A Late-August Dispatch From Athens


If I am not mistaken, this the same agreement reached in early July, which was no settlement. Yes, I know the July agreement was only the precursor for these recent negotiations, but it took all of two weeks for Greece to walk away from those agreed upon provisions. Now we have another settlement ... and all is good ... the Greek economy is going to miraculously operate at a surplus in 2016 and beyond.

The actual settlement document is several hundred pages long. The European Commission issued the following press release concerning the settlement. It is significant for what it does not say. Of course this settlement is based upon a promised series of implementations, but given the history, I have to be skeptical that any of this will actually occur. Even the best run organization in the world could never meet the deliverables set forth in the most recent plan. Here are a few key provisions:

1. The retirement age will gradually be increased to 62 years old. This will be phased in by 2022. 2. The equity shortfall at the Greek banks will be calculated and capped at E25 billion. 3. By October the banks will identify their non-performing loans and laws will be passed to create an active secondary market for non-performing loans. 4. The balance of the Port of Piraeus, the Greek Railway and the Port of Thessaloniki will be sold by March 2016. This is a link to the list of properties that will ultimately be privatized.

The first concrete step to recovery will be the passing of legislation that will allow for the write-off and sale of non-performing loans. This is a big "IF." Obviously, the banks have little interest in resolving this problem, as it will prove for once and for all that the banks are insolvent. However, borrowers (who are not servicing their debt obligations) have little interest in seeing this issue resolved, as well. These borrowers are currently under no pressure from the banks to pay interest and principal. A final solution for non-performing loans will likely lead to a massive turnover in ownership of Greek companies.

Capital controls remain in effect. The reason is quite simple: If you have money in a Greek bank and capital controls are fully lifted, are you going to withdraw all of your money from the banks? Assuming the answer is, "Yes," then how can capital controls ever be lifted? And if capital controls are not lifted, how can the economy operate? If you need any more proof that the banks are insolvent (and could not stand the lifting of capital controls), senior bank notes of the four systemic banks are trading in the mid-30's.

There has been no economic data released after the banks were closed; get ready for a further contracting economy and 30% unemployment. The fact that the second quarter showed growth was very misleading. Greeks were spending money in anticipation of a haircut of their deposits (which ultimately did not happen). I think the third quarter will show contraction.

I am not sure what spell the banks have cast over the political leadership (in Greece and Europe), but as long as the banks are allowed to survive, this crisis will never end. The banks are holding Greece hostage and want to hold the economy hostage for another 30 years (that is the period of time they initially wanted in order to work through the non-performing loans). The simplest solution is for the Europeans to give the E25 billion, currently earmarked for the Greek banks, to the major banks in Europe and let those banks take over the Greek banks.

The next milestone for the settlement happens in October when the EU meets to review Greece's progress. This is when the EU discovers the publicly owned assets are worth a fraction of what they think and the total amount of non-performing private sector loans is well north of E100 billion. The amount of Greek debt will soon hit E400 billion. If Greece has E300 billion of debt today and the EU is going to give them another E86 billion (of which E35 billion will be paid back to the EU for existing debts), how far away can E400 million be? The answer can be found here.

As it relates to new elections, I think Tsipras is stuck between two sub-optimal choices. Part of him wants him to go to elections as soon as possible with the fresh memory of the E25billion infusion, while the other part of him wants to put the Greek parliament into a "summer mode" (which we discussed in our last update) where he can pass the pre-requisite bills and go to elections late October after the EU has reviewed the first milestones. Given that I do not believe Greece can adhere to the October milestones, I think Tsipras will call for elections immediately. In any event, I think we can forget about any established timetable or the EU's October review of progress.

My view is Tsipras cannot win an outright majority; not after the Greeks return from vacation and they realize what the government has not done. The question is whether or not Tsipras will end up with a better or worse coalition than he had when he was first elected in January. This will largely depend on his ability to get 40% of the vote, which allows him to form a government. Tsipras has a distinct advantage, as there is no one in leadership positions within the competing parties who can mount a meaningful campaign.

Meanwhile, the leftists of Syriza are ready to form a new back-to-Drachma party. I am not sure where the socialists, moderates and conservatives stand (New Democracy, Pasok and the River), but I cannot imagine they will be as pliable as they were when Tsipras took office. Then there is the Golden Dawn (the ultra-right wing party), who has been left for dead, but with an immigration problem that has gotten out of control, the Golden Dawn should not be counted out. There is a Donald Trump joke in here somewhere. In any event, I would not count on Tsipras receiving 40% and strengthening his position with new elections.

Perhaps the worst news for the Greeks is that the Germans have gone "radio silent." When the Germans were beating up the Greeks daily in the press, the Greeks were getting sympathy ... no more. Greece is on its own.

Sadly, this entire episode can be solved in a weekend. If you want proof, look at the Bear Stearns and Lehman crises. It simply takes the "want to" (for all of you fans of college basketball, credit that line to Roy Williams). But who "wants to"?

The leadership in Greece has no "want to."

Greece is leaving the Euro ... it is only a question of when.