And it All Falls Apart: EuroCrisis 2012

The Greek election was for schnooks. That’s not where the real story is happening.

Sure, a win by the loony leftist Syriza party would have put Greece on the fast-track to the Euro exits. But Hellas, even with a New Democracy-Pasok coalition government, is still on the moving walkway that is likely taking it to the very same place. So instead of sooner rather than later, it’s probably [a bit] later rather than sooner.

Here’s what Citigroup is saying today:

Initial reactions from European officials welcome the outcome of the election, but made very clear that the there is little room for the new government to change the existing bailout programme. With this in mind, our probabilities for Grexit [Greek Exit] remain unchanged in the range between 50% and 75% over the next 12 to 18 months.

And Morgan Stanley in a new research note:

Not much is resolved from a medium-term perspective. … The list of prior actions that Greece needs to comply with is long and substantial. The IMF Memorandum of Understanding published on March 9, 2012, says that “prior to the first disbursement of the new programme, the Government adopts the following measures, through a supplementary budget.” These measures amount to about €3bn, or 1.5% of GDP. And “some 7% of GDP in additional measures will be needed to attain the 2014 fiscal target”. Even though the Troika might make some small concessions, there’s a high risk that the loan tranche is disbursed with some delay, given that we are running at least six weeks behind schedule for Greece’s ability to make all domestic payments.

Finally, Goldman Sachs with the exclamation point:

Greece will remain a source of uncertainty due to its macro-dynamics. The country is undergoing extreme economic pressures that are likely above and beyond austerity; prolonged uncertainty have led to a multi-year suppression in confidence and a collapse in credit growth, which has helped compressed the private sector, create supply shortages and has contributed to the lack of investment or privatization efforts, higher structural unemployment and persistent inflation currently observed. Unless this uncertainty of tail events is lifted over Greece, moderate solutions will be prone to marginalization, while extreme and populist views could become ever so prevalent.

And if New Democracy can’t form a government with Pasok, we’re right back where we started.

But Greece is a sideshow. It’s Spain and Italy on center stage. Despite the favorable election results in Greece, borrowing costs rose for both economies. The yield on Spanish 10-year bonds surged above the 7% red line, Italy above 6%. Markets may have finally moved beyond relief rallies based on nuggets of supposed good news. They want the Big Fix, and maybe it will come at the big EU meeting at month’s end. But that is not likely, is it? Everyone wants “more Europe,” but defines that goal differently. France wants a banking union leading eventually to a greater political union; the Germans just the opposite. More muddle from the politicians could put both Spain and Italy on an accelerated exit path.

Meanwhile, the other growth engines are sputtering—China, India, the United States. In the U.S., we’re now looking at a repeat of 2011, even if the EU crisis is contained. Slow growth, flat incomes, high unemployment. We’re not ready for another storm, much less a perfect one. But that’s just what might be on its way. And nothing that happened in Greece yesterday changes that. The only people who believe that are the schnooks—or someone trying to sell you something.

  1. Lady Bertrum

     Europe looks like a painful, protracted tooth extraction with a dirty pair of pliers, a drunken dentist, and no anesthesia.

    Some say the world will end in fire,

    Some say in ice.

    -Robert Frost, 1920

    This is the way the world ends

    Not with a bang but a whimper

    -T.S. Eliot, 1925

    I don’t believe the world’s ending, just a certain worldview.

  2. Mendel
     The country is undergoing extreme economic pressures that are likely above and beyond austerity;

    I think this is the key: Greece is beyond all repair, and thus it is no longer important what Greece decides to do. What matters now is what the other European countries are willing to do to keep Greece in the Euro. 

  3. The Mugwump

    The word “economy” is derived from a Greek root word (oikonomia) meaning “to run a household.”  Savor the irony.  What will happen next is what’s already happening.  People are retreating to the countryside where they are growing crops and managing herds.  The only boom industry is in the area of personal security.  If you own a shotgun, you can always get a job guarding the property of the “rich”  (aka government bureaucrats).  Socialism’s endgame in a nutshell.   

  4. Robert Promm
    ~Paules: The word “economy” is derived from a Greek root word (oikonomia) meaning “to run a household.”  Savor the irony.  What will happen next is what’s already happening.  People are retreating to the countryside where they are growing crops and managing herds.  The only boom industry is in the area of personal security.  If you own a shotgun, you can always get a job guarding the property of the “rich”  (aka government bureaucrats).  Socialism’s endgame in a nutshell.    · 2 minutes ago

    This immediately brought the Godfather to mind.  Remember Michael Corleone having to flee to Sicily after he killed the corrupt precinct captain and walking around that bucolic scene with two rifle-bearing bodyguards in tow?  

  5. James Lileks
    C

    So what happens? Military coup, then war with Turkey over Cyprus natural gas field, with Israel drawn in to defend its interests in the field. 

    It’s as likely as a coalition agreeing to reduce living standards to 1952. 

  6. Matthew Bartle

    “schnooks” ?

    Never heard that word before.

  7. Steve MacDonald

    Just to be clear, the cost of a German Euro exit is huge. Their target 2 (moneys owed between central banks on EU trade) runs around 600++ Billion.

    Their share of what has already committed is hundreds & hundreds of Billions more. No one walks away from this in good shape or unscathed. It is simply a question of a)booking huge losses and getting on with life or b) continuing to kick the can down a rapidly end approaching dead end road in the hope that something sane will be achieved. The road is evaporating with Spanish 10 year bonds heading to 8% – and Italy following at 6+ in their footsteps. Hollandes French solution further storm clouds the picture. Ireland? Portugal? Others?

    The Euro elite have shown an ability to lie shamelessly and the media (sans Telegraph & Der Spiegel), especially US,  have followed in slavish  cheerleading. Ben/Tim/O continue to push for time to not complicate November.

    My guess is the final EU card will be the wisemen solution re. over 60% financing on gold reserves + VAT taxes + other. After that it is Endgame.

    Then, buckle up for Japan, UK and last but certainly not least, USA.

  8. Steve MacDonald

    As was said on ZeroHedge, this whole thing is getting to be like a soap opera rerun. It is amazing how supposedly intelligent can do so many dumb things for so long. It looks as if the markets may soon bring this farce to a close, and thus bring us to “interesting times.”  

  9. Chris Johnson

    RP, I don’t think their welfare system, or government are relevant, short term.  In summer, they will boil, and in winter, they will freeze, to paint the picture of their energy situation.  Whom will trade fuel for the new Drachma at a rate that will leave anything for niceties?  Absent energy, even their tourism economy collapses.

  10. Chris Johnson

    Ah, I see James beat me to it on the energy question, at least for the middle and longer term.  Short term, they will have an energy crisis.

  11. Robert Promm
    CJRun: RP, I don’t think their welfare system, or government are relevant, short term.  In summer, they will boil, and in winter, they will freeze, to paint the picture of their energy situation.  Whom will trade fuel for the new Drachma at a rate that will leave anything for niceties?  Absent energy, even their tourism economy collapses. · 9 minutes ago

    I guess that’s my point.  Either they impose austerity on themselves or the market will do it for them.  I see Zimbabwe on the Adriatic.

  12. Mendel
    CJRun: RP, I don’t think their welfare system, or government are relevant, short term.  In summer, they will boil, and in winter, they will freeze, to paint the picture of their energy situation.  Whom will trade fuel for the new Drachma at a rate that will leave anything for niceties?  Absent energy, even their tourism economy collapses. · 4 minutes ago

    If such a crisis is a real concern, then it is understandable that other European countries seem so reluctant to let Greece leave the Euro.  No politician, even in Germany, wants to be seen as pulling the trigger that sends a neighboring people into depression. 

    Maybe what appears to us to be dalliance and fence-sitting on the part of Eurocrats is actually just waiting for the markets to take the blame for Greece’s downfall off their hands.

  13. Mendel
    Robert Promm

    CJRun: RP, I don’t think their welfare system, or government are relevant, short term.  In summer, they will boil, and in winter, they will freeze, to paint the picture of their energy situation.  Whom will trade fuel for the new Drachma at a rate that will leave anything for niceties?  Absent energy, even their tourism economy collapses. · 9 minutes ago

    I guess that’s my point.  Either they impose austerity on themselves or the market will do it for them.  I see Zimbabwe on the Adriatic. · 2 minutes ago

    If Greece leaves the Euro, I think an IMF-led bailout is inevitable. 

    Even though Christine Lagarde made some threatening remarks recently about the need for Greece to start shaping up, I can’t imagine that such a European-dominated organization would allow a European country to slip into depression.

  14. flownover

    Of the four hundred articles on this today, the best one I read was an interview with a Greek shipping magnate who had moved the family to London for the the summer, the Olympics, and mostly, the riots he felt were coming to Athens.

    Best bit was his prediction that Germany would leave the Euro first. His proof included some corporate bonds that would payoff in DM if the move out of the Euro occurred. So Germany has some temporary pain, provides a new money sanctuary for the euro crowd and the rest of the union subjects itself to a massive adjustment of their currency, sans les allemands.

    That makes alot of sense.  

    Pity that the Obama and Geithner and their milieu think they’re already Europeans or something.

  15. Charles Mark

    Meanwhile in the Euro2012 Football (soccer) tournament, Greece had an amazing win over Russia on Saturday and now face Germany in the quarter-finals on Friday-with a predictable outbreak of puns. Fellow economic strugglers, Spain, Portugal and Italy have also progressed; no such luck, sadly, for Ireland who, like Holland, lost all their three games.

  16. Jerry Carroll

    Remember Zorba the Greek? The poverty, the primitive villages, the donkey power and the crones in black. Alan Bates represented the scrimping and saving Europe, repressed but decent. Anthony Greek was the live-for-today free spirit happy to cut corners. Not much has changed.

  17. King Banaian
    C

    Seems likely Greece will be out of the euro at some point. While we can focus on Italy and Spain in isolation, the contagion from Greece cannot be dismissed. As we saw last week, whatever deal made for Spain’s banks leads to deals for Ireland and Portugal (maybe as soon as this week.) Likewise, once you set parameters for Grexit, those become a baseline for Spain and Italy, for Jim’s big fix. 

    I actually think the Germans should have been pulling for the anti-austerity bunch to win, because that would have pushed the other EU countries into Merkel’s arms.  Now she has to negotiate with Samaras, Hollande, Lagarde and the rest, which I think she’ll find cold comfort.  Yes, it keeps the game going a bit longer, but for what?  A deal offered to Germany that Merkel cannot get voted for by her own party?

    Exit question: Are younger Greek voters more likely pro-austerity? Elderly voted for the ND so as to not lose the value of their savings (under drachma-iztation.)  What do young Greeks think about a new drachma?

  18. Last Outpost on the Right

    I suspect that the only thing that will actually change Greece is a civil war. It could be a contest between any of these groups:

    • Young vs Old

    • Private vs Public
    • Ruling class vs Non-ruling class

    None of the beneficiaries are going to agree to give up what they’re getting … not without a fight, at least. What happened in Wisconsin last year is just a preview of what will happen – even when everyone agrees that that the current path is not sustainable.

  19. Robert Promm

    So, what’s the other side of the door look like? 

    Greece exits the euro and…

    At this juncture I am interested in what it means for Greece rather than the potential domino effect for the rest of the PIIGS and the euro’s ultimate collapse.

    A new drachma presumable set at purchasing power parity with the USD and/or the euro. 

    Greece will not be able to sustain its social welfare system nor its huge government sector regardless of the currency.

    So what happens?  It looks pretty much like austerity to me.