Why the Beautiful New Greek Government Is Screwed

Greek Prime Minister Alexis Tsipras and Finance Minister Yanis Varoufakis, often in a good-cop-bad-cop manner, have been cruising through the media, lobbing a mix of admirable rhetoric, verbal hand grenades, and down-to-earth explanations. And they have become white-hot media darlings.

So Varoufakis was in Germany to meet with his counterpart, Wolfgang Schäuble, and they didn’t “even agree to disagree,” he said. He urged Germany to help end the “gross indignity” of the Greek debt crisis. The Troika’s austerity program had wasted “too much time, hopes, lives,” he said.

But it’s all about other people’s money.

They’d come to power with a pledge to wipe out half of Greece’s insurmountable pile of debt. Debt restructuring, debt exchange, more haircuts for bondholders, exit from the Eurozone… these are the kind of terms that Syriza party officials have bandied about before and after the election victory.

To show that this isn’t just talk, that the Greeks mean business, the government hired Lazard’s government advisory arm, headed by Matthieu Pigasse, master of sovereign-debt restructurings. And they made sure the media picked it up.

Syriza is also running a highly effective charm offensive. Not just words and smiles – but actions, or at least symbolic actions. It wants to show that it’s different from the prior succession of corrupt, self-serving governments.

And the Spiegel picked it up so that German taxpayers would get the drift: The entire fleet of official cars that prior cabinet members had used would be sold. Among them a custom-made bullet-proof BMW with satellite communications system, acquired for €750,000 by the government of George Papandreou, prime minister from 2009 to 2011 during the heady bailout days. It was last used by Evangelos Venizelos, finance minister during the bailout days and deputy prime minister and foreign minister until the election in January.

Tsipras, who is still driving his Audi A-4 that he drove as leader of the opposition, exhorted his ministers to avoid blowing a lot of money and if possible stick to economy class for official travel. So Varoufakis, who’s ostensibly getting around Athens by taxi or motorcycle, made sure the media depicted him during his whirlwind tour around Europe in economy class.

Georgios Katrougalos, deputy minister of administrative reform and in charge of selling these cars, told the Greek media that “ministers don’t need state luxury cars.” He’ll use his personal car, he said, a classic MG Roadster. Who can’t love these guys that have so much style?

And his personal security? “Why would I need police protection?” he said. “When I notice that someone wants to throw yogurt at me, I’ll resign immediately” – because that would mean, he said, that the people no longer wanted him as minister.

This is the sort of attitude we wish all politicians had. But it’s just part of the government’s charm offensive, where the goal is other people’s money.

So Thursday evening, thousands of Greeks amassed in front of the Greek parliament, not to protest against the government as they’d done in prior years – pictures of violence and fires still resonate through distant memories of the bailout years – but to support Syriza.

But it’s not working.

During the debt crisis years of 2010 to 2012, every time a Greek politician said something untoward about the euro, the Eurozone, or defaulting on the debt – all mild compared to what Syriza’s politicians are propagating these days – European stocks swooned.

I came to call it the extortion racket. Chancellor Merkel, like all successful politicians, governs with one eye on stocks. During the three summer months of 2011, the German DAX, which is the only stock index that really counts in this racket, crashed 30%.

German nerves were rattled. Then, in November that year, Prime Minister Papandreou dared to mention in an exasperated one-sentence comment that he wanted a “referendum” at home; Greeks themselves should decide if they wanted to keep the euro and subject themselves to the umpteenth austerity and bailout plan being concocted at the time. The EU deposed him and installed a caretaker government. Something needed to be done to calm the waters.

Taking down European stocks and bonds, and thereby hurting the wealth of powerful entities and investors has been the sharpest weapon available to the prior Greek governments. And it worked – to some extent.

It resulted in a remarkable socialization of losses. Not that the Greeks benefited. But banks, hedge funds, and other entities were able to unload their toxic Greek bonds onto the ECB, the IMF, and the European bailout mechanism. Together they currently hold 76% of the Greek debt. The remaining private sector bondholders had to take a big haircut. It also ensured that Greek politicians would get to keep their euro-denominated pensions, rather than pensions converted to dwindling drachmas.

If Greece defaults on its debt, it would mostly be taxpayers in other countries, particularly German taxpayers – but also US taxpayers via the IMF – that would eat the losses on deals banks and hedge funds had made a killing on.

Now the financial markets don’t care anymore. Despite Syriza’s financial firebrand rhetoric before and since the election, European stocks had the best January since 2011. The all-important DAX is a hair away from an all-time high.

The only market that has been hit by the pre- and post-election firebrand rhetoric has been in Greece.

Since June last year, Greek stocks have plunged 40%; half of that since early December. Greek bank stocks have been demolished. Now the ECB has cut off one of its funding mechanism, and they’re facing bank runs. The 10-year yield of Greek government debt spiked to 11% a few days ago and now sits at just under 10%, in an otherwise near-zero environment. Financial mayhem is breaking out in Greece, while investors elsewhere are raking in the QE-fattened bucks.

Every time Syriza’s politicians fire a verbal dart, they’re not sinking German assets and banks; they’re sinking Greek assets and banks.

And that’s why neither the ECB, nor the IMF, and least of all the German government show any appetite for officially telling taxpayers in Europe and around the world the obvious, that they were shanghaied into bailing out banks and hedge funds during the last few waves, and that now was the time to begin eating the losses.

Alas, debt that can never be repaid won’t be repaid. That’s the other side of the equation. Whatever “solutions” will be found – Greece’s more or less orderly exit from the Eurozone or some form of politically palatable restructuring of its debt – banks and hedge funds, and their investors, made off with the money long ago. And taxpayers outside Greece are left holding the bag, one way or the other.

The ECB is starting up its own QE, but won’t buy anymore Greek bonds. Its deposit rate is already negative. Other central banks around the world are falling all over each other lowering their benchmark interest rates. Which begs a big fat question. Read… How Long Can Central Banks Push Bonds to Absurdity?

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  21 comments for “Why the Beautiful New Greek Government Is Screwed

  1. robert h siddell jr says:

    The banksters & Elites may get a justified Monopoly Money haircut and a swift kick out of Greek Privatizations while the 99% of Greeks cheer (even though they know they will be lucky to get enough to eat for years). The next big question is will Spain, Portugal, Italy, Ireland and France choose some of the same. As for America, I believe the “We shall overcome” classes would immediately riot and loot instead.

  2. Vespa P200E says:

    Hope the newly elected leftist will go beyond bluffing and hire Government Sachs to peddle their new drachma bonds and default on the loans which they cannot pay back anyway. Mind you Government Sachs helped the Greeks hide the debt weenies to get into EU but I digress.

    What the good ol Troika headed by monetary assassin IMF did was pile on more debts to Greeks and dictate austerity which mind you was badly needed with bloated government payrolls. Yeah give more alcohol to extend the drunken stupor when the drunk needed to go thru bad hangover and forced to restructure.

    IMHO – EU will blink as they cannot afford the Euro tanking not to mention instability thru out EU land and offer another round of loans and extend the existing loans AKA kick the debt can down the road or something.

  3. Nothing is going to change.

    Euro = gasoline.

    No euro = no cars. Greeks will sacrifice their children before they get rid of their precious cars. So the Greeks are indeed sacrificing their children right now, their grandchildren, too.

    Next: Greece = Yemen. Afterward Yemen becomes Somalia. Somalia becomes Haiti. Then Greece is left as an uninhabitable wasteland, a stony desert filled with ruins, scorpions and bones = Syria. See how this game works? It’s coming to your town.

    Dollar = gasoline.

  4. Mick says:

    If I owe you $5000, I have a problem. If I owe you $5,000,000,000,000, you have a problem.

    • NotSoSure says:

      Depends on the power relationship as well. If both people have equals guts, the above may be true, but if the one owing a gazillion is meek then you can make him a slave.

      As Tyrion Lannister observed so accurately in GoT: There’s no living slave who’s chosen to be otherwise. The choice is hard but it’s there regardless.

  5. Julian the Apostate says:

    And the new face of Greece is morphing into…(fanfare)…Jimmy Carter?! I think I’ve seen this movie before. After this he brings peace to the Middle East, then in retirement he found Parthenons for Humanity and provides every one a temple for the cost of sweat equity…

  6. Alec says:

    Hi, newbie here.
    The way I see it the situation is pretty straight forward: Greece must be punished.
    Yes, that there’s no way Greece can repay its debts is a given, and the banks have already made their profit, but the thing is that Greece is tiny, and while the Eurozone would probably survive a Grexit, if the Spaniards were to follow the Greeks’ example and elect PODEMOS, that would be it. That’s why the TPTB are suddenly so vehement about the need to make an example out of Greece, and a key component of that example has to be reducing the previously dreaded a Grexit into a non-event.

  7. Greece is insolvent. It’s been insolvent for years. Finally people are starting to act like it. We’ve been waiting years for elected officials to realize that the crisis is not over and now we’ve got that. I don’t think that can be understated enough at this point. Maybe they are bluffing. As 75% of Greeks want to keep the Euro it seems hard to believe that SYRIZA will do just that.

    Greece may be a small country but the instability and weaknesses in the EU will give them more power than it should. The EU and ECB can’t afford to give Greece anything. If SYRIZA is successful in Greece then Podemos will gain momentum in Spain and in an instant a new populist left wing movement could sweep across Europe and threaten the EU.

    One thing is clear. Greece won’t be paying back all its debts and its not alone. How long till more elected officials act like it.

    blog: https://starshipinvestor.wordpress.com/

  8. Julian the Apostate says:

    Steve, I’ve heard your meme many times before that “precious cars” are the root of all evil. True, a car is a tool, and every “tool is a weapon, if you hold it right.”, as the lyric from some feminist song I heard once has it, and motor vehicle homicide does exist.
    But something you sacrifice your children for?
    Any new tech that is embraced gets the contempt of old farts like me, who sneer and shout “Get a horse!” While the young Turks get ahold of it and make it sit up and do tricks.
    In physics, Einstein was the young Turk who upended 19th century physics and was surprised that the young Turks that followed him made it sit up and do tricks. The old fart grumbled that God does not play dice with the Universe and the young Turks shot back, “don’t tell God what to do!”
    So why your animus against a product, cars, that at best is an asset and at worst a mere symptom of the disease? Just curious

  9. williamwilliam says:

    Greece, with an economy the size of Ireland’s, is revealing they are just seeking to re-boot their banking system, not replace it. Without radical reforms like new monetary systems such as social credits or trade protectionism, they’re likely going to just stabilize their country’s standard of living and suffer through long-term stagnation and ‘brain-drain’.

    They even have an opportunity to become a future wealth management mecca like the Cayman Island, British Virgin Islands, and Bahamas with the right set of banking laws in place.

  10. NY Geezer says:

    If the new Greek government is to have a chance of success it must choose to represent the Greek people and not be concerned about pleasing Brussels or Germany.

    The overwhelming majority of Greeks have spent all their lives in Greece, speak only Greek with perhaps a few words of some other languages. They are proud of being Greek. They have no European identity. They do not share the concept of one Europe. They are not willing to sacrifice their lives and the lives of their children and grandchildren to save the European dream.

    The Europeans who cherish the dream of one Europe are the elite EU officials and bureaucrats. They are well educated, often abroad. They have well-paid jobs-for-life upon which they pay no taxes or very low taxes. In addition they are bestowed special benefits such as taxpayer-funded elite schools for their kids, and generous pensions and living allowances.

    And unlike EU officials, most Greeks are poverty stricken and overtaxed. To them the idea of tribal nationalism is attractive and the attractions of Europeanism are not obvious. Rather it is a bizarre means of facilitating stealing from them.

    Unfortunately the EU officials who spend their lives traversing borders and speaking multiple languages view the proud monolingual Greeks as too provincial to be significant.

    No Greek government can not perform the dual role of pleasing the Eurocrats
    and serving the interests of the Greek people as those interests are in sharp conflict. The new Government must choose. In addition, they should not be measuring their policies by the response of the markets, but by the response of the Greek people.

  11. Michael Gorback says:

    No matter how much the EU/ECB/IMF beat on Greece the problem remains: the laws of mathematics trump the laws of mankind. Greece is the proverbial dead horse.

    Ultimately Europe can’t win this game. They can pressure Greece into more can-kicking and gain an interim victory but the next iteration will just be worse as the problems compound in severity. Maybe along the way someone will be able to strip mine some national assets but the EZ will still be left staring down the bore of massive amounts of bad debt.

    The goal of the can-kicking is to keep the game going until the current players retire from public life, like what the Greenspan Commission did to Social Security.

  12. SteveK9 says:

    The best approach would be to leave the Euro … they need plenty of good advice on exactly how to go about that, but it’s available. The trouble is that the people would not support it … and Syriza did not run on it. A majority of the population still thinks they can work things out with the Germans. And, they are philosophically still committed to the idea of a united Europe (well some of them).

    If they did leave, they would suffer perhaps even more for a short period and then things would start to improve (Argentina 2009 … I know it is not exactly the same). If that did happen it would be the end of the Euro in short order. Spain would leave next, followed by Portugal, then Italy and finally France, Belgium and Ireland.

    The EMZ would then be Germany, Netherlands, and Austria … and Eastern Europe? … maybe they would want to stick with Germany.

  13. Christoph Weise says:

    Reasonable analysis, but does not explain why “Greece government is screwed”. It should not be forgotten that the Greece government claims it does not need access to debt because more debt is precisely what is not needed in Greece. I can understand that this does not go down the american throat, a country that is build on continuous debt expansion.

    • Gordon says:

      The entire global banking system is based upon debt expansion. This is not unique to American banking.

  14. dave roderick says:

    Just use the greek version of the bradbury pound sorted

  15. Vespa P200E says:

    Well here are some interesting factoids about the how the Greek bailout was really bankster bailouts from ZH:

    1. Greece received $284 billion (in euro) since 2010
    2. Whopping 92% went to Greek and EU banksters
    3. Only 8% went to Greeks

    Reality is that Greece canot pay back the debts kind a like our national debt. BTW – debt is either paid off or defaulted thus I think Greece should just default and devalue its way out using newly issued drachmas and issue high interest debt as greedy TBTF banksters will wade into the high interest Greek debt “protected” via complicated counter party derivatives and swaps (and yes there is money to be made by banksters to peddle these).

    But I think EU will fold again and give in to the Greek demands by extending (not forgiving) the loans and pretend all is well until next round – in other words same old brinkmanship all the while Greece degenerates into utter chaos followed by some kind of coup or socialist takeover and default.

  16. Petunia of Delphi says:

    I see 100 year bonds in Greece’s future. No kidding.

    • NY Geezer says:

      Hmm. Very interesting. A negative interest rate of 1% and Greece is debt free at the end of the period.

  17. Julian the Apostate says:

    Greetings and Felicitations, Alec. Welcome to the Long Porch!

  18. Peter says:

    2010 the Greeks received 284 billion bailout 80% of the bailout money went to European Union banks that were Greek bondholders, and not the Greek economy.
    Greece debt crisis, the role of the banks in creating this mess, the possibility of an outright default, the danger of derivatives, the destruction of the euro and how a Greece default could set off a global economic meltdown.
    Ah yes “To Big To Fail”

Comments are closed.