CRASH 2: Credit markets already treating Greece as a default

And Italy is looking bad

Reuters this morning described the economic growth, cutting programmes, loan repayments and asset sales facing Greece as ‘a Herculean task’. S&P seems to agree: the ratings agency has in the last two hours told the media, “”It is our view that each of the two financing options described in the (French banks’) proposal would likely amount to a default under our criteria.” As The Slog opined last week, it is also an offence under EU banking law: but political denial knows no boundaries and recognises no laws.

European politicians and bankers had expressed confidence last week that the French proposal would not trigger a default, but ratings agency Standard & Poor’s said it would involve losses to debt holders, thus earning Greece a “selective default” rating. All of this is somewhat academic because the lending sector is already treating Greece as a default anyway.

This development is absolutely crucial, and another reminder of the inevitability of formal Greek default: the euro was built on the assumption that no country in it would ever default, and as a result there is no precedent and, more important still, no mechanism for what is about to happen.

All this makes a nonsense of the Troika/Merkel/French banks ‘strategy’, but Luxembourg’s Prime Minister seems determined to stir the pot some more. A warning from Eurogroup chairman Jean-Claude Juncker that Greece must “lose sovereignty and jobs to meet these criteria” has enraged Greek trade unions. Public sector union ADEDY, which has launched crippling strikes and protests, reacted angrily to his comments. Its President Spyros Papaspyros said Juncker was being inflammatory. “Mr Juncker interferes in the internal affairs of a country, provokes European rules and is an embarrassment for the country whose government tolerates him,” said Papaspyros.

But the elephant reserve in Brussels has always been the certainty of more Clubmeds going the same way. As I’ve suggested for several months now, the dark horse of Italy is galloping over the horizon.

The Italian government’s forecast of 1.5+% growth in 2013 and 2014 “will raise some eyebrows,” said Marcel Alexandrovich, an economist at Jefferies International. And although government bonds responded well to the austerity package announced last Thursday, Standard & Poor’s reiterated its negative outlook on the country’s €1.8 trillion in sovereign debt. Weak economic growth prospects translate into “substantial downside risks” for efforts to reduce public debt, currently almost 120% of GDP, credit analyst Eileen Zhang said.

The reason for pessimism about Italy’s unrealistic growth forecasts is the clear existence of fundamental economic indicators signalling major problems ahead. Unemployment rose in May, and a key manufacturing survey showed contraction in June. Meanwhile, the €47 billion in fiscal savings the government revealed last week cast a shadow over growth prospects.

“It’s like a dog chasing its tail,” said Mario Baldassarri, a former vice minister of the Treasury. The government’s fiscal plan may “put a brake on growth, which in turn will mean other fiscal shortfalls and more deficits,” he warned. This is, of course, if you believe the cuts data anyway: given that credit contacts known to The Slog don’t, I’m not sure I do either.

It may all seem like just another episode of the comedy known as The Sprouts That Number 27, but Greece’s Herculean task is the EU’s Achilles heel. It has a central bank, twenty odd private banks and two dominant governments at war with every combination of the combatants – and an insurance policy big enough to drown Wall Street. The debt forgiveness being kicked down the road will require increasingly forgiving lenders with every month that passes. Left for too much longer, it will kill those lenders with an injudicious mixture of two poisons: bad debt, and called-in credit derivatives.

Crash 2 is rapidly moving on to the next Mediterranean stage: uncontrollable citizen revolt alongside falling bank dominoes.

Related: The Four Lies of the Apocalypse   Why New York is selling off Sterling

 

An end to the Greek crisis now looks definitely uncertain.

Fee-diddle-fy-do-bum-bum-bum

The French have a plan. What’s more, even Trichet has approved the plan. It is called, “Nous kickons la boite down le road”. But it is still a plan that will ‘change the game’, and that much is true: it will change the date of Greece’s default, but not its inevitability. It’s also illegal under EU Law…but Blind Eyes are the order of the day, it seems.

An hour ago, the New York Times said world stocks were already rising ‘on hopes of a resolution of the Greek debt problem’. Sloppy reporting is so common these days, you wonder about the average hack’s ability to think. My New Year’s resolution was never to believe politicians who have resolutions to problems: so lacking are they in resolve, they never resolve anything.

As if to prove the point, within 30 minutes another NYT lady said no, hang on a minute, it’s now looking bad again…the vote may not pass, as some of Papandreou’s socialist comrades fear being ripped to shreds by the mob. This reporter’s mind-boggling assertion two paragraphs further down was ‘failure to pass the new law will engulf the world banking system in a spiralling crisis’. Yes, hmm. Well if you believe what the banks say about the danger, it will. And if you believe what the French banks say about their ability to withstand Greek default, it won’t. And if it won’t do the French can-kickers any harm, why the plan to (effectively) write off half the debt and delay Domesday?

This remains the fundamental problem at the core of so much media coverage these days: lazy, naive, ill-informed, and lacking in any attempt to read past, through or around the numbers in the press pack. The FT’s oped today, for example, is headed ‘Give Greece time to prove it can do the job’. But nothing below the headline suggested how it could do that job – or indeed, what the exact job might be. At the BBCNews website, Bobby Peston’s piece – ‘Is the French plan flawed?’ - showed no awareness of Der Spiegel’s piece from the day before saying the flaw was its illegality. (One of his comment threaders was left to point this out.)

The Wall Street Journal writes about how ‘the European Union warns that failure by the Greek government to pass into law and implement its newest austerity package would disqualify it from another bailout’. It still beats me exactly why the Greeks see this as a threat, but then I’m not there and staring oblivion in the face. However, I don’t make the point lightly: the EU’s diktat lacks any real ability to back it up. As so often in international affairs, the leader who just ignores the threats gets away with it. Hitler built a career and a Reich doing it. Not that I’m suggesting Greece should demand an Anschluss with Troy (although that would certainly be more entertaining) but rather that Papandreou could say “Stick your rotten, hypocritical rules up your Rompuy” or something similar.

The whole charade – the bailout, the deals, the threats and the dire predictions – is bollocks. Wholesale debt forgiveness or disaster: the choice really is that simple. For myself, I’m hoping there will be what the Fascists in Bankfurt quaintly call ‘an accident’. That is, the People or their representatives saying ‘No’. Usually, that sort of thing makes no difference to the EU at all. This time it would. If the Greek Deputies vote down the deal today, they will be doing all of us a favour in the long term.

If you liked this, you should have a look at Crash 2: Situation Normal, all….