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Thursday, January 29, 2015 2:18 PM


Alexis Tsipras "Open Letter" to German Citizens Regarding Extend-and-Pretend Unserviceable Debt


Here's a story from January 13 that just came my way today thanks to a reader wootendw who posted a link as a comment to one of my articles.

The background to this story is SYRIZA leader Alexis Tsipras' "Open Letter" to German Citizens, published on Jan.13 in Handelsblatt, a leading German language business newspaper.

Alexis Tsipras, now prime minister of Greece, sent this letter to Handelsblatt:

Most of you, dear Handesblatt readers, will have formed a preconception of what this article is about before you actually read it. I am imploring you not to succumb to such preconceptions. Prejudice was never a good guide, especially during periods when an economic crisis reinforces stereotypes and breeds bigotry, nationalism, even violence.

In 2010, the Greek state ceased to be able to service its debt. Unfortunately, European officials decided to pretend that this problem could be overcome by means of the largest loan in history on condition of fiscal austerity that would, with mathematical precision, shrink the national income from which both new and old loans must be paid. An insolvency problem was thus dealt with as if it were a case of illiquidity.

In other words, Europe adopted the tactics of the least reputable bankers who refuse to acknowledge bad loans, preferring to grant new ones to the insolvent entity so as to pretend that the original loan is performing while extending the bankruptcy into the future. Nothing more than common sense was required to see that the application of the 'extend and pretend' tactic would lead my country to a tragic state. That instead of Greece's stabilization, Europe was creating the circumstances for a self-reinforcing crisis that undermines the foundations of Europe itself.

My party, and I personally, disagreed fiercely with the May 2010 loan agreement not because you, the citizens of Germany, did not give us enough money but because you gave us much, much more than you should have and our government accepted far, far more than it had a right to. Money that would, in any case, neither help the people of Greece (as it was being thrown into the black hole of an unsustainable debt) nor prevent the ballooning of Greek government debt, at great expense to the Greek and German taxpayer.

Indeed, even before a full year had gone by, from 2011 onwards, our predictions were confirmed. The combination of gigantic new loans and stringent government spending cuts that depressed incomes not only failed to rein the debt in but, also, punished the weakest of citizens turning people who had hitherto been living a measured, modest life into paupers and beggars, denying them above all else their dignity. The collapse of incomes pushed thousands of firms into bankruptcy boosting the oligopolistic power of surviving large firms. Thus, prices have been falling but more slowly than wages and salaries, pushing down overall demand for goods and services and crushing nominal incomes while debts continue their inexorable rise. In this setting, the deficit of hope accelerated uncontrollably and, before we knew it, the 'serpent's egg' hatched – the result being neo-Nazis patrolling our neighbourhoods, spreading their message of hatred.

Despite the evident failure of the 'extend and pretend' logic, it is still being implemented to this day. The second Greek 'bailout', enacted in the Spring of 2012, added another huge loan on the weakened shoulders of the Greek taxpayers, "haircut" our social security funds, and financed a ruthless new cleptocracy.

Respected commentators have been referring of recent to Greece's stabilization, even of signs of growth. Alas, 'Greek-recovery' is but a mirage which we must put to rest as soon as possible. The recent modest rise of real GDP, to the tune of 0.7%, signals not the end of recession (as has been proclaimed) but, rather, its continuation. Think about it: The same official sources report, for the same quarter, an inflation rate of -1.80%, i.e. deflation. Which means that the 0.7% rise in real GDP was due to a negative growth rate of nominal GDP! In other words, all that happened is that prices declined faster than nominal national income. Not exactly a cause for proclaiming the end of six years of recession!

Allow me to submit to you that this sorry attempt to recruit a new version of 'Greek statistics', in order to declare the ongoing Greek crisis over, is an insult to all Europeans who, at long last, deserve the truth about Greece and about Europe. So, let me be frank: Greece's debt is currently unsustainable and will never be serviced, especially while Greece is being subjected to continuous fiscal waterboarding. The insistence in these dead-end policies, and in the denial of simple arithmetic, costs the German taxpayer dearly while, at once, condemning to a proud European nation to permanent indignity. What is even worse: In this manner, before long the Germans turn against the Greeks, the Greeks against the Germans and, unsurprisingly, the European Ideal suffers catastrophic losses.

Germany, and in particular the hard-working German workers, have nothing to fear from a SYRIZA victory. The opposite holds. Our task is not to confront our partners. It is not to secure larger loans or, equivalently, the right to higher deficits. Our target is, rather, the country's stabilization, balanced budgets and, of course, the end of the grand squeeze of the weaker Greek taxpayers in the context of a loan agreement that is simply unenforceable. We are committed to end 'extend and pretend' logic not against German citizens but with a view to the mutual advantages for all Europeans.

Dear readers, I understand that, behind your 'demand' that our government fulfills all of its 'contractual obligations' hides the fear that, if you let us Greeks some breathing space, we shall return to our bad, old ways. I acknowledge this anxiety. However, let me say that it was not SYRIZA that incubated the cleptocracy which today pretends to strive for 'reforms', as long as these 'reforms' do not affect their ill-gotten privileges. We are ready and willing to introduce major reforms for which we are now seeking a mandate to implement from the Greek electorate, naturally in collaboration with our European partners.

Our task is to bring about a European New Deal within which our people can breathe, create and live in dignity.

A great opportunity for Europe is about to be born in Greece on 25th January. An opportunity Europe can ill afford to miss.
Emphasis in italics is mine.

Interest Rate Math

Regardless of how one views his other policies, that particular letter is not the work of an economic madman. Tsipras' position is entirely accurate. And although I disagree with many SYRIZA economic views, there is not a single thing in the "open letter" that I can find fault with.

A simple economic truism is that what cannot be paid back, won't be paid back. I posted the math recently in Greek Payback Math at 0% Interest.

Unfortunately, Greece has to convince 17 other Eurozone countries to renegotiate the terms. Germany and Finland have both said no.  Eurozone rules are such that every country must agree.

Sanction Math

Interest rate math is not the only problem for Greece.  Other clashes have developed.

I discussed that development in Clash Over Sanctions: Syriza Opposes Sanctions on Russia, Calls Them "Neocolonial Bulimia"; Negotiation Rules.

Greece opposes sanction on Russia, a position I fundamentally agree with. Sanctions inevitably harm both sides.

However, as with eurozone rules,  EU sanction rules require unanimous agreement. With sanctions, 1 vote out of 28 (more countries in EU than eurozone) can kill the deal.

That's a lot of leverage, especially when 27 on the other side want something from you. What are they willing to offer in return?

Will these situations resolve via common sense or wreckage?

If there were two parties in the room, those parties might easily come to terms. Can 19 or 28 parties in Europe all agree to do the right thing?

Color me skeptical.

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

4:15 AM


Asset Price Deflation Coming Up? Food Prices About to Drop? CPI About to Go Negative? Credit Deflation?


When inflation alarmists want to convince everyone the dollar is about to become worthless, they post this chart of the CPI.

CPI - Urban Consumers - All Items - Index



Inflationists claim that is a trend to oblivion. And actually it is. But it's a slow trend towards oblivion with intermittent disruptions as the following chart shows.

CPI - Urban Consumers - All Items - Percent Change From Year Ago



As measured by consumer prices, inflation went negative from December 2008 until October 2009.

CPI - Urban Consumers - All Items - Percent Change Detail



The CPI hit a record low of -1.959 in July of 2009.

My prediction made in 2005 or so, was and still is "The US would go in and out of deflation a number of times over a long period of time".

I was speaking in terms of "credit deflation", but that occurred as well. Either way, I was correct and the inflationists who predicted hyperinflation before deflation were simply dead wrong.

Oil vs. CPI

I got to thinking about this again recently given the plunge in oil. Let's take a look at oil prices in relation to the overall CPI.



Clearly there is a correlation over longer periods of time but the amplitude of oil in both directions is much greater. That makes sense because housing is the largest component of the CPI, not energy.

Food

An article on Yahoo Finance on January 16 caught my eye and I bookmarked it: Yes, you ARE paying more for food.



I am not here to dispute that chart. In fact I agree with it. Worse yet it has been persistent, especially with beef, and for more than a year.

Mish Food Shopping Experience

From approximately 2000 until 2010 or perhaps 2011, the sale price of prime rib was $4.99 a pound. Now the sale price is $7.99 a pound, if you are lucky.

Pork is different though. I picked up center cut pork chops on sale last week for $2.49 a pound. That is roughly the same sale price for 10 years.

I have written about this many times. For example, on April 26, 2006 in A Look At Hyperinflation, I stated "Center cut pork chops not on sale are $5.49 lb. Phooey. Who needs that? At least once a month they are on sale for $2.29 lb or less. Seriously, we are talking 1970's prices [on chicken]. I know because I worked as assistant manager in a grocery store back then. Heck I have no idea how they can even raise chickens at .49 lb. If you know then please tell me!"

Chickens were a loss leader at $0.21 a pound in 1970. They were $0.49 when I wrote that.

In regards to pork chops, I have made similar claims in 2007, 2008, and 2011. And here we are again, back at $2.49. But what about beef?

Live Cattle



Beef prices are high because cattle prices are high. But, for the first time since the beginning of 2013, prices are down two consecutive months, and there is plenty of room to drop.

Why are pork chops back to $2.49 again?

Lean Hogs



Here we are once again. From 2011 until the beginning of 2014, center cut pork chops sale prices were higher, in the range of $2.79 to $3.29 a pound.

Welcome back $2.49. We missed you.

Not on sale? Don't buy them, or buy them sparingly.

Wheat



Wheat is back to where it was in late 2006.

Soybeans



Soybeans are back to where they were in late 2007. There's considerable room for prices to drop to 2006 levels like the other food commodities.

Advice

Buy a freezer and use it! It is crazy to pay $5.49 for chops when you can get them for $2.49. It is equally crazy to pay $10.99 for prime rib when you can get it for $7.99. Butter, bacon, and cheese all freeze well. Cheese is often half-price, so is bacon. If you are a vegetarian you have a harder time, but I hazard a guess a freezer or pantry can still come in very handy. Learn to shop!

Where To From Here?

No one can say, but it is pretty clear that food commodity prices are falling and food prices should drop with a lag.

If rent prices drop as well (I do not expect that, but it easily could happen), then the CPI could turn negative once again, even if oil prices head back up.

HPI-CPI

My preferred consumer price measure is HPI-CPI a self-designed index that includes actual home prices instead of rent. By that measure, we will be soon back in price deflation if housing prices drop, and I believe we are on the cusp of another housing decline.

I last wrote about HPI-CPI on September 24, 2014 in Housing Prices, "Real" Interest Rates, and the "Real" CPI

Here's the chart. See the article for discussion.



Credit Deflation?

The important thing is credit deflation, not the myopic central bank focus on consumer prices. I do expect credit deflation and a tightening of lending standards once elevated asset prices plunge.

The plunge in US treasury yields in the face of expected Fed hikes lends credence for the above analysis.

One more point: Please don't tell me about shadowstats CPI. It's a thoroughly discredited model.

For analysis, please see Wading Through Molasses: "Did the Real Economy, Not Counting Government, Expand in Last 20 Years?"

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

Wednesday, January 28, 2015 4:29 PM


Slope of Hope vs. Reality: Greek Assets Hammered, 3-Year Yield Near 17%; Worst Day Ever for Greek Bank Stocks


Investors who plowed into Greek assets ahead of Mario Draghi's QE €60 billion a month bond-buying spree figuring the ECB could paper over this mess have been pounded almost nonstop recently.

Today alone, Greek bank shares plunged 22-29%, and yield on the 3-year Greek treasury hit 16.97%.

Worst Day in History for Greek Bank Shares

Bloomberg reports Greek Markets Hammered as Fears Grow Over New Government.

Greek bank shares suffered their worst one day loss on record on Wednesday, as anxiety grew over the new government’s plan to renegotiate Greece’s €240bn bailout.

The country’s four biggest lenders saw their stock prices plummet by an average of more than 25 per cent just two days after Alexis Tsipras, leader of leftwing party Syriza, was sworn in as prime minister. It was the third day of double-digit share slides for the banks.

In the space of a few hours, the yield on three-year Greek bonds jumped 2 percentage points to almost 17 per cent, as investors wondered whether Greece would honour its debts in the near term.

Shares in Piraeus, Greece’s largest bank by assets, whose stock price has halved over the past month, plunged 29 per cent. National Bank of Greece and Eurobank each fell 25 per cent and Alpha Bank 26 per cent.

Greek banks have been tapping the European Central Bank’s “emergency liquidity assistance” facility to replenish funds in the face of withdrawals by depositors and foreign banks’ reluctance to lend.
A few charts will confirm the above picture.

Greek 3-Year Bond



Greek 3-Month Bond Yield



Greek Yield Curve

  • 3-Month: 4.530%
  • 3-Year: 16.970%
  • 5-Year: 13.666%
  • 10-Year: 10.865%
  • 15-Year: 10.342%
  • 30-Year: 8.635%

The yield curve may look strange to some, but here's the three-part explanation:

  1. Mid-range bonds will be hammered the most in any haircut deal. 
  2. Yield on the 3-month bond spiked since the end of December. 
  3. The market is pricing in the possibility of a default, but not within 3 months.

National Bank of Greece 15-Minute Chart



Shares of National Bank of Greece closed about 22% lower today. At one point they were down about 28%. Let's investigate the broader picture for this fine company.

National Bank of Greece Monthly Chart



NBG has plunged from 67.60 in September of 2007 to 1.03 today. That's a plunge of 98.5% 

Greece FTSE 20 Index



Slope of Hope vs. Slope of Reality

In June of 2012 the Greek-20 hit a low of 8.77. It hit a high of 25.76 in March of 2014. It was downhill from there, much faster than it went up. Today's decline was a modest 11.61%.

Run on the Banks

From Bloomberg (link above):

Deposits have declined by an estimated €12bn since December from a private-sector deposit base of about €164bn in November, according to Moody’s.

Those deposit declines looks like the start of a run on Greek banks. If so, it is necessary to get out before Greece imposes capital controls or the ECB shuts down the ELA (Emergency Liquidity Assistance) program for Greece.

Repeat Warning

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

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

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