Greece Is Running Out of Time

I have repeatedly described myself as a Euroskeptic.  The current combination of politics and economics looks likely to at worst doom the Euro to failure, at best to commit the Continent to a deep and long-lasting recession.  Moreover, the pace of deterioration in Greece, combined with an economic structure that seems completely at odds with much of the rest of Europe, seems to make a Grexit all but impossible.

That said, I am horrified at the ongoing willingness of European policymakers to still be playing chicken at this point.  I assumed that my skepticism would ultimately be proved wrong as the European Central Bank would ultimately cave and effectively monetize national debt across the Eurozone, and that Germany would come to this conclusion as necessary to save the single currency that they have long-championed.  That ultimately, the Eurozone would step up and take greater responsibility for this mess, understanding that while the Greeks have mismanaged their economy, they should never have been admitted to the Eurozone in the first place.

Instead, Europe’s situation is now akin to two or three trains running full-speed at one another, and by the time someone finally pulls on the brakes, it will be too late.  By the time key actors step into action, irreparable damage will have been done

Consider that one of those trains, Greece, has no driver, nor will it until June 17 when fresh elections are held.  Combine that with a deteriorating fiscal situation – believe it or not, it actually continues to get worse.  From Bloomberg:

The level of funds in Greece’s state coffers has fallen below 1.5 billion euros ($1.9 billion), Imerisia reported, citing “reliable information.”

If the state doesn’t receive predicted revenue for the rest of this month, it will find it difficult to pay for social services, pensions and public-sector wages, the newspaper said.

This was confirmed by the outgoing leader:

Greece’s outgoing Prime Minister Lucas Papademos has warned the country’s political leaders the government may have difficulty in meeting its cash obligations as of the start of June, a Greek newspaper reported Monday.

In a note Papademos sent to Greek President Karolos Papoulias and discussed in Sunday’s meetings between the president and party leaders on forming a coalition government, the prime minister said it is likely Greece will have significant difficulties in covering its cash payments in June, according to newspaper Ta Nea, citing unnamed sources from Papoulias’ office

Now, further consider one of the proximate causes of the new fiscal shortfall:

Greece’ s budget revenues have reportedly dropped by 10.2% in April compared to the same month in 2011, as daily Kathimerini reports quoting provisional figures the Finance Ministry is studying. The election period did nothing to help state receipts as the tax collection and monitoring mechanism traditionally relaxes ahead of polls, and did so again this year despite the crisis.

It has been said before, but is worth saying again – how did this economy pass the bar to Euro membership in the first place?  If officially sanctioned tax avoidance remains in effect, and we have another month until the new elections, I can’t imagine that the fiscal picture is going to do anything but go from bad to worse. Or from worse to as worse as it can get.

Given the deteriorating fiscal position, Greece will eventually need a larger bailout if it is to stay in the Euro.  Simply put, if they can’t pay their bills with Euros, they will need to issue their own currency.  Deep in a piece on the failed efforts to collect property taxes via electricity bills, the FT brings us this from a “friendly trader”:

When we talk about Greece “running out of money” in coming weeks/months, the combination of dire recession, plus non compliance in Revenue collection will speed the day that Civil Servants and suppliers are paid in IOU’s or “New Drachma” in the absence of any funding from the EU/IMF…

Once IOU’s start circulating, the clock will start ticking.  Either they get replaced soon with actual Euros, or they start trading as currency.  In other words, time is growing very, very short to find a solution that keeps Greece in the Eurozone.

Meanwhile, is the final run on Greece’s banks underway?  From the Wall Street Journal:

Greek depositors withdrew €700 million ($898 million) from local banks Monday, the country’s president said, as he warned that the situation facing Greece’s lenders was very difficult.

In a transcript of remarks by President Karolos Papoulias to Greek political leaders that was released Tuesday, Mr. Papoulias said that withdrawals plus buy orders received by Greek banks for German bunds totalled some 800 million.

A bank run in the absence of a functioning government.  Is there anyone ready to push the button on a bank holiday with capital controls?  Or is this about to devolve into a free-for-all flight of capital?

Meanwhile, Germany and France are holding to the official line.  From the FT:

“We want Greece to stay in the euro,” Ms Merkel said. “We know that the majority of people in Greece see that.”

The Greek government had also agreed on a rescue programme with the IMF and the EU after lengthy negotiations, she said. “I believe that memorandum must be respected.”

This ignores the small point that the last bailout was certain to fail from the start.  The message remains that no one but Greece is making the decision to leave the Euro:

“We have to respect that there will be new elections in Greece,” she added. “We will make it clear that we want Greece to remain in the eurozone, and that is what the citizens are voting on.”

But out comes the unspecified carrot:

That meant fulfilling the commitments in the EU and IMF programme, she said, but added: “We will also give proposals to Greece to encourage growth.”

Mr Hollande went further, saying that “I hope that we can say to the Greeks that Europe is ready to add measures to help growth and support economic activity, so that there is a return to growth in Greece.”More carrot with stick would have been helpful two years ago.  Now it is looking like too little, too late.  And what kind of measures are these?  Direct bilateral transfers from Germany, which would be helpful?  Or more loans to add to those that Greece can not already afford?

In other news, in the wake of its two LTRO operations, the ECB is back to neglecting its role as lender of last resort.  As a consequence, Spanish yields are now solidly back above 6%, with Italian yields in close pursuit.  Apparently, investors are not convinced that the supposed firewalls are sufficient to control contagion.  European policymakers have fallen short of the mark.  Again.

Bottom Line:  I don’t see how European policymakers can be anything but terrified that this whole experiment is unraveling at a frightening pace.  Yet they keep barreling ahead on this disastrous path, ensuring that things continue to get worse before they get better.

This post originally appeared at Tim Duy’s Fed Watch and is posted with permission.

3 Responses to "Greece Is Running Out of Time"

  1. wyatt f   May 16, 2012 at 9:46 pm

    Fasten your seat belts-this ain't gonna be pretty. People don't seem to realize that we're all in this together and need to help each other out. Instead it's more of the same consciousness that got us into this mess. "What's in it for me, Charlotte." I wonder if we're going to see Europe in flames, people starving, etc.

  2. Aegean1972   May 17, 2012 at 1:32 am

    If Greece exits the euro, it WILL BE endgame for europe as we know it. The euro will survive, but it will prolly be after major damages and other exits. Spain and even Italy. Because lets face it. Italy IS the next Greece. The solution imo is postpone Greek elections until July and till then, dont give them any money for pensions, salaries etc. Just pay their bonds that are due. This is the only way to make the suicidal Greeks understand what they are about to do. This is the best way to make the brainwashed Greeks change their vote from leftism to stability.

    On top of that, Greece needs a complete overhaul of its politicians. 95% change. Fire 95% of its politicians and MP's and replace them with technocrats (greek nationals) from abroad.

    thats the fastest solution for prosperity and stabilization of this country.

    But things need to get worse before they get better. Cut the money on them way before the elections. Doing it after the election will have the opposite effect because they will already be with some idiot-leftist gmvnt and with no option for another election.

  3. rodeneugen   May 18, 2012 at 11:29 pm

    What’s the big fuss about Greece? Greece’s GDP of 300 milliard US$ out of 15000 milliard US$ of European Union is 2%. In reality after the cut of Greece from the external credit probably half of the GDP will disappear, so it is less than 1%. So in fiscal terms if Greece would entirely stop its economy it would influence by 1% the European GDP. We already know, the Greece GDP will anyway fall to its real terms and Europe will loose statisticaly1% of its GDP. This 1% GDP in reality never existed, only in the statistics of Greece and the assets of the balance sheet of European banks and financial institutions. Yes for banks and financial institutions it will be a blow, good for them. Their practice of transferring financial resources from hard working productive economic entities of Europe, to the no-working non-productive governments, was a taxation of the strong and subsidies of the non-productive, who wasted it for personal enrichment and over-consumption (if the credit would be wisely invested, Greek economy would be in perfect state). This taxation reduced the potential growth of European economy by more than 1%. This had stopped and good that happened. Europe without these practices will be economically stronger than before. As to the banks and financial institutions, who will probably loose additional 200-250 milliard Euro, will be forced to take loans to save themselves. The best provider of these loans should be ECB, and if these rescue loans will be cleverly done, they will be swapped to equity, giving the ECB, decisive position in the banks and financial institutions. I know it is nationalization, but should we be so afraid of it. Did the previous owners of the banks done so well that they are irreplaceable? Yes the owners will loose part of their assets (and some of them are pension funds and small investor), But then isn’t all the modern economic system based on penalties for mistakes and mismanagement? Did not come the time, to punish all those financial Barons, who created this mess in the European and World economy?