In this interview, with Deutsche Wirtschafts Nachtrichten (German Business News), I address the question of what happened in recent days in the Greek bond markets, in view of the Greek government’s failed attempt to argue that Greece is about to exit its Bailout. Regular readers may notice that I am merely repeating what I was saying back in April. For the full interview (in German, as it appeared in DWN) click here. For the English version, read on…
Prime Minister Samaras has indicated that Greece might leave the Troika-program. This sounds a little optimistic?
It was not even wishful thinking! Rather it was a clear ploy to recover electoral ground on the basis of a blatant lie; a lie of the sort that many Greeks want to hear, and to believe, even though they know it is a lie deep down. In short, it is a prime example of what a desperate political leader does when trying to lure a desperate electorate.
Mr Samaras strategy was to portray himself as the heroic PM who forced his people through terrible hardship but is now about to lead them into the Promise Land (beyond… Bailoutistan) if only the voters trust him to see this feat through. And to paint SYRIZA, the main opposition party, as the dark force that will, if it wins government, close the door to the Promised Land and condemn the country to permanent serfdom. At least that was Mr Samaras’ plan.
Was there ever a chance that he could pull it off until the next election? I think there was, even though it was slim. After all, Portugal and Ireland exited, formally, their Bailout courtesy of Mr Draghi’s OMT that pushed yields on their government bonds down and allowed the Eurozone to pretend that these two countries were solvent again. Why could Mr Samaras not hope for a similar umbrella under which to build his own myth? Indeed, for a while it seemed to be working. Greek government bonds and bank shares recovered and the Greek Success Story illusion seemed plausible. But, as we know, bubbles are condemned to burst, eventually. Mr Samaras must be cursing his fate; to have said bubbles burst well before the general election.
The data for Greece are not very encouraging. What is the real situation like?
Pretty awful. The state remains more insolvent than ever, the banks ditto, and the private sector is one where everyone owes to everyone and no one can pay. Two factors have contributed to a small pick-up in spending, which more or less stabilized the economy at a terribly low level of activity (the standard definition of a depression).
First and foremost was the political fact that Mrs Merkel stated unequivocally that Greece would be kept within the Eurozone. The result was that many Greeks, who had taken their money abroad (including Frankfurt) started spending more happily in Greece (e.g. repairing homes, buying cars, going on lavish holidays, returning to the restaurants etc.), even though they never actually brought the bulk of their funds to Greek banks. The second contributor to the slight pick-up in spending were the two excellent tourist seasons we had in 2013 and 2014, courtesy primarily of the collapse of the Turkish and Egyptian tourist markets but also of the fact that bad news about Greece disappeared from Northern European and American newspapers and channels. However, other than that the economic indicators point to a continued disaster: investment in fixed capital remains non-existent while credit to the private sector is continuing to shrink. Put bluntly, no economy can recover, after such a great fall, without investment and without credit. Period.
The EU-commission has said there should be “no doubt that Europe will continue to assist Greece in whatever way is necessary”. What could this be?
Simply, that they will do whatever it takes to preserve the myth that Greece is on the right track without however doing anything of what is required to put it on the right track. In other words, the EU and the ECB will continue to help the current government to persevere with its ‘extend and pretend’ policy, which I have also described as Ponzi Austerity; that is, a program combining new loans and strict austerity that, ultimately, increases indebtedness and reduces the country’s capacity to generate the output and income necessary to repay its debts.
Has there be any significant clean-up in the Greek banking system recently? We are under the impression that Greek banks rather have returned to the global casino…
Exactly the opposite. Greek banks are well and truly insolvent, with 40% non-performing loans and other ‘assets’ that are purely fraudulent. In any well-administered banking system, they would have been taken over, re-structured and re-sold to new owners. Only in a bankrupt Eurozone country such a course of action is not possible under the current ‘rules’. Instead, under the auspices of the ECB and our so-called Banking Union, the taxpayer borrowed €40 billion to give to the banks, the failed Boards of Directors and major shareholders were kept in their place, and soon after the state’s equity was allowed to be depleted so that the directors and major shareholders could regain their ‘property rights’ over banks can neither lend nor borrow – which explains why credit is continuing to fall so rapidly. And as if this were not enough, the state has also provided these banks with hidden guarantees of many tens of billions, without parliamentary approval – see this.
How do you read the latest development in the bond market?
As I have been arguing since the summer of 2012, Mr Draghi managed, quite skillfully, to use a non-credible threat against bond dealers in order to get the spreads down. He should be congratulated because, without buying a single bond, he bought a great deal of time for the politicians to do something about the underlying malaise. Alas, the politicians did nothing other than to insist on the same mix of toxic, self-defeating austerity and macroeconomically meaningless ‘reforms’. Thus the Euro Crisis moved from the bond markets to the real economy, causing deflationary forces to rage against investment and aggregate demand. In most of the Eurozone this has pushed bond yields to incredibly low levels, not because investors trust governments more but because: (a) they expect low-flation or deflation to boost their real interest receipts from Eurozone bonds and (b) they trust that Mr Draghi will, if he has to, redeem their Italian, Irish and Spanish bonds. Turning briefly to Greece, its bonds were the only ones to slide and to see a sharp increase in their yields. Why? Because the Samaras Greek Success Story fiction has been de-cloaked and his government is looking very shaky in the face of a strong challenge by a party (SYRIZA) whose main policy is to re-negotiate (as it should) Greece’s Bailout agreements.
Have investors lost trust in Draghi’s magic?
No, not yet. Bonds (except Greece’s) are holding up, revealing the continued influence of OMT. What investors have lost is any degree of confidence in the EU, and in the German government, to come to terms with a crisis of their own making.