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Monday, January 26, 2015 12:46 AM


Pact With the Devil? Syriza Projection 150 Seats; Coalition Deal Already; "Indisputable Mandate to Leave Austerity"


One Short of Outright Majority

With vote counting nearly over, it appears Syriza captured exactly half of the 300 member Greek parliament with approximately 36.3% of the vote compared to 27.8% for New Democracy.

That was a solid trouncing, nearly double the 4-5% expected margin (see Syriza Trounces New Democracy; Greeks Stop Paying Taxes; Run on Greek Banks Escalates; Get Out!)

Syriza is one vote short of an outright majority. However, Syriza has already secured an alliance with the Independent Greeks, a right-wing party that shares little common ground with Syriza except for its rejection of austerity measures.

The coalition would have at least 162 seats, and that's an allegedly comfortable governing majority.

I do not rule out other alliances. But holding them all may prove difficult. Certainly this was not the alliance most expected.

Can Syriza govern with the Independent Greeks on some issues and another party on others? Or will this all blow up soon? If the latter, before or after Grexit?

For now, it's party time for Syriza, albeit one vote short of an even bigger party. Of course, there is always the chance of a party shift. It only takes one shift.

New Clash for Europe

With that backdrop, please consider Greek Vote Sets Up New Europe Clash.

With nearly all votes counted, opposition party Syriza was on track to win about half the seats in Parliament. In the wee hours of the morning, it clinched a coalition deal with a small right-wing party also opposed to Europe’s economic policy to give the two a clear majority.

“Today the Greek people have written history,” Syriza’s young leader and likely new prime minister, Alexis Tsipras, said in his victory speech late Sunday. “The Greek people have given a clear, indisputable mandate for Greece to leave behind austerity.”

A Syriza victory marks an astonishing upset of Europe’s political order, which decades ago settled into an orthodox centrism while many in Syriza describe themselves as Marxists. It emboldens the challenges of other radical parties, from the right-wing National Front in France to the newly formed left-wing Podemos party in Spain, and it sets Greece on a collision course with Germany and its other eurozone rescuers.



Tsipras will have a mammoth task at home and abroad.

For one thing, Syriza is a broad coalition of the left that includes factions that believe Greece should leave the eurozone. Those factions would pressure Mr. Tsipras if he moves to compromise with Europe.

The pressure to compromise will be intense. Under the bailout program’s rigorous schedule, Greece is required to complete a review of its progress with the so-called troika of bailout inspectors by the end of February. Mr. Tsipras has said he doesn’t recognize the troika’s authority.
Pact With the Devil?

The Wall Street Journal called the coalition of 162 seats a "comfortable majority". I called it an "allegedly comfortable majority".

Time will tell which version is correct. But other alliances are possible as well.

It's interesting this coalition is the one that emerged rather than a coalition with one of the other leftist or centrist parties.

Perhaps there is more in common on the issues that is apparent at first glance. Then again, perhaps so many are so fed up with austerity they would sign a pact with the devil to get rid of it.

Bow to Austerity or Go Bust

The Telegraph reports Greece must bow to austerity or go bust, says EU
Eurozone finance ministers will on Monday threaten an end to negotiations on debt relief for Greece unless its new radical Left government promises to honour all existing austerity agreements.

Eurozone officials are convinced that the EU holds all the trump cards in the coming clash with Greece's leader-in-waiting, Alexis Tsipras, including the nuclear option of letting Greek banks collapse. They believe Mr Tsipras knows his weakness.

The hardline approach will be sugared with offers of flexibility on the detail of austerity measures, and a move to allow Greece more time to meet an end of February deadline for renewal of key EU loans that are keeping the country’s economy afloat.

Mr Tsipras will be reminded that unless he plays the EU game there will be no extension to a 28 February deadline for a review of Greek austerity measures by the hated “troika” of inspectors from the EU, European Central Bank and International Monetary Fund.
Nuclear Chips on Both Sides

The above sounds like a hard bargaining chip, and it is. But Tsipras would have to give up everything he has stood for to accept that stance. Also, his coalition would collapse and he would immediately be out of office. When do politicians voluntarily accept that fate?

Tsipras may easily decide he has nothing to lose.

Moreover, Tsipras has his own nuclear bargaining chip. If Greece exits the eurozone, the rest of the countries immediately become liable for Greek debt.

Revised Grexit Debt Liabilities 

On January 22, with thanks to Dr. Eric Dor, director of IESEG School of Management in Lille, I posted a Revised Greek Default Scenario that showed "Liabilities Shifted to German and French Taxpayers".

Who is bluffing whom with Italian liabilities at 48 billion euros and Spanish liabilities at nearly 33 billion euros. See link for other countries' liabilities.

No Solution?

Saxo Bank chief economist and CIO pinged me with this thought after the election ...
  1. The Syriza position is clear: They were given mandate to “ignore austerity”.
  2. IMF and ECB stance is also clear: There are room for talks on maturity and terms but no on substance and doubts about repayment.

The EU, being the political animal it is, will look for compromises and short cuts, but end of the day this process is running out of time there are no new “pockets” to move the problem to anymore.

Greece needs a haircut. Anyone can see that. Getting it and executing it is probably the biggest single challenge. Unlike what we are trained to believe often there are no solutions to a lot of the problems we face. That’s the real conclusion on last night election result.
Actually, there is a short-term, can-kicking solution of sorts, but that would require some compromises on both sides.

Longer term, even if some writedown of debt was worked out, all of the eurozone structural problems still remain.

Finally, it's one thing for two or three parties to work out a compromise. It's another thing indeed for 18 parties all to agree, especially when some of them perceive they have to contribute more than everyone else.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot

Sunday, January 25, 2015 9:00 PM


Ireland Proposes Debt Restructuring Conference for Spain, Greece, Ireland; A Turnip is a Turnip


Contagion? Well don't worry about that! German Chancellor Angela Merkel assures us that will not happen. However, a difference of opinion is forming in Greece, Spain, and Ireland.

Via translation from El Confidencial, SYRIZA Extends the Debate, "Ireland Stands Out: Seeks Conference to Restructure Debt, Including Spain."

The Greek elections this Sunday still shaking European foreign ministries. ...

The restructuring of the debt (about 319 billion euros in the case of Greece) scares the markets for contagion effect.

Christine Lagarde was quick to respond in the pages of the Irish Times during a visit to Dublin last Monday. "In principle, collective efforts are welcome, but at the same time a debt is a debt" she said.
Why Ireland Should Support Greek Plan

The above article was based on an Irish Times column Why Ireland Should Support Greek Plan to Write Down Eurozone Public Debt.
Contrary to many reports, Syriza is not threatening a unilateral default but wants Greece’s debt burden to be considered within a broader restructuring of sovereign debt in the euro zone. Its leader, Alexis Tsipras, has called for a “European Debt Conference”, based on the 1953 London Conference that wrote off half of post-war Germany’s debt and extended the repayment period for the rest over a number of decades. As Hans-Werner Sinn, one of Germany’s leading economists and president of the Ifo Institute for Economic Research, acknowledged recently, the 1953 conference was, along with the Marshall Plan, a key factor in enabling Germany’s post-war economic miracle.

The conference met from February 28th to August 28th, 1952, with the final agreement signed the following year and involved representatives from 20 creditor nations (including Greece, Portugal and Ireland) as well as Germany and the Bank for International Settlements. The United States, Britain and France took the lead, making clear from the outset that one of the aims of the conference was to strengthen the German economy.

The preamble to the agreement said it should help to “remove obstacles to normal economic relations between the Federal Republic of Germany and other countries and thereby to make a contribution to the development of a prosperous community of nations”.

Demanding that Germany pay all its debts was seen as incompatible with that aim and with hopes of rebuilding the country’s democracy and anchoring it in the West. The creditor countries acknowledged that the burden of repayments should not be so high as to endanger the welfare of the German people and explicitly spared Germany from any “structural adjustment” policy such as budget cuts or tax increases to fund debt repayments.

The final deal wrote off more than half of Germany’s debts, stretched out repayments on the remainder for 30 years and agreed that, from 1953 to 1958, Germany would only make interest payments. Finally, it was agreed that repayments in any given year should not exceed 5 per cent of Germany’s trade surplus. The agreement was a success – Germany paid off its remaining debts on time and with great ease and its economy rebounded to become the strongest in Europe.

Greece is not Germany and post-war Germany’s debt amounted to a much smaller proportion of its gross domestic product than Greece’s does today. Germany was, however, regarded internationally as a deadbeat debtor, having welched on various debt repayment deals between the two world wars. And the creditor nations’ forbearance in 1953 is all the more remarkable given how recently Germany had led Europe into a catastrophic war that also plunged its antagonists into debt.
Simple Math

I saw Lagarde's nonsensical "A Debt is a Debt" speech in numerous places last week. I nearly responded "A turnip is a turnip and gold is gold, but neither turnips nor gold can default."

And that is the essence of the debate isn't it?

Whether Germany agrees to restructuring or not, what cannot be paid back, won't. Germany either agrees to debt restructuring or Greece will default. Either way, Germany will pay a price.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.

1:57 PM


Syriza Trounces New Democracy; Greeks Stop Paying Taxes; Run on Greek Banks Escalates; Get Out!


As late as yesterday I read numerous mainstream media reports that Syriza would win by three to five percent and would need to form an unstable coalition to rule.

In contrast, here was my January 19 prediction (and rationale): Expect a Blowout Win by Syriza in Greece.

Syriza Trounces New Democracy

The final votes are not counted, but exit polls show a blowout, with incumbent party New Democracy going down in flames.

The Wall Street Journal reports Greece’s Radical Leftist Syriza Party Poised to Win Election, Exit Polls Say.

Syriza appeared set to win between 35.5% and 39.5% of the vote, trouncing the incumbent New Democracy party, which managed to secure just 23% to 27% of the vote, according to the exit polls whose results were issued immediately after voting booths closed.

If Syriza is able to secure more than 150 seats on its own—which the exit polls show is possible—it won’t need coalition partners and will have a freer hand in implementing its platform—something that could lead to ruptures with Greece’s creditors.

The polls also showed that voters backed a handful of smaller parties—ranging from the extreme-right Golden Dawn party to the centrist To Potami party—making it unclear whether Syriza would win an absolute majority in Greece’s 300-seat legislature. According to the polls, Syriza was projected to secure between 146 to 158 seats, depending on the final outcome.

Greece Exit Polls



Note the double-digit (or near double-digit) trouncing of New Democracy leader and current prime minister Antonis Samaras.

Here's an interesting quote from the Journal.

“Europe is self-destructing,” said Polyxeni Konstantinou, a 56-year-old public-sector worker voting in central Athens. “I voted for Syriza because I hope that it will help change the tragic circumstances that now govern Europe. Will Syriza be able to achieve everything it says? Probably not. But whatever it does achieve, then that will be good for Europe.”

Greeks Stop Paying Taxes

Late last week the Financial Times reported Greeks Stop Paying Taxes in Expectation of Syriza Poll Victory.
A reluctance to pay taxes was much criticised by Greece’s creditors as one reason why the country needed a big international bailout. Now many Greeks are again avoiding the taxman as they bet the radical left Syriza party will quickly loosen fiscal policy if it comes to power in Sunday’s general election.

A finance ministry official confirmed on Friday that state revenues had collapsed this month. “It’s normal for the tax take to decline during an election campaign but this time it’s more noticeable,” the official said, avoiding any specific figures on the projected shortfall.

However, two private sector economists forecast the shortfall could exceed €1.5bn, or more than 40 per cent of projected revenues for January.

Angeliki Mousouri, a dentist who is paying off more than €20,000 of tax arrears, said she missed a monthly instalment due in December.

“I don’t expect to be penalised,” she said. “If Syriza is the government they will show leniency to cash-strapped taxpayers.”

Syriza is set to win the election even though it may not achieve an outright majority, according to opinion polls. Three polls published on Friday showed Syriza leading the centre-right New Democracy party of Antonis Samaras, the prime minister, by 4-5 percentage points.
As late as last Friday polls expected New Democracy would lose but not get trounced.

Voting by Feet (Bank Accounts)

ZeroHedge reports Greek Deposit Outflows Soar In Run-Up To Syriza Victory.
The monthly Bank of Greece balance sheet data for the month of December revealed a significant increase in Greek bank ECB borrowing which rose by €11bn in December to €57bn (including €1bn of Emergency Liquidity Assistance). This is more than the €3bn deposit outflow reported for December. It is thus likely that Greek banks had to borrow even more in December to offset not only their lost deposits but likely reduced access to private repo markets, as it happened before during Greek crisis.

We argued in recent weeks that one indirect way of gauging the pace of bank deposit outflows in Greece on a high frequency basis is to look at the inflows into offshore money market funds such as those based in Luxemburg. Purchases of offshore money funds, one way for Greeks to invest their withdrawn bank deposits, spiked to very high levels this week. These purchases totaled €206m during Mon-Thu this week vs. €91m over the previous week (between Jan 9th and Jan 16th), €54m in the week before (between Jan 2nd and Jan 9th), and €107m for December as a whole (€24m per week between Dec 1st and Jan 2nd).

So there is a sharp acceleration this week. If the €3bn deposit outflow reported by the press for the month of December is accurate and these offshore money market purchases are a good proxy for deposit flows, we should have seen deposit outflows of around €4bn in the first two weeks of January and a large €8bn deposit outflow this week alone.

The fear factor, New Democracy’s biggest weapon, has thus risen sharply this week [and clearly backfired].
The above paragraphs not by ZeroHedge but rather from JPMorgan (no link given).

Run on Greek Banks Will Escalate

I repeat my January 9 warning: Another Run on Greek Banks Begins; Get Out While You Still Can; Buy Gold.

Get Out!

There is no reason to hold money in Greek banks, and every reason not to (even if there is talk of ECB guarantees). At this point, the "Juncker Rule" applies (they will lie when it's serious).

It's serious. Get out! 

Get Out Where?

By get out, I do not mean to another European bank. If I were a Greek citizen, I would personally worry that any euro-denominated bank (not just Greek banks) would confiscate my money.

For short-term needs, consider US dollars or euros, in hand, not in Greek bank safe deposit boxes.

For mid- to long-term needs, US treasuries (or US treasury ETFs), German bonds (or German bond funds), and gold look attractive, especially gold.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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