Greek Debt Crisis

Greece…One Way…or the OTHER!

Off the keyboard of Michael Snyder

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Published on The Economic Collapse on July 9, 2015

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European Leaders Promise The Greek Debt Crisis Will Be Resolved One Way Or Another On Sunday

The wait will soon be over.  Greece submitted a final compromise plan to its eurozone creditors on Thursday, European finance ministers will meet on Saturday to discuss the proposal, and an emergency summit of all 28 EU nations on Sunday will make a final decision on what to do.  The summit on Sunday is being billed as a “final deadline” and a “last chance” by EU officials.  In essence, Greece is being given one more opportunity to embrace the austerity measures that are being demanded of them by their creditors.  So has Greece gone far enough with this new proposal?  We shall find out on Sunday.

For months, the entire planet has been following this seemingly endless Greek debt saga.  Global financial markets have gyrated with every twist and turn of this ongoing drama, and many people have wondered if it would ever come to an end.  But now European leaders are promising us that the uncertainty is finally going to be over this weekend

This time, the leaders’ summit called for Sunday is being billed by all concerned as the definitive moment that will determine Greece’s future in the euro. It’s “really and truly the final wake-up call for Greece, but also for us — our last chance,” EU President Donald Tusk said on Wednesday, the day after the most recent emergency session.

So what is the general mood of European leaders as they head into this summit?

Overall, it does not appear to be overly optimistic.

For example, just consider what the head of the Bundesbank is saying

Bundesbank Chief Jens Weidmann, meanwhile, said that central banks have no mandate to safeguard the solvency of banks or governments, and stressed that emergency liquidity to Greece should not be increased.

And even normally upbeat leaders such as ECB President Mario Draghi are sounding quite sullen

Just how uncertain the coming days are was highlighted when ECB President Mario Draghi voiced highly unusual doubts about the chances of rescuing Greece.

Italian daily Il Sole 24 Ore quoted the ECB chief, under growing fire in Germany for keeping Greek banks afloat, as saying he was not sure a solution would be found for Greece and he did not believe Russia would come to Athens’ rescue.

Asked if a deal to save Greece could be wrapped up, Draghi said: “I don’t know, this time it’s really difficult.

That certainly does not sound promising.

It isn’t as if the Greeks are not trying to find a compromise.  Their latest offer reportedly contains some very painful austerity measures

Greece is seeking another bailout totaling at least 50 billion euros ($55 billion) from its European creditors and offering to make painful spending cuts and tax increases as it races to avert a financial meltdown, according to government sources.

Under a 10-page blueprint completed late Thursday, the country said it would undertake austerity measures worth between 12 billion and 13 billion euros ($13 billion to $14 billion), including raising taxes on cafes, bars and restaurants.

But once again, it appears that pensions may be a major sticking point.  The following comes from a Zero Hedge report about the latest Greek proposal…

The biggest surprise is once again in the biggest hurdle: pensions. Recall that as we accurately predicted two weeks ago, it was the government’s unwillingness to directly cut pensions that led to the IMF refusing to even negotiate the Greek proposal.

As a further reminder, this is what IMF’s chief economist Olivier Blanchard said almost a month ago on the topic:

Why insist on pensions? Pensions and wages account for about 75% of primary spending; the other 25% have already been cut to the bone.  Pension expenditures account for over 16% of GDP, and transfers from the budget to the pension system are close to 10% of GDP.  We believe a reduction of pension expenditures of 1% of GDP (out of 16%) is needed, and that it can be done while protecting the poorest pensioners

Fast forward to today when MNI reports that “there are no pension cuts in the draft of the proposal.”

And if recent experience is indicative, this likely means that the Troika will once again refuse to move on with the draft.

We shall see what happens on Sunday.

I have a feeling that it is all going to come down to what Germany wants to do.  At this point, the Greeks owe the Germans approximately 86.7 billion euros.  The German people are overwhelmingly against pouring more money down a financial black hole, and German leaders have taken a very hard line with Greece in recent days.

If Germany does not like this new Greek proposal, it will almost certainly fail.  And if there is no deal, Greek government finances will totally freeze up, the Greek banking system will utterly collapse, and the Greeks will probably be forced to switch back to the drachma.

Speaking of the drachma, check out what Bloomberg is reporting

Between June 28 and July 4 at a Hilton hotel in Athens, transactions on a Bloomberg reporter’s Visa credit card issued by Citigroup Inc. were posted as being carried out in “Drachma EQ.”

The inexplicable notation — bear in mind, the euro remains Greece’s official currency — flummoxed two very polite customer service representatives and spokesmen for the companies involved. It depicts a currency changeover that the Greek government and European officials have been working for over six months to avoid.

Banks around the world are bracing for the increasingly real possibility that Greece may be forced to abandon the euro, a currency it shares with 18 other European countries.

Could plans to roll out the drachma already be in motion behind the scenes?

The next few days promise to be extremely interesting.

Meanwhile, there are all sorts of other indications that big economic trouble is ahead for the entire planet.  For instance, global commodity prices have been plunging big time

While market commentators worry whether an economic collapse in Greece could trigger turmoil in financial markets, a slump in commodity markets may be signaling the world is already in a deep recession.

The slump in the Chinese stock market and concern over the Greek debt crisis sent commodities towards multiyear lows. The S&P GSCI—an index which represents a diversified basket of commodities—has been down nearly 40% over the past year and had slumped by more than six percent as of Wednesday, July 8th.

We witnessed a similar pattern just prior to the financial crisis of 2008.

And in addition to the problems that have erupted in China, Greece and Puerto RicoCNN is reporting that every major economy in Latin America “is slowing down or shrinking”…

Every major Latin American economy is slowing down or shrinking. The World Bank predicts this will be Latin America’s worst year of growth since the financial crisis. As if that’s not dire enough, the world’s two worst performing stock markets are in the region as well.

Very few people are talking about Latin America right now, but the truth is that the region is in the midst of a slow-motion economic implosion.  Here is more from CNN

Venezuela is arguably the world’s worst economy with sky-high inflation. Next door, Colombia has the world’s worst stock market this year. Its index is down 13% so far this year. The second worst is Peru, down 12.5%.

Right now, trouble signs are emerging all over the planet.  That is why we shouldn’t just focus on Greece.  Yes, if Greece is kicked out of the euro that is going to greatly accelerate things.  But no matter what happens with Greece, the truth is that we are steamrolling toward another major worldwide financial crisis.  Perhaps you didn’t notice, but I purposely did not use the word “Greece” once in my recent article entitled “The Economic Collapse Blog Has Issued A RED ALERT For The Last Six Months Of 2015“.

Yes, I am taking what is happening over in Europe very seriously.  I believe that we are about to see some things happen over there that we have never seen before.

But the Greek crisis is only part of the picture.  Everywhere on the globe that you look, red flags are going up.

Sadly, just like in 2008, most people have chosen to be willingly blind to what is happening right in front of their eyes.

Greece Votes NO – Let The Chaos Begin…

Off the keyboard of Michael Snyder

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Published on The Economic Collapse on July 5, 2015

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The result of the referendum in Greece is a great victory for freedom, but it is also threatens to unleash unprecedented economic chaos all across Europe.  With almost all of the votes counted, it is being reported that approximately 61 percent of Greeks have voted “no” and only about 39 percent of Greeks have voted “yes”.  This is a much larger margin of victory for the “no” side than almost everyone was anticipating, and it represents a stunning rejection of European austerity.  Massive celebrations have erupted on the streets of Athens and other major Greek cities, but the euphoria may not last long.  Greek Prime Minister Alexis Tsipras is promising that Greece will be able to stay in the euro, but that gives EU bureaucrats and the IMF a tremendous amount of power, because at this point the Greek government is flat broke.  Without more money from the EU and the IMF, the Greek government will not be able to pay its bills and virtually all Greek banks will inevitably collapse.  Meanwhile, the rest of Europe is about to experience a tremendous amount of pain as financial markets respond to the results of this referendum.  The euro is already plummeting, and most analysts expect European bond yields to soar and European stocks to drop substantially when trading opens on Monday morning.

Personally, I love the fact that the Greek people decided not to buckle under the pressure being imposed on them by the EU and the IMF.  But amidst all of the celebration, the cold, hard reality of the matter is that your options are extremely limited when you are out of money.

How is the Greek government going to pay its bills without any money?

How are the insolvent Greek banks going to operate without any money?

How is the Greek economy going to function without any money?

Now that the Greek people have overwhelmingly rejected the demands of the creditors, it will be very interesting to see what the EU and the IMF do.  Prior to the referendum, European leaders were insisting that a “no” vote would put an end to negotiations and would force Greece to leave the euro.

Now that the results are in, are they going to change their tune?  Because the ball is definitely in their court

“This does two things: it legitimises the stance of the Greek government and it leaves the ball in Europe’s court,” ANZ Bank analysts said in a note.

Europe either folds or Greece goes bankrupt; over to you Merkel.”

So would they actually let Greece go bankrupt?

It is going to be fascinating to watch what happens over the next few days.  Right now, Greek banks are on life support.  If the European Central Bank decides to pull the plug, they would essentially destroy the entire Greek banking system.  The only thing that can keep Greek banks alive and kicking is more intervention from the ECB.  The following comes from the New York Times

Now that Greek voters have said no to the economic demands of its international creditors, the fate of the country’s struggling banks is in the hands of the European Central Bank.

Greece’s banks, closed since last Monday because they are perilously low on cash, have been kept alive in recent weeks by emergency loans from the European Central Bank. On Monday, the central bank’s policy makers plan to convene to determine how much longer they are willing to prop up the Greek banks, now that the country has essentially said no to the unpopular dictates of the other eurozone countries.

Of much greater concern to the rest of the world is how financial markets are going to respond to all of this.  As I write this article, things already appear to be unraveling.  The following comes from CNBC

Germany’s Dax is indicated sharply lower from Friday’s close at around 4 percent, while the euro was down 2 percent against the yen as the news emerged. U.S. stocks are expected to open around 1 percent lower Monday, according to recent stock futures data.

What could be most important for those worried about contagion from the Greek crisis is how Portuguese, Spanish and Italian government bonds perform in Monday morning trade.

If these peripheral euro zone countries, often lumped in with Greece, suffer a sharp spike in yields, this could cause alarm about whether Greece leaving the currency might cause further contagion to other weaker euro zone economies.

This could potentially become a “trigger event” that unleashes a wave of financial panic all over Europe.  And once financial panic begins, it is very difficult to end.

If the EU and the IMF want to avoid a crisis, they could just give in to the new Greek government.  But that would be politically risky for certain high profile European leaders.  For instance, Angela Merkel would face a huge backlash back home if she conceded to the new Greek government now.  And other German leaders are already calling the referendum result a “disaster”

German politicians branded the result a ‘disaster’, with the country’s economy minister Sigmar Gabriel Sigmar accusing Tsipras of ‘tearing down the last bridges on which Greece and Europe could have moved towards a compromise’.

He added: ‘Tsipras and his government are leading the Greek people on a path of bitter abandonment and hopelessness.’

And the president of the European Parliament, a German, told a German radio station over the weekend that a “no” vote would almost certainly mean that the Greeks will be forced out of the euro

If after the referendum, the majority is a ‘no,’ they will have to introduce another currency because the euro will no longer be available for a means of payment,” Martin Schulz, European Parliament president, said on German radio.

That is pretty strong language, eh?

Here is yet another quote from Schulz

Without new money, salaries won’t be paid, the health system will stop functioning, the power network and public transport will break down, and they won’t be able to import vital goods because nobody can pay,” he said.

So at this point it is all up to the EU and the IMF, and in particular the focus will be on the Germans.

What will they decide to do?

Will they give in, or will they force the Greeks to leave the euro?

If the Greeks do transition from the euro to a new currency, it will be a process that takes months (if not longer).  You just can’t change ATMs, computer systems, cash registers, etc. overnight.  So a move to the drachma  would not be as simple as many are suggesting…

British firms like De La Rue, which prints 150 currencies worldwide, are believed to have been contacted with a view to providing such services.

It’s done in great secrecy to prevent currency speculation. The other big problem is the logistical challenges of switching a currency. All ATMs, computers and other machinery of commerce that bears the euro symbol will have to be adjusted. It could, and would, take months.

And if Greece does leave, it will be a massive shock for global financial markets.  Faith in the European project will be shattered, the euro will drop like a rock, bond yields all over the continent will rise to unsustainable levels and major banks all over Europe will fail.

I think that the following quote from Romano Prodi sums things up quite well

Romano Prodi, former chief of the European Commission and Italy’s ex-premier, said it is the EU’s own survival that is now at stake as the botched handling of the Greek crisis escalates into a catastrophe. “If the EU cannot resolve a small problem the size of Greece, what is the point of Europe?

Meanwhile, we should all keep in mind that a financial crisis has already erupted over in Asia as well.  Chinese stocks have lost 30 percent of their value in just the last three weeks.  In fact, the amount of “paper wealth” wiped out in China over the past three weeks is approximately equivalent to “10 times Greece’s gross domestic product”

A dizzying three-week plunge in Chinese equities has wiped out $2.36 trillion in market value — equivalent to about 10 times Greece’s gross domestic product last year.

The great financial collapse of 2015 is well underway, and it should be a very interesting week for global markets.

But no matter what happens this week, we all need to keep in mind that this is just the tip of the iceberg.

A “perfect storm” is on the way, and we all need to get prepared for it while we still can.

 

Knarf plays the Doomer Blues

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