s bailout terms and conditions, the better for Greece and for Europe. Something must end the current inertia that the powers-that-be describe as ‘stability’ and ‘recovery’ but which, in reality, are nothing more than ‘stagnation’ and the continuation of ‘extend and pretend’ at a European (not just Greek) level

Can Greece exit troika’s second bailout without a precautionary credit line as suggested last week by Madame Christine Lagarde, head of IMF? The “clean exit” has a serious probability, as the Greek government tries to convince troika and the financial markets, or it is an electoral gambit from Mr. Samaras?

It was always an electoral gambit for the purposes of drawing level with SYRIZA and painting himself as the heroic leader who, like a new Moses, will lead the nation into the Promised Land and out of… Bailoutistan. On the particular question, it really does not matter whether Greece will be granted a precautionary credit line, fall under the umbrella of Mr Draghi’s OMT, get another loan from the ESM etc. What matters is that Greece is in the clasps of a triple insolvency: an insolvent state, insolvent banks and an insolvent private sector. For four years now, these three insolvencies are being camouflaged under various credit lines that did nothing to address the problem; indeed, they only made it worse. Until and unless we have a new agreement, a new logical approach to this triple insolvency, everything Europe and the IMF do will remain in the realm of window-dressing.

ECB and the new European Commission of Mr. Juncker will due “whatever necessary” to avoid Greek exit from the Euro as in 2011 and 2012?

They would like to fulfill this promise. Except that Mr Juncker does not have the power to make a difference and the ECB’s role is severely circumscribed. The fate of Greece, and of the Eurozone, will be decided at the level of the EU Council and in the Eurogroup as a result of a political negotiation. But for the latter to happen, we need a government in Greece willing to negotiate (as opposed to beg). This is why I believe a snap election, and a decisive SYRIZA, will be good for Greece and good for Europe.


  • @yanisvaroufakis

    “XMXMXM Grand denial” … “XMXMXM Grand unravelling” … “XMXMXM Grand Decoupling” … “XMXMXM Grand GR experiment ”

    Incomplete, sequential development?

    Thank you for the good read, Yanis.

    • Renegotiate with Europeans requires a truly willingness to stay IN European Union, persuading other countries on how wrong is Berlin’s view upon crisis (austerity policies as an atonement for the past, opposition to Draughi etc). Requires clear explanations from SYRIZA that he can’t demand an immediate haircut on debt without negotiating (Why will Merkel accept it?) or raise salaries in private sector through laws and parliament. Requires wisdom and although Yanis I am convinced that YOU as a person have plenty of it, I wouldn’t bet a penny on SYRIZA. Samaras of course has no chance in coming elections, that’s for sure (how many lies anymore?), but I am convinced that Greece’s political elite, as a whole, has no alternatives to go in this crisis…unfortunately for my country!

  • I am not a supporter of the Samaras’ incompetence (as now is fully revealed) but your argument is flawed Yani. Here is why:

    Almost 2 years ago Berlin promised that upon achieving primary surplus Greece would qualify for a debt restructure. Last year at this point in time it was evident that Greece would achieve a primary surplus. Berlin said: “let’s wait until the end of the year to make sure”. So we waited. Upon the dawning of the new year Berlin said “we can’t confirm the primary surplus until late in April when Eurostat would publish the official figures”. So we waited. After Eurostat confirmed in late April then Berlin said “we can’t decide now because of the upcoming euroelections”. So we waited. In July Berlin said “we can’t decide now because everyone is gone for the August vacations”. So we waited. Now Berlin says “we can talk about debt restructure until the Troika verifies by year’s end certain promises”. So we waited yet again. In early 2015 Berlin would say let’s wait until April and then June and “oops we have vacations now; no one around to vote on debt reduction”.

    Even a 2 year old could see the pattern here.

    The notion that Berlin and Samaras are promoting a “success story” as collaborators is patently false. Berlin’s line is that “Greece hasn’t succeeded enough and needs more to succeed” because once Berlin admits success it has to deliver on debt restructure (something Berlin avoids like the devil avoids holy water). Occasionally Berlin acknowledges progress (to keep the morns in check) but the bottom line is there is never enough progress measured otherwise the prisoner escapes.

    To suggest that the subservient Samaras and Berlin are in it together is a total misread of the situation. Samaras probably feels betrayed (kai kala na pathei o vlakas) since he relied on promises from the beast of Berlin. Question is: where Syriza fits into this? Does Syriza have a secret formula to induce Berlin into promise delivery? The minute Berlin sees Syriza at the negotiating table Germany would permanently withdraw any debt restructure promises on the basis of a broken “pacta sunt servanta” from the Greek side. That’s precisely what Berlin wants: Syriza in power so that Berlin can discharge any and all of its obligations with a magnificent NEIN. Berlin wants Syriza in power in order to prove that it did all it could by the Greeks are mad. Berlin holds parallel talks with Syriza on a daily basis and it would be greatly relieved when Syriza finally arrives according to the German timetable.

    What is beneficial for Greece in any of this?

    • Dean,

      Judging by the markets from last week and the violent -450 move intraday on Thursday Berlin must be concerned about the fallback to Italy and Spain that are now enjoying 2.5% interest rates. They thought they had isolated Greece but it appears not to be the case. There is also Greman investment in Greece a prime example being the Telecom sector which is now 80% owned by DT (of the whole sector). Finally Greece is an important front to fight illegal immigration in Europe.

      All these are reasons that Germany will need to work with Syriza. So there is some hope. Since you said that “pacta sunt servanta” is already violated by Germany which had promised Samaras debt reduction, it is to Germany’s advantage to broker a realistic deal with Syriza.

      Samaras big mistake was to overtax the Greek middle class in the face of the worst recession the country has seen. He will exit regretting this mistake.

    • Κωνσταντίνος:

      Samaras will never be re-elected; he is finished and he knows it but he will not leave sooner than 2016. The beast of Berlin will support him because it has no one else so subservient to do the dirty job.

      As to Syriza, there is no way to have elections on the inconsequential issue of President of the Hellenic Republic; this is a figurehead job with zero substance. They will find a way to get the 180 votes and if not they will amendment the Constitution, get an extension for Papapoulias…whatever it takes.

      Here is the quick math how they will get the votes: 154 from the coalition government and the rest from independents and the old DHMAR whose representatives already know that they are not going to be re-elected since DHMAR is now at 1% (DHMAR will not even make the 2% cutoff to stay in the next Parliament, so all of its members know that they are finished…the same applies for PASOK, Independent Greeks and whatever else political trash is left…they simply are not going to be re-elected). Same for Samaras and Venizelos; they will be booted out unceremoniously; everybody knows it and they know it. For these reasons these people will not depart under any circumstances by agreeing to early elections and they have the Ebola Merkel to back them up.

      As for the Papapoulias’ job, it’s a mickey mouse issue and there are 10000 ways to get around the procedure (under no circumstances the beast of Berlin will allow a loss on this irrelevant issue after having found a perfect collaborator in Samaras; no way). Read it here yourself but even untrained myself could spot at least 5 different ways to circumvent the whole procedure in a perfectly legal way (the whole thing is a joke):

    • Dean,

      I don’t see it. They need 180. Any constitutional amendment will create tremendous instability and there is no reason for it. I know that they are planning to jail all the the right wing parliamentarians but if that is the reason for it, it would be too Machiavelian and unsuitable to Greece.

      The easy way for Samaras is to reduce the ENFIA tax and back down from taxation from the first euro, provide tax relief and at the same time enact spending cuts.

      If he does not want to do this then the 2nd easiest path is for him to give up the rule to a government across multiple parties under another leader.

    • K:

      Here is article 32 of the Constitution:

      In order to understand how easy it is to circumvent the Greek Constitution read as a sample the following paragraph 29.3:

      “Article 29
      1. Greek citizens possessing the right to vote may freely found and join political parties, the organization and activity of which must serve the free functioning of democratic government.
      Citizens who have not yet acquired the right to vote may participate in youth sections of parties.
      2. The financial support of parties by the State and the publicity of electoral expenses of parties and parliamentary candidates may be provided by law.
      3. Manifestations of any nature whatsoever in favor of political parties by judicial functionaries, the military in general, members of the security corps and public servants, as well as the active support in favor of a party by employees of public law legal persons, public enterprises and local government agencies are absolutely prohibited.”

      29.3 is violated on a daily basis; need we say more of this issue ? ….because the evidence is abundant and inexhaustible.

  • Let me see if I got this right: the best chance we have to escape the markets’ deadly embrace is, to trust a politician. Man, we are so screwed…

    • The success of the Swiss model suggest something different. No natural resoucrces, historically tight monetary policy and no structural barriers.