Has the Greece Success Story bubble burst? Interview with Deutsche Wirtschafts Nachrichten

SAMARAS MERKELIn this interview, with Deutsche Wirtschafts Nachtrichten  (German Business News), I address the question of what happened in recent days in the Greek bond markets, in view of the Greek government’s failed attempt to argue that Greece is about to exit its Bailout. Regular readers may notice that I am merely repeating what I was saying back in April. For the full interview (in German, as it appeared in DWN) click here. For the English version, read on…

Prime Minister Samaras has indicated that Greece might leave the Troika-program. This sounds a little optimistic?

It was not even wishful thinking! Rather it was a clear ploy to recover electoral ground on the basis of a blatant lie; a lie of the sort that many Greeks want to hear, and to believe, even though they know it is a lie deep down. In short, it is a prime example of what a desperate political leader does when trying to lure a desperate electorate.

Mr Samaras strategy was to portray himself as the heroic PM who forced his people through terrible hardship but is now about to lead them into the Promise Land (beyond… Bailoutistan) if only the voters trust him to see this feat through. And to paint SYRIZA, the main opposition party, as the dark force that will, if it wins government, close the door to the Promised Land and condemn the country to permanent serfdom. At least that was Mr Samaras’ plan.

Was there ever a chance that he could pull it off until the next election? I think there was, even though it was slim. After all, Portugal and Ireland exited, formally, their Bailout courtesy of Mr Draghi’s OMT that pushed yields on their government bonds down and allowed the Eurozone to pretend that these two countries were solvent again. Why could Mr Samaras not hope for a similar umbrella under which to build his own myth? Indeed, for a while it seemed to be working. Greek government bonds and bank shares recovered and the Greek Success Story illusion seemed plausible. But, as we know, bubbles are condemned to burst, eventually. Mr Samaras must be cursing his fate; to have said bubbles burst well before the general election.

The data for Greece are not very encouraging. What is the real situation like?

Pretty awful. The state remains more insolvent than ever, the banks ditto, and the private sector is one where everyone owes to everyone and no one can pay. Two factors have contributed to a small pick-up in spending, which more or less stabilized the economy at a terribly low level of activity (the standard definition of a depression).

First and foremost was the political fact that Mrs Merkel stated unequivocally that Greece would be kept within the Eurozone. The result was that many Greeks, who had taken their money abroad (including Frankfurt) started spending more happily in Greece (e.g. repairing homes, buying cars, going on lavish holidays, returning to the restaurants etc.), even though they never actually brought the bulk of their funds to Greek banks. The second contributor to the slight pick-up in spending were the two excellent tourist seasons we had in 2013 and 2014, courtesy primarily of the collapse of the Turkish and Egyptian tourist markets but also of the fact that bad news about Greece disappeared from Northern European and American newspapers and channels. However, other than that the economic indicators point to a continued disaster: investment in fixed capital remains non-existent while credit to the private sector is continuing to shrink. Put bluntly, no economy can recover, after such a great fall, without investment and without credit. Period.

The EU-commission has said there should be “no doubt that Europe will continue to assist Greece in whatever way is necessary”. What could this be?

Simply, that they will do whatever it takes to preserve the myth that Greece is on the right track without however doing anything of what is required to put it on the right track. In other words, the EU and the ECB will continue to help the current government to persevere with its ‘extend and pretend’ policy, which I have also described as Ponzi Austerity; that is, a program combining new loans and strict austerity that, ultimately, increases indebtedness and reduces the country’s capacity to generate the output and income necessary to repay its debts.

Has there be any significant clean-up in the Greek banking system recently? We are under the impression that Greek banks rather have returned to the global casino…

Exactly the opposite. Greek banks are well and truly insolvent, with 40% non-performing loans and other ‘assets’ that are purely fraudulent. In any well-administered banking system, they would have been taken over, re-structured and re-sold to new owners. Only in a bankrupt Eurozone country such a course of action is not possible under the current ‘rules’. Instead, under the auspices of the ECB and our so-called Banking Union, the taxpayer borrowed €40 billion to give to the banks, the failed Boards of Directors and major shareholders were kept in their place, and soon after the state’s equity was allowed to be depleted so that the directors and major shareholders could regain their ‘property rights’ over banks can neither lend nor borrow – which explains why credit is continuing to fall so rapidly. And as if this were not enough, the state has also provided these banks with hidden guarantees of many tens of billions, without parliamentary approval – see this.

How do you read the latest development in the bond market?

As I have been arguing since the summer of 2012, Mr Draghi managed, quite skillfully, to use a non-credible threat against bond dealers in order to get the spreads down. He should be congratulated because, without buying a single bond, he bought a great deal of time for the politicians to do something about the underlying malaise. Alas, the politicians did nothing other than to insist on the same mix of toxic, self-defeating austerity and macroeconomically meaningless ‘reforms’. Thus the Euro Crisis moved from the bond markets to the real economy, causing deflationary forces to rage against investment and aggregate demand. In most of the Eurozone this has pushed bond yields to incredibly low levels, not because investors trust governments more but because: (a) they expect low-flation or deflation to boost their real interest receipts from Eurozone bonds and (b) they trust that Mr Draghi will, if he has to, redeem their Italian, Irish and Spanish bonds. Turning briefly to Greece, its bonds were the only ones to slide and to see a sharp increase in their yields. Why? Because the Samaras Greek Success Story fiction has been de-cloaked and his government is looking very shaky in the face of a strong challenge by a party (SYRIZA) whose main policy is to re-negotiate (as it should) Greece’s Bailout agreements.

Have investors lost trust in Draghi’s magic?

No, not yet. Bonds (except Greece’s) are holding up, revealing the continued influence of OMT. What investors have lost is any degree of confidence in the EU, and in the German government, to come to terms with a crisis of their own making.


  • oh, come on Yianis. The situation in Greece has everything to do with the Ebola of Europe, Merkel. She has an Italian and French revolt in her hands and when it comes to Greece she hits hard the torture experimental guinea pig called the Greek pseudo-government to show all other Europeans what’s in store for them.

    Are you serious that Syriza could even stay afloat for 5 minutes after a brutal German onslaught?

    Can we please stop please this cheap exchange of low grade Greek political BS and focus on the fact there Greece is no longer a sovereign country? And under Syriza Greece would become the equivalent of an ISIL suicide mission?

    Let’s talk the truth please and let’s stop misleading people.

    • Dean,
      You have to propose realistic solutions. Currently there is 0% chance of Germany leaving the euro so that other countries can have more of a say in their future.
      There is also 0% chance that Greece will leave.
      What is left is trying to get an understanding with the help of the ECB that something has to be done and that it is not OK to leave scores of young people unemployed.

    • Κωνσταντίνος:

      I fail to see what the ECB could do. The ECB has said that they will continue to fund Greece provided that Greece stays on the austerity path because Greece is below investment grade and as such they will make the exception of buying Greek bonds in exchange for further reforms.

      To cure unemployment, get the economy going, cut taxes these are all political decisions. But Greece is devoid of a political class at the moment. So you want politicians of other EMU countries to make these decisions in favor of Greece? Why would they do that? Why would politicians of other countries be benevolent to Greece? Are they elected by Greek voters?

    • Why?

      Because the countries are in a union. If there is a Eurozone there has to be a mechanism to act based on unemployment in all countries or at least based on the average Eurozone unemployment. Isn’t this what the US does? The Fed is fighting unemployment and have brought this down to 6%.

      Why does the ECB only act based on German unemployment?
      Isn’t that one sided?

      If the average Eurozone unemployment is 10% doesn’t that call for massive QE?
      The ECB has been asleep at the wheel for years. Trichet was incompetent.
      Draghi gets it but is not allowed to do anything. And Rome burns while incompetent Lagarde sees it and does nothing about it other than talk at the IMF conferences.

      All talk, no action, gross negligence. After 50 years of recession Draghi lowered the
      interest rate to 0 just this year!

      The stock market was crashing in the US on Thursday and at -450 the Fed God came out and whispered that there might be a need for more QE.

    • “If there is a Eurozone there has to be a mechanism to act based on unemployment in all countries or at least based on the average Eurozone unemployment”

      If it is in the treaty, yes. If no, than no.

    • Yes, I suppose. But the people who signed the treaty had absolutely no idea.

    • At least the People that were “represented” by those who signed were not told the truth. The EU is nothing more than a history of lies, breaking of contracts, laws and even constitutions.

  • The recipe from Germany was austerity and in the absence of deeper cuts by way of lay-offs in the public sector,
    Merkel via the Germans that work to supervise Greece and Samaras decided that the new recipe should be taxes.

    So in the face of an economy suffering a 25% reduction in GDP, 27% unemployment and a huge capital exodus to
    safe heavens, the geniuses at hand settled on this over-taxation policy.

    Now you might say, surely Greeks are good at tax evasion. Absolutely, the top 5% are masters at it.
    As such the over-taxation policy falls squarely on the middle class the ones that cannot do anything to protect themselves.

    These master minds at the IMF agreed to overtax an economy in severe recession, thinking that they should
    draw as much blood as possible without killing the patient.

    So we have the economy of Greece today. Income tax starts from 0 and there are no deductions for children in a country that has a sever demographic problem (courtesy of the new tax law passed last year – Genius IMF could care less).

    A new real estate tax is enacted on possession in a country that people’s savings were traditionally in real estate as opposed to the stock market. This real estate tax is based on values that were set 7 years ago before the 25% reduction in GDP and before the collapse of the real estate market. So people are expected to pay this tax on valuations that are at least twice the real market values.
    And of course this real estate tax is not deductible from income.

    So Greeks pay their income tax with no deductions, their inflated real estate tax, and then 23% sales tax on consumption and 13% on basic food from the grocery store.

    This taxation policy was agreed by the geniuses of the IMF all based in the US where $20,000 is the limit to even file income tax, where the deductions for children are generous, where the real estate taxes are always based on real values, where in some states there is 0% tax on food and where consumption tax varies from 0-10%.

    And these geniuses expect the economy to start kicking again, and unemployment to fall with increased taxation.

    • How could you fire half of the public sector in Greece? That’s the Syriza crowd. Plus the armed forces, the church and any other unproductive part of society you could think of.

      So you want to fire half of the public employees (which you should by the way) and then have a feeble private sector (30% of the total Greek economy) pay for all taxes to support the government? How else can you do that unless you tax real estate? By the way do you know that the biggest landlord in Greece by far is the church which pays nothing in real estate taxes? Not only the church free loads on taxes but the clergy is paid by the state as public employees – no other country in Europe does such nonsense. The reason real estate is taxed the way it is in Greece is because this is where all the tax avoidance money went to over decades. Tax dodging proceeds were invested in real estate because among other things holding real estate in Greece was tax free. This is a classic comeuppance case.

    • Exactly, and Greece nevfer went bankrupt before others forced Greece into the crazy currency experiment!

    • Dean,

      The additional RE Tax that Samaras added was 2 Billion.
      Can’t he find 2B somewhere else? Geniuses at the IMF and Germany are drawing blood from the average Greek family. Start with the dividend tax and raise it to 20% like in the US or 25% like in Germany and then implement cutbacks in spending. Start by stopping the hiring of new employees and by stopping nepotism which is still rampant.

      This is Samaras biggest mistake and this will cost him the election and -70 members in parliament. The ENFIA tax is not deductible from tax and it hits poor and middle class people that live in cities and not the wealthy class. It is very targeted.

      This is classic taxation by an oligarchy of the elite towards the lower classes. And they enjoyed imposing it, that is why their days are numbered.

      By the way this is a mistake by the IMF which is clearly an organization that has absolutely no consideration about the well being of people, 27% unemployment for 4 years and continuous recession and Christine Lagarde agrees to more taxes for the middle class in Greece. No wonder the BRIC countries are doing their own IMF.


      Tax evasion in Greece is predominantly a wealthy class problem and is due to the nature of the business Greece does i.e. tourism and shipping. The current government have done absolutely nothing to tackle this problem. This is not a reason to throw the problem to the Greek middle class.

      The ENFIA real estate tax is not deductible from income, it is based in surreal values and is in a way a haircut imposed by Merkel and Lagarde on middle class Greeks. It is the main reason the economy will stay stagnant and unemployment will remain high.

      The current government in Greece is on its way out. Simply because in spite of the severe recession and unemployment the imposed heavy taxation to the middle class as a recipe.

      You are lucky in Germany that Bernanke and now Yellen came about and they decided to throw trillions to save their economies and keep your German exports going. They have been exporting deflation to the Eurozone via the Euro at x1.3 while getting their unemployment from 9% to 6%. While at the same time Lagarde and Merkel could really care less about Greek unemployment at 27%.

  • Yanis why do the banks continue to hold onto distressed illiquid loans? At what point in the cycle will they begin selling their distressed debts? Why hasn’t tis began yet? I would have thought that this is a vital step at this stage of the cycle. Does the local jurisdiction have the appropriate laws in place to facilitate the purchasers , by investors ,of these sorts of debts?

    • Very simply, because if they do sell they will have to book these losses, revealing instantly their insolvency.

    • Con Katsiouras:

      Let me help you (and Yanis stop it). There is a Katseli law which prevents NPL liquidations. The Greek banks have constantly been reporting red loan provisions up to 45% with each reporting period (every 3 months or so). Their red loan exposure has been document over and over again with the upcoming European bank stress test to be the icing on the cake. Blackrock has also identified and quantified the extent of the NPL exposure. All of this is yesterday’s news.

      The problem with the banks is that they can’t find qualified new borrowers because 1. either the would be borrowers don’t want to borrow in such dismal economic climate or 2. those who truly want to borrow as a necessity for their survival simply don’t qualify due to the credit risk that they represent.

      As everybody knows the eurozone crisis is not one of liquidity rather because of lack of demand.

  • O.k. I was going to let this article fly by but Yanis by giving us his usual “bank aphorisms” is asking for it.

    Here what Syriza says – which is summarized in the previous article by Yanis: “Greece can’t stand on its own feet”. O.k. if this is true this means that Greece needs EMU support. But if Syriza comes to power it will basically say the same thing “that Greece can stand on its own and needs to renegotiate the terms”. To which the EMU will say no, because among other things, Greece can’t stand on its own due to its total ECB dependence in staying afloat.

    So what is the difference between the present Greek pseudo-government and a future Syriza Taliban government? They both say the same thing: the core argument is that Greece could manage under both regimes. Why would we believe that Syriza has a breakthrough on this issue when we very well know that a Syriza government would have mountains of European hostility to overcome? Why would the Greek citizens fall for the “trust me I have a better solution” myth?

  • Excellent comments, proposals, remedies…..and so on…..
    But the bitter truth is that no one cares about Greece; Lets assume that your CFO really messed up bringing your Company in the verge of bankruptcy. Would you let him keep his place….even more assign him as the Task Force Manager responsible for turning around the Company into successs!!!
    This is what the IMF & TROIKA has done…..with the only objective, not to save Greece, but to buy sufficient time for their own Banks & Economies. Something like…”When the neighborhood is on fire, I will make sure my family is safe first and then run next door…”.
    1. Leave the Monetary Union….for sure Italy or France will follow soon after,
    2. Establish a flat Corporate Tax Rate of 10%-15% for the next 10 years, signed by all political parties,
    3. Bring VAT on Holidays premises & related services to zero for 5 years,
    4. Enforce the strictest TAX EVASION laws available,
    5. Take full control of all systemic banks, by appointing the majority of members in the boards; professional coming from the Financial Industry – minimum requirements, at least 5 years employment outside Greece.

    Radical problems require radical solutions

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