Greek Election Day Minus 4

Greek vacations are over and reality is setting in ...

Logic left the room a long time ago. In July the Greeks voted to reject the EU agreement in a referendum called for by Prime Minister Tsipras. Tsipras then accepted the EU deal that he had just recommended the Greek populace reject (which they did overwhelmingly). Tsipras then resigns and calls for new elections. Tsipras wants to rid his party of the far left who wanted the EU deal rejected. Are you confused? And, by the way, where is Varoufakis, the architect of this mess?

Athens is eerily quiet. The restaurants are half-full. If it were not for a few lingering tourists, the restaurants would be empty. Even the Nike store in Kolonaki closed in the last two weeks (in the interest of full disclosure the store was not owed by Nike, it was operated by Folli Follie).

What would you expect? Capital controls remain in place; but instead of the E60 you can withdraw each day, you now can withdraw E420 per week. OK, we can all do the math. Capital controls will remain in place until the banks are recapitalized and that is not going to happen any time soon.

So, Tsipras should be shown the door and New Democracy should reassume control. Right? I am not sure that is the answer. Tsipras signed the agreement with the EU and if New Democracy wins, then they will be blamed for the agreement with the EU instead of Tsipras and Syriza.

If Syriza wins and Tsipras attempts to remain in out-right control, who is he going to coalesce with? The party in third position could easily be the far-right Golden Dawn (it will be interesting to see what impact the refugee crisis will have on their popularity); PASOK and Potami (the "River") are unlikely to improve their standing (they need at least 3% of the vote to remain in the parliament). It is hard to imagine that Tsipras attempts to form a coalition with the communists that he so desperately wanted to get rid of. So it is either coalescing with New Democracy or another election in November.

The best outcome for Greece is for Syriza to win by one vote, be forced to form a government with New Democracy and take responsibility for the EU agreement.

The election is scheduled for Sunday, September 20.

Concerning our favorite topic ... the banks ... the four systemic banks in Greece are preparing to raise capital. I am dumbfounded ... who is going to invest new capital in a banking system when it is impossible to determine the extent of the non-performing loans? The EU is committed to invest E25 billion in the banks, but is doubtful that is enough money to even restore the banks to a zero net worth. Meanwhile, the banks are hoping that the hedge funds, who have lost upwards of E4 billion, will be happy to invest billions more to maintain their ownership.

I sound like a broken record, but the only issue in Greece worth discussing is non-performing loans. Until these loans are dealt with, nothing, and I mean nothing is going to change. Rather than workout the loans and get the borrowers current, the banks are scrambling in an attempt to modify existing loans to avoid having these loans qualified as non-performing. "Extend and pretend," is the mantra. This includes giving homeowners the option to not make their monthly payments and roll the payment (with no additional interest expense) into the value of the loan. A homeowner who skips a E1200 payment simply increases their future monthly payments by E2 per month for the term of the loan.

Likewise the banks are allowing corporate customers to do the same thing. A real-world example is the reduction from 4% to 2% for a corporate borrower, the forgiveness of all accrued interest and pushing the principal repayment to 2024. This miraculously turns a non-performing loan into a performing loan. This also "avoids" the forced liquidation of the company, which would be required under the agreement with the EU, as the company has a negative net worth. On the best day this "performing" loan is worth 25% of face value. There is simply no reason anyone in Greece whether they are a company or an individual should make a single payment to, or modify a loan with a bank until the banks are liquidated.

On the topic of privatizations, the Greek privatization entity, Taiped, has said that they expect fewer proceeds from the sale of state-owned assets than previously predicted. Separately, Taiped recently announced that Fraport, the German airport operator, had agreed to purchase a concession to operate 14 regional airports for a E1.2 billion commitment. Fraport commented immediately after the announcement that the decision was, "Not tantamount to the conclusion of a contract but rather offers a basis for the resumption of negotiations." I would not be holding my breath for any meaningful privatizations in the next six months.

Pension reform is the last of the three main pillars of the July agreement. This topic is under discussion, and while pensions will be reduced next month, the reforms do not adequately address the problem.

Unfortunately for Greece it is probably too late to keep Greece in the Euro. Had Greece not gotten sidetracked for the last nine months, perhaps things would be different, but now the only argument for Greece to remain in the Euro is pride. Greece's use of the Euro as currency serves no other purpose. Greek is not an exporter; it never has been. Greece is a tourist destination and a way station for international commerce. Greece needs to embrace being the "Florida" of Europe and quit trying to be something it is not. The last time I looked, Florida is doing just fine.

Greece leaving the Euro will ultimately provide the Germans with the cover it needs to forgive a portion of Greece's debt. For those who argue against a debt reduction, perhaps they can explain how a country of ten million people and a shrinking economy can service a debt that will be over E400 billion by the first quarter of 2016, plus E100 billion in non-performing loans. Leaving the Euro will likely take some time, as Greece's European partners continue to pretend that Greek's debt problem will work itself out.

The unwinding process is not going to be pretty, but it needs to happen. The devaluation of the currency is already taking place through the constant dropping of real estate prices. If Germany insists on Greece remaining, it is quite simple ... forgive E250 billion (one half of Greece's E400 billion in loans and one half of the non-performing loans) and they can have Greece in the Euro.

A final note concerning the U.S. press coverage of the refugee crisis ... the crisis is not apparent in Athens (apart from the fact that the trains are bursting at the seams going north), as the refugees are not interested in staying in Greece. The refugee crisis is a management crisis. Last week the Germans offered to take 500,000 refugees per year without any organized way of getting the refugees to Germany or controlling the number at 500,000. Then, over the weekend, Germany tightened its borders in order to restrict the flow of refugees. The law of unintended consequences will come into effect in dealing with an even bigger issue ... what to do with the 7 million Syrians that are internally displaced in Syria or the 3.75 million refugees living in Turkey, Lebanon and Jordan. What a mess.