Streetwise Professor

February 5, 2012

Now the Real Show Begins–And Likely Ends

Filed under: Economics,Financial Crisis II,Politics — The Professor @ 7:54 pm

For weeks the Perils of Pauline melodrama regarding Greece has focused on the euphemistically-labeled “Private Sector Initiative”, the negotiations between an organization that sort of speaks for banks and the Greek government.  But that was always a sideshow: it was never the crux of the matter. The main act, the real issue, was whether Greece would knuckle under to (primarily German) demands that it cede control of its budget, and much of its social and economic policy, to outsiders.

The Germans are acting on the principle of he who pays the piper calls the tune. Very logical, from a logical German perspective.  But not really in this situation, because the piper is not usually into the payer for hundreds of billions as is the case here.  Which gives the piper a tremendous amount of leverage, on the old principle that if you owe the banker $1000 and can’t pay, you have a problem: if you owe the banker several hundred billion and can’t pay, the banker has a problem.

Negotiations between the German payers and the Greek piper are on the brink of failure:

The two sides were still far apart over projected cuts of 25 per cent in private sector wages, 35 per cent in supplementary pensions and the closure of about 100 state-controlled organisations with thousands of job losses.

Eurozone officials are deliberately refusing to allow Greece to sign off on a €200bn bond restructuring plan because the threat of default is the leverage they have to convince recalcitrant Greek ministers to implement necessary cuts.

Greek unions are going to strike Tuesday.  Greek politics are highly fractious. But the fundamental issue is that the Greeks have tremendous bargaining power.  They would be not much worse off–if at all–by accepting the terms being thrust upon them than they would by defaulting: the European deal is essentially paying debt comes first, and only after that is paid can the Greeks spend anything on themselves.  Not a very attractive deal for the Greeks.  The Germans, et al, however, would be much worse off if Greece defaulted.  Given this, the Greeks have considerable bargaining power.

Yes, there is tremendous room for a mutually beneficial deal.  But given the political nature of the problem, the fact that there are multiple items to be negotiated, and multiple parties involved (with multiple affected groups within each), transactions costs are high and the chances of a failure are acute.  And even if a deal is signed, the ability of the Germans, et al, to force the Greek government to live up to any agreement it make,s is quite limited.  Rioting in the streets of Athens, social turmoil, widespread strikes are likely if the government caves.  Not going to be much money going north if that happens.

So maybe Pauline will be pulled from the tracks at the last instant.  But IMO it’s more likely that she ain’t.

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11 Comments »

  1. While you have your calculator handy, add in the cost of applying the cost of a Greek default to other troubled European debtor nations. If the Greeks call the bluff of the creditor nations, it will serve as a template for other debtor nations to use as an opening position in future restructuring talks.

    Comment by Charles — February 5, 2012 @ 9:43 pm

  2. Absolutely, Charles. These negotiations are highly leveraged. Which increases the likelihood of a breakdown.

    The ProfessorComment by The Professor — February 5, 2012 @ 9:54 pm

  3. hi-hi -Yes, there is tremendous room for a mutually beneficial deal.

    Who said socialism works fine until you run out of other people’s money?

    Private sector creditors were being “extremely generous” in offering to take a loss of more than 70 per cent on their Greek government bonds, he said, as a contribution to helping Greece manage its debts.

    Josef Ackermann, chief executive of Deutsche Bank told a conference in Munich: “I think the markets are recognising this. But we have to fix the Greek problem.”

    Comment by Anders — February 6, 2012 @ 8:16 am

  4. It is not a question of if, but of when. As an American Greek, I roundly condemn the behavior of t he Political Elite (with a very few exceptions) since Andreas Papandreaou took power. There is no political will, and some of the Greek populace is in a form of denial, fostered by the political elite who are desperate to maintain power – the elite transcends parties, by the way NDP, PASOK etc. mostly come from the same class. indeed the only time Greece was ever ruled by the sons of peasants was under the dictatorship. I remember hearing many complaints from rich (connected) women at the Tennis club (where they played bridge all day) that the Junta’s wives had the temerity to use their hairdressers.

    That said, as a former banker, I would like to remind everyone that a loan involves two parties, and both bear responsibility for the transaction. The behavior of the central banks and insurance regulators, particularly in France and Germany, have been disastrous. May I remind everyone that BEFORE the Greek fiasco, every single Landesbank in Germany was bankrupt; of the 30 year fiasco that was Credit Lyonais, for which no one went to prison! Or that 30 to 50% of assets have Level II or Level III pricing (e.g. estimates to guesses). Or that the nice conservative German Banks had levered up their balance sheets to a point that, for example, DB had footings larger than the entire GNP of Germany?

    To Blame the poor Greeks for a European financial system built on cronyism, the misuse of pseudo scientific finance theory from the EDHEC and others is too much. Greece has caused problems, but is also being used as a scape goat to cover a lot of other sins.

    Comment by sotos — February 6, 2012 @ 8:58 am

  5. Sotos-

    Let me understand your position – since the GGreeks bailed out the failed German banks and Credit Lyonnais it is insignificant that German taxpayers have to bail out the Greek government for its failed socialist policies. Interesting.

    Comment by Charles — February 6, 2012 @ 12:23 pm

  6. No that is not my position – the point is that there is blame enough to go around. The problem with Greece wasn’t socialism or welfare state ism but a collective kleptocracy, using funds to buy votes. No one says what the did was a good thing, but it could not exist without the shoddy banking practices practiced largely within the EU, practices that went back a long way before even Andrea the Liar came to power.

    The Greeks are responsible for many things, but not the neo-merchantilist German policies that have built a structural current account imbalance in Europe that is destroying it. The German taxpayers are not either, but their political elites are responsible, along with the Greek political class. Bail out – which solves nothing – default – which has many consequences and monetization of the debt and earn out the losses on excess banking spreads. These are the choices the political system has given them.

    Actually the elites seem to have chosen to flood the system with printed money. Sound familiar? We are told that the Germans would never stand for it. Really

    Comment by sotos — February 6, 2012 @ 4:35 pm

  7. keyboard spaz out. sorry.

    Really? Then someone please tell me the effective difference in terms of liquidity between the LTRO and currency swaps and a Fed system reverse repo?

    Comment by sotos — February 6, 2012 @ 4:37 pm

  8. Actually I can answer that myself. I didn’t think it was possible but the Euros have launched TARP X and QE wit heven less political resposability, control and oversight than we did. Those Euro’s are soooo smart!

    Comment by sotos — February 6, 2012 @ 4:48 pm

  9. […] want to bail out Greece? Anyone? More commentary […]

    Pingback by Wednesday Breakfast Links | Points and Figures — February 8, 2012 @ 7:34 am

  10. No Sotos just seems sick and tired of his cousins in Greece being described as a bunch of lazy scoundrels and hairdressers that want to retire at German taxpayers’ expense at 50 so they can be demonized while Papa and co sell off Greece’s historic patrimony to the banksters. Sounds very much like Russia in the 1990s to me — they’re all either mail order brides, whores, or mafia so let’s sell off Russia’s juiciest assets to George Soros with oligarchs as his local agents.

    Comment by Mr. X — February 8, 2012 @ 5:17 pm

  11. Moron X -The neo -Stalinist banksters in PUTIN RUSSIA are very satisfied with the KGB branch in USA ZeroHedge

    Comment by Anders — February 10, 2012 @ 2:20 pm

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