Tumbling Futures Rebound After Varoufakis Resignation; Most China Stocks Drop Despite Massive Intervention

More than even the unfolding “chaos theory” pandemonium in Greece, market watchers were even more focused on whether or not China and the PBOC will succeed in rescuing its market from what is now a crash that threatens social stability in the world’s most populous nation. And, at the open it did. The problem is that as the trading session progressed, the initial 8% surge in stocks faded as every bout of buying was roundly sold into until every other index but the benchmark Shanghai Composite turned sharply red.

The reason the SHCOMP stayed above water is because China’s sovereign fund Huijin was in the market to keep large caps like PetroChina, ICBC up. And then, shortly after it was announced that China’s National Security Fund had ordered all of its managers “not to sell a single stock“, the Composite briefly dipped into the red and the local Chinese bank was on the verge of a total loss of control.

Luckily, by the end of the session, the Composite managed a modest 2.4% recovery even as investors in the vast majority of Chinese shares suffered another day of losses and as the PBOC’s credibility came this close to being fully wiped out.

Elsewhere in Asia, central banks were less forceful and the Nikkei 225 (-2.1%) fell to within close proximity to the 20,000 level while JPY strength further weighed on the index. ASX 200 (-1.3%) was dragged lower by weakness in the commodities complex.

And while China was a roller coaster, Europe’s volatility wasn’t far behind: as was to be expected, the price action was dominated by the Greek ‘No’ vote victory, in turn prompting a risk-off tone which was observed overnight with US equity futures slumping 1.5% while T-notes gapping higher by over 1 point. However, the subsequent shocker that Yanis Varoufakis is to step down, citing preference of some Eurogroup participants, resulted in EUR and equity markets recovering off the worst levels. According to the latest reports, Greece’s chief negotiator Tsakalotos is the favourite to replace Varoufakis as the Greek Finance Minister.

EUR/USD staged an impressive recovery overnight, largely supported by the resignation of the Greek finance minister and the upside in EUR/CHF driven mostly by another post-weekend day of relentless Swiss National Bank intervention. However, in recent hours the central bank bid appears to have fizzled and the EUR is once again grinding slowly lower as the selling wave appears to have overcome European central banks just as it did in China earlier.

Gold failed to hold onto early gains and trended lower overnight, before consolidating in negative territory in early European trade, amid the ongoing concerns over growth prospects in China. The drop in gold is due to further central bank intervention, this time by the BIS’ FX and gold trading desk under the auspices of Benoit Gilson. At the same time, the risk averse sentiment weighed on the energy complex, with WTI and Brent Crude futures trading lower.

Notable energy stories:

Saudi Arabia has cut the OSP for Arab light crude to Asia in August by USD 0.10 per barrel, while increasing the price to European customers by USD 0.25 per barrel. (RTRS). Iranian Oil Minister Bijan Zanganeh will release a template for international oil contracts in the near future, as companies wait for deal that will open up one of the world’s premier oil markets to foreign investment. (RTRS) FCC (36.9k bpd ) has been shut down at the CVR — Coffeyville refinery (155.7k bpd) having been recently restarted. (Genscape) The CDU (64k bpd ) and VDU (30k bpd) have been restarted at the Phillips 66 – Wood River refinery (306k bpd). (Genscape) The FCC (80k bpd) was shut down at the Valero — Port Arthur Refinery (292k bpd) (Genscape)

On the macro economic calendar today we have ISM non-manufacturing, and the Markit U.S. composite/services PMI due later but these will be absolutely meaningless in light of the headline Greeknado that simply refuses to go away.

In summary: European shares remain lower, off opening lows, with the banks and basic resources sectors underperforming and travel & leisure, health care outperforming. Varoufakis quits as Greek finance minister, Greeks voted “no” in Sunday’s referendum. Merkel to meet Hollande today ahead of emergency summit of European leaders Tuesday. ECB governing council due to talk today on support to Greek banks. Hang Seng index enters correction with 11% drop from April peak, Shanghai Composite rises.

The Italian and Spanish markets are the worst-performing larger bourses, the U.K. the best. The euro is weaker against the dollar. Greek 10yr bond yields rise; German yields decline. Commodities decline, with WTI crude, nickel underperforming and gold outperforming. U.S. ISM non-manufacturing, Markit U.S. composite PMI, Markit U.S. services PMI due later.

Market Wrap

• S&P 500 futures down 0.6% to 2056.3
• Stoxx 600 down 0.8% to 380.2
• US 10Yr yield down 8bps to 2.3%
• German 10Yr yield down 5bps to 0.74%
• MSCI Asia Pacific down 2% to 143.5
• Gold spot down 0.3% to $1165.1/oz
• All 19 Stoxx 600 sectors fall
• Eurostoxx 50 -1.5%, FTSE 100 -0.5%, CAC 40 -1.3%, DAX -1.2%, IBEX -1.6%, FTSEMIB -2.4%, SMI -0.6%
• Asian stocks fall with the Shanghai Composite outperforming and the Hang Seng underperforming; MSCI Asia Pacific down 2% to 143.5
• Nikkei 225 down 2.1%, Hang Seng down 3.2%, Kospi down 2.4%, Shanghai Composite up 2.4%, ASX down 1.1%, Sensex up 0.4%
• Euro down 0.79% to $1.1026
• Dollar Index up 0.37% to 96.47
• Italian 10Yr yield up 9bps to 2.34%
• Spanish 10Yr yield up 10bps to 2.31%
• French 10Yr yield down 2bps to 1.22%
• S&P GSCI Index down 3.3% to 419.4
• Brent Futures down 2.3% to $58.9/bbl, WTI Futures down 4.3% to $54.5/bbl
• LME 3m Copper down 3.2% to $5573/MT
• LME 3m Nickel down 3.4% to $11595/MT
• Wheat futures down 2.5% to 575.8 USd/bu

Bulletin headline summary from Bloomberg and RanSquawk

• Risk-off tone was observed overnight with US equity futures slumping 1.5% while T-notes gapped higher by over 1 point, however subsequent reports that Greek finance minister Varoufakis is to step down prompted a recovery in riskier assets amid a glimmer of hope that a deal will be easier to reach.
• EU’s Juncker is to hold a conference with Tusk, ECB’s President Draghi and Eurogroup Dijsselbloem on Greece. Furthermore, an EU summit will take place on Tuesday at 1700BST.
• Going forward, market participants will get to digest the release of the latest US ISM-Non-Manufacturing report, Canadian Ivey PMI and also await any further developments surrounding Greece.
• Treasuries gain, 10Y yield falls to touch 50-DMA at 2.271% as 61% of Greeks, more than forecast, voted against yielding to further austerity demanded by creditors.
• Most Chinese stocks fell as a fresh round of government support measures, including suspending IPOs as brokerages pledged to buy shares and urged investors not to panic, failed to spark gains outside the largest state-run companies
• Yanis Varoufakis quit as Greek finance minister, a move intended to help speed talks with creditors; “I shall wear the creditors’ loathing with pride,” he wrote in a blog post
• Economists from JPM to Barclays Plc made a Greek exit their base scenario, while those at Goldman and Citigroup saw ways it can remain within the bloc
• European officials are putting the onus on the Greek government to make the next move as Merkel heads to Paris today for talks with Hollande to map out a way forward for Greece
• Help for Greece is possible on basis of ESM rules, which say states in receipt of aid must accept contractual conditions, German Finance Ministry spokesman Martin Jaeger said
• Jaeger also said euro area has different sustainability assessment of Greek debt than presented last week by IMF, which said Greece needs at least $40b in new euro-area funds
• Podemos, Syriza’s ally in Spain, said EU should guarantee Greek financial system, Troika must respect Greek sovereignty
• Sovereign 10Y bond yields lower with the exception of EU periphery: Greece 10Y +300bps to 17.642%; Portugal, Spain, Ireland and Italy yields also rise. Asian stocks mostly lower; Shanghai gains 2.4%. European stocks fall, FTSE -2.1%. U.S. equity-index futures fall. Crude oil slides, WTI -4.4%, Brent -2.4%; copper -3.1%, gold -0.4%

In conclusion, here is DB’s Jim Reid with his view of this weekend’s crazy events

Europe has perfected the art of muddling through over the last few years. With yesterday’s 61% ‘No’ vote win in Greece, they will have to do it all again to ensure the status quo. For the wider global economy/macro markets, this doesn’t yet feel anywhere near as scary as when Italy and Spanish 10 year yields were trading well north of 7% a few years back. It is however a major historic event and a Greek exit if it happens could have significant medium-long term ramifications on the survival of the Euro.

Before we delve deeper, let’s first glance at the initial Asian market reaction so far. There’s been an unsurprising sell-off across risk assets this morning although much like last week the moves have been fairly well contained. The Nikkei (-1.98%), Hang Seng (-3.18%), Kospi (-2.05%) and ASX (-1.41%) are all more or less at their lows without being overly stressed, while S&P 500 futures are currently 1.3% lower. Credit markets are modestly weaker but have pared a lot of the initial early move wider. Having traded 7 to 8bps wider at the open, Asia (+5bps) and Aus (+4bps) indices have bounced back slightly. 10y Treasuries yields are 10.4bps lower as we type at 2.278% while similar maturity yields in Australia (-17.1bps), New Zealand (-7.5bps), Singapore (-2.8bps) and Hong Kong (-9.6bps) have followed suit. The Euro has slid -0.73% versus the Dollar to $1.103, again paring some of the earlier weakness (-1.3% at the Sydney open). The single currency is also -1.1%, -0.7% and -0.3% against the Yen, Sterling and Swiss Franc respectively. Trading to their own tune are China equities with bourses reacting to the measures announced over the weekend (which we detail later). Having initially opened nearly 8% higher, the Shanghai Comp has tumbled sharply, trading at +2.16% as we to print. The Shenzhen Comp (-2.59%) and CSI 300 (+2.52%) have been similarly volatile. So we need to keep an eye on this story this week as there’s a danger Greece could distract us from what would otherwise be the main story.

Back to Greece for now though. Following the result, some important meetings have now been scheduled in response.An emergency summit of European leaders has been called for Tuesday. German Chancellor Merkel is said to be meeting with French President Hollande tonight. European Commission President Juncker is also set to hold a conference call with the ECB’s Draghi and Eurogroup President Dijsselbloem this morning while the ELA review is also due today. In terms of the political reaction so far, Dijsselbloem said in a statement that ‘the result is very regrettable for the future of Greece’ while German Vice-Chancellor Gabriel said that Tsipras has ‘torn down the last bridges across which Europe and Greece could have moved toward a compromise’. On the other side of the fence, Greek PM Tsipras was quoted shortly following the result saying that ‘the mandate you’ve given me does not call for a break with Europe, but rather gives me greater negotiating strength’.

This leads to the obvious question of where we go next? The starting point for most discussions will be the likelihood of a Grexit. DB’s George Saravelos noted on last night’s client call that despite the result, Grexit is not inevitable but ultimately depends on the political will following pressure on the ground in Greece. George believes that the probability of a Grexit is somewhere around 40% now. Another outcome path is a potential bank recap program eventually resulting in EU bank ownership assuming Greece remained in default, however this is probably less likely at this stage given the moral hazard implications. That leaves some sort of agreement as the other possible option, although the path to which is far from straightforward and likely to take some time.

Immediate focus now switches to the European response, starting with the ELA review today. We expect that the ECB will keep the current cap in place rather than any seeing an outright suspension. A suspension would effectively put the Greek banking system into immediate resolution and so moving Greece one step closer to exit, however we believe that it’s more likely that we wait and see the European political response first before such a move was contemplated.

With the result, it feels like Tsipras has bought himself a few more days before the economic reality of the situation catches up with him. By the end of the week we may see most ATM’s out of cash, massive pressure on the payment of upcoming public sector wages, tourism issues and wider economic damage. For that reason Tsipras will be keen to move quickly with his new found momentum, but the risk is that the relationship between Europe and Greece has been damaged so much that additional conditions need to be set before any negotiations around a possible ESM program can even begin. The stance that Europe takes from here will be critical in how things develop. Too soft a stance and there is the risk of moral hazard, too hard a stance (possibly by demanding government change) and we may remain at deadlock. So some sort of middle ground will need to be achieved if keeping Greece in the Euro is desired.

The negotiations for an ESM program are unlikely to be straightforward. George notes that an ESM program requires prior ECB/IMF assessment of financing needs/debt sustainability as well as Bundestag approval before talks around a Staff Level Agreement can even begin. He believes that a written letter from the Greek government on its commitment to continue negotiations along the prior path may be requested, or possibly even a broader negotiating team backed by cross-parliamentary support required. The rhetoric out of Tsipras may also be a play a part in how Europe ultimately chooses to react. Irrespective of this however, the need for greater fiscal commitments as well as the overall weakening commitment of the Europeans in recent months to negotiations will only make the process more difficult.

DB’s Mark Wall touches on another interesting possibility, that being a scenario whereby a collapse in the Syriza government (due to rising economic and political costs of a closed banking system) results in a new government of national unity being formed and resulting in an agreement on a new deal with Creditors. In such a case, an agreement would have to be based on a more balanced programme and probably along the lines outlined by the IMF in their latest debt sustainability report. Structural reforms would have to be well considered in exchange for a less growth-unfriendly fiscal consolidation and a commitment on a gradual debt relief based on implementation milestones. Political deadlock in the event of a new government failing to be formed (assuming Syriza resigned) is still a possibility under such a scenario however.

As we look ahead to European market open this morning then, the wait-and-see aspect (with regards to a European response) may mean markets are reasonably well behaved and revert to ‘controlled risk-off’ mode. The moves 7 days ago and for much of last week were fairly contained on the whole, however this may also reflect partly the view of a yes vote being favoured. It’s certainly possible that we see disorderly market behaviour should a Grexit appear to be more and more likely, in which case all eyes would turn to the ECB and specifically to their reaction function – most probably through front loading of QE.

There’s a lot to consider and the ‘no’ result certainly muddles the outlook. Over the next 24-36 hours however it’s likely that we stay in wait-and-see mode with the European response function most important right now. The latter part of the week could see bigger market moves one way or the other once we know where we stand on negotiations. Its a tricky one to call but both Mark Wall and George Saravelos still put the risk of ‘Grexit’ at less than 50%. If ‘Grexit’ does occur my personal view is that its more damaging for the longer-term than the short-term. Europe has ensured that direct contagion should be limited for now and more liquidity should help stabilise markets after any initial shock. However it will become a huge focal point in the future for any country with issues within the EU, especially if Greece finds some growth further down the line. This could be a catalyst for extreme politicians around the continent campaigning on the basis that there was an alternative to the Euro. We stress this is not for now but its potentially the biggest long-term consequence of a ‘Grexit’.

Not to be outdone, China once again shared at least some of the headlines this weekend following an effort to stabilize equity markets. According to the nation’s two exchanges, 28 companies are said to have halted their IPO’s while the Securities Association of China also announced that a group of 21 brokerages will invest at least 120bn yuan in a stock market stabilization fund in a bid to support the market. Most importantly, the China Securities Regulatory Commission also announced ‘liquidity support’ from the PBoC and the China Securities Finance Corporation will also raise its capital to RMB100bn from RMB24bn previously. DB’s Zhiwei Zhang believes that a PBoC intervention in the equity market is not necessary to avoid a financial crisis in China. Zhiwei notes that the index is still one of the best performing markets in the world from a YTD perspective and that the economy is dominantly dependent on the banking sector rather that the equity market for financing. He notes that the exposure of the banking sector to the leveraged finance scheme in the equity market to be only around RMB300bn and thus it’s hard to make a case that there is systematic risk from the equity market selloff for the economy. At this stage there has been no statement from either the PBoC or the State Council. Zhiwei notes that what this does do however is that this heightens the uncertainty on growth and inflation beyond this year with the PBoC’s mandate becoming more obscure as it becomes involved in the equity market. A fascinating sideshow to Greece and one that might be the more important story medium-term.

Looking at this week’s calendar now. It’s a fairly quiet start to the week in Europe this morning with just German factory orders and Euro area investor confidence data due. Across the pond this afternoon in the US we get the final composite and services PMI’s for June, alongside the ISM non-manufacturing and the labour market conditions index. Moving to Tuesday, industrial production readings out of Germany and the UK will be the morning’s highlight, as well as the manufacturing production print in the latter. Over in the US we’ve got the May trade balance, JOLTS job openings and the IBD/TIPP economic optimism survey to look forward to. Trade data out of Japan kicks things off on Wednesday, before we get French business sentiment data in the European session. The focus however will be on the FOMC minutes of the June 17th meeting due out late in the session, while consumer credit data is also expected. Turning to Thursday, attention will be on the China CPI and PPI reports in the early morning. German trade data for May along with the BoE decision highlight the European session while in the US we’ve just got initial jobless claims due. Moving to Friday, Japan PPI and consumer confidence data are the only notable releases in the Asia timezone. Over in Europe we’ve got French industrial and manufacturing production, Italian industrial production and UK trade data and construction output. It’s a quiet end to the week in the US with just wholesale inventories expected. Earnings season kicks into gear meanwhile with Alcoa due to report tomorrow. On top of that, it’s a busy week for Fedspeak with Williams, Brainard, George, Kocherlakota, Rosengren and Fed Chair Yellen (on Friday) all expected.

For now its over to the European politicians!!

First:  trading from China and Asia while the USA was celebrating Independence day:

Chinese Stocks Plummet Despite Government Threats To Shorts, Europe Lower, US Closed

Sunday afternoon, we find panic with the Central Bank of China ready to bailout stocks as soon as trading commences later their evening:

Panic: China Central Bank Steps In To Bailout Stocks As Underwater Traders Pray For A Rebound

The Greek banks have only a few days of physical cash left as citizens pull out 60 euros per day:

Germany 92 billion euros

Italy: 60 billion euros

France: 70 billion euros

Spain: 42 billion euros.

Stockman claims as to I that as soon as parliamentarians in each respective country finds what would is owed, they will demand a renege and have those debts foisted upon the original banks that had this debt.

You will recall that I stated in 2012 that these debts were on the balance sheet on French and German banks and to save their skins they swapped these bonds for cash with the ECB.  You will also recall that I stated that these bonds were also used as Tier 1 capital upon which huge leverage to the tune 26:1 were orchestrated by the banks in question. Stockman believes that there will be blood on the streets on this.

As far as the Greek banks are concerned, they only have 9 billion in liquid assets against debts over well over 250 billion euros.  It is better to default and start all over again.  It is interesting that Stockman believes that depositors are senior to the ECB’s ELA.  That should be fun..

a must read

(courtesy David Stockman)

Good On You, Greece – But Don’t Waver Now (Part 2)

Submitted by David Stockman via Contra Corner blog,

Earlier this week the embattled Greeks delivered still more body blows to the rotten regime of Keynesian central banking and the crony capitalist bailout state to which it is conjoined. By defaulting on its IMF loan, walking away from the troika bailout program and taking control of its insolvent domestic banking system, Alexis Tsipras and his band of political outlaws have shattered a giant illusion.

Namely, that the world’s debt serfs will endlessly and meekly acquiesce to whatever onerous, eleventh hour arrangements might be concocted by their official paymasters——even when these expedients are for no more noble or sustainable purpose than to forestall a Monday moring hissy fit among the gamblers in the world’s financial casinos.

So at midnight on June 30 the proverbial can was not kicked again as scheduled. Instead, Greek democracy kicked back. And it is to be hoped that the end result will be a mighty boot to the tyranny of the status quo in the form of a resounding “no” vote on Sunday.

The latter would clarify that everything at issue between the parties is false. There is no way to pay Greece’s debts, modify the troika austerity plan, save the euro, rescue Greece’ banking system or stabilize Europe’s hideously mispriced and distorted debt markets.

Its all going to blow and it should. The entire European mess has been concocted by statist politicians and policy apparatchiks who falsely and arrogantly believe they can defy the laws of markets, sound money and fiscal rectitude indefinitely.

The truth lost in all the meaningless “puts and takes” of the latest negotiations is that the Greek state was bankrupt five years ago; it can not reform, save, skimp, or grow its way out of its crushing debt, and should stop looking for ways to accommodate its paymasters. It urgently needs to default massively and decisively, and is in a ideal position to do so.

That’s because the clowns who run the troika have taken themselves hostage.That is, they have shifted virtually the entirety of Greece’s unpayable debts from private banks and bond funds to the taxpayers of Europe, the US, Japan and even the unwary citizens of Peru, Senegal and Bangladesh.

Here is the debt in 2009–mostly owed to private banks and bondholders—compared to Greece negligible private external debt today. In the case of the French, German, Dutch and Italian banks and other private lenders, for example, outstandings have been cut from $100 billion in 2009 to barely $15 billion today.

By contrast, here is the pea under which Greece’s massive debt is hiding today. Namely, almost all of it has been shifted onto the backs of the taxpayers of these Eurozone nations.

Moreover, as the New York Times noted with respect to this massive shift, the most aggressive punters have made a killing. One of them noted quite explicitly that when hedge funds started buying Greek government bonds in 2012:

“People made their careers on that trade,” Mr. Linatsas said.”

Indeed they did. And now taxpayers around the planet have been stuck with the due bill. Specifically, $250 billion or nearly 80% of Greece’s $320 billion of fiscal debt is directly owed to the EU facilities and the IMF; and upwards of half of the balance is indirectly owed to European taxpayers because $45 billion of Greece’s T-bills and bonds are either owned or funded by the ECB.

If Tsipras were not so badly advised by his pro-euro Keynesian advisors like Varoufakis, he would realize that there is no point in negotiating with the troika at all because Greek concessions can not possibly lead to the only two things that count. That is, meaningful debt relief or reentry into world bond markets.

In fact, the sole reason for compromising—nay capitulating—-is to keep the euro, and that is a snare and a delusion.

Accordingly, a clean default on this massive burden of official debt is in order for two reasons. First, Greece’s government never asked for the giant bailouts of 2010 and 2012 which transferred their onerous debts to the world’s taxpayers. The $250 billion outstanding was forced upon them by Brussels and IMF officialdom in order to protect the German, French, Dutch, Italian and other banks; and to insure that when the markets opened on innumerable Monday mornings, there would be no inconvenient turmoil on the stock exchanges or in the bond pits.

Secondly, the troika cannot give honest debt relief anyway. That’s because officialdom is now petrified of their own taxpayers—-whom they have betrayed and baldly lied to from the very beginning. Thus, the IMF has now loaned Greece $35 billion in gross violation of its own credit standards and long-standing rules. Were it ever to take the huge write-offs that are objectively warranted by the actual facts of Greece’s economic and fiscal situation, it would be eaten alive in the legislative chambers of its member governments.

Indeed, in the case of the $6 billion share of the loss attributable to the US quota, the Republican congress would have a field day investigating the incompetence and misdirection underlying the IMF’s role in the Greek bailout. The IMF would never again achieve a congressional majority for a subscription funding increase—effectively putting it out of business.

And that’s nothing compared to the political explosion that would be unleashed in the national parliaments of the Eurozone itself—– were proper debt relief to be granted. As shown below, the Germans are on the hook for $56 billion of the direct fiscal debt, but that’s not the whole of it by any means. Through the backdoor of the ECB, German taxpayers have also loaned Greece another $36 billion in the guise of liquefying the collateral of the Greek banking system.

“Liquefying” my eye!

The Greek banking system is hopelessly insolvent; the so-called “Eurosystem” obligations shown below are nothing more than fiscal transfers.  Accordingly, what the clueless Angela Merkel actually accomplished during five years of weekend Gong Shows was to bury her taxpayers under $92 billion of liabilities—–nearly all of which are off-budget and unacknowledged.

Her desperate and mindless temporizing in order to remain in power thus constitutes a monumental political lie and betrayal. Were this to be exposed by a major write-down of the Greek debt,it would lead to an instant fall of her government.

The same is true for the rest of the Eurozone—only the facts are even more egregious.

France’s share of the fiscal debt is $42 billion and its total obligation including the ECB exposure is $70 billion. But France has not had a balanced budget in 40 years; is suffering from record unemployment and a decaying economy that has been suffocated by socialist taxes and regulatory dirigisme; and will soon join the triple digit club on its public debt. Accordingly, its government is petrified by even mention of Greek debt relief.

Then you have Italy buried under a 130% debt-to-GDP ratio and an economy that is 10% smaller in real terms than it was 7 years ago. So it is not surprising that its paralyzed, caretaker government does not wish to contemplate even the prospect of a write-down on the $37 billion of fiscal debt owed by Greece or the $60 billion of total exposure.

Then there is the crook and fiscal phony running Spain. No wonder Mr.Rajoy has practically threatened to take out a contract on Alexis Tsipras’ life. Spain’s economy is still grinding away 15% below its boom time peak and its government is faking its fiscal accounts to a fare-the-well. Still, its public debt continues to rise toward 100% of GDP.

So its cowardly government would rather consign the Greek people to permanent depression and debt servitude than own up to the $42 billion it has loaned the Greek state and banking system in order to keep the European banks and bond funds afloat.

Source: @FGoria 

After generations of fiscal profligacy the Greek government should not worry about re-entering the capital markets at any time soon. It should resign itself to running primary budget surpluses for the indefinite future based on whatever domestic political consensus it can cobble together on the matter of taxation, pension reform, divestiture of state assets and weaning its crony capitalist leeches and special interest groups from their stranglehold on the Greek state’s depleted coffers.

Under such an all-Greek fiscal regime, it need not worry about its $250 billion of official fiscal debt or even the $130 billion of Euro-system obligations. Here’s why.

None of the governments which foisted these obligations on Greece will survive a blanket default. The more likely scenario is that the successor governments—–almost certain to be anti-EU—- will disavow the guarantees undertaken by the EFSF and demand haircuts from the underlying bank and bond holder claimants. Stated differently, a Greek default on its $150 billion of EFSF funding would trigger a domino effect back to the status quo ante.

In any event, the only alternative to this sequential chain of defaults or punishment of Eurozone taxpayers is to send in the German and French armies. But unlike the Ruhr in 1923, there are no coal mines, steel mills or other significant industrial assets in Greece to occupy. The geniuses at the troika have essentially made massive unsecured loans that are uncollectible—–proof positive that, among other things, governments shouldn’t be in the banking business.

So if Syriza gets its “no” mandate Sunday and if meaningful debt relief is impossible, what is it exactly that it would negotiate for from an arguably strengthened position? The conventional answer, of course, is continued ECB support for its banking system and retention of the euro.  But both of these objectives are invalid, and are just gateways back into subservience to the Troika.

Since Greece is already irrevocably knee deep in capital controls it need only complete the process and nationalize the banks since they are irreparably insolvent anyway. For instance, Greece’s three largest banks with available public data—–Alpha Bank, National Bank of Greece and Eurobank Ergasias—–have upwards of $60 billion of non-performing loans, which represent nearly one-third of their total book of $180 billion. In addition, they also have $50 billion of bonds and other investments—much of which was issued or guaranteed by the Greek state.

Against the massive imbedded losses in these totals, by contrast, the three banks have only $9 billion of tangible book equity excluding their worthless tax-deferred assets. In short, neither the stock or the long-term debt of these banks have any recoverable value at all.

As part of a housecleaning at these wards of the state, therefore, tens of billions of bad debts would be written off including the debt of the Greek state. And the massive $130 billion of ECB claims would be primed by the claims of domestic depositors.

To be sure, most of the deposits have already fled the Greek banking system and there is upwards of $50 billion in euro notes and coins in the billfolds and mattresses of Greek citizens and multiples of that in off-shore bank accounts. Nevertheless, under a proper state directed liquidation and clean-up of the Greek banking system, the remaining domestic depositors would be made the senior creditors of a shrunken but solvent banking system. The eurosystem’s $130 billion of claims, including the ECB’s lunatic extension of $90 billion in ELA funding to the Greek central bank, would be forced to take a deep haircut on the subordinated claims it would hold after a restructuring.

Given what needs to be done with respect to Greece’s massive fiscal debt and its insolvent banking system, why would Syriza want to make post-referendum concessions to the troika for the privilege of staying in the euro?

The short answer is that is wouldn’t and shouldn’t. After the necessary fiscal default and nationalization of the Greek banking system the euro is a club no one would want to join.

Stated differently, underlying the present fraught confrontation between Greek democracy and the troika’s financial oppression is an epochal catch-22. The sweeping debt relief on which survival of the Greek economy depends would unhinge European politics, discredit the so-called European project and shatter the flawed and unsustainable money printing regime underlying the euro.

Indeed, if the Greeks do not waver after a successful rejection of the status quo on Sunday they will not need to feel lonesome about returning to the Drachma. The Italian lira, Spanish peseta, Portuguese escudo, the French franc and  countless more will be back in short order.

Think of that. The IMF out of business. Merkel and Brussels gone. The Bundesbank and D-mark restored. The Keynesian money printers discredited. The front-runners and speculators in the casino carried out on their shields.

Now that’s a referendum that the world desperately needs.

end

Greece: Friday night

(courtesy zero hedge)

Police Fire Tear Gas, Stun Grenades Ahead Of Tsipras Speech

With Greek PM Tsipras due to speak any moment, scuffles in the crowds of protesters have broken out and police have resorted to stun grenades and tear gas…

As Reuters reports,

Greek police threw stun grenades and scuffled with protesters in central Athens on Friday, as a rally got under way in support of a ‘No’ vote in a Sunday referendum on whether to endorse an aid deal with creditors.

 

The scuffles involved a few dozen people, many dressed in black and wearing helmets but quickly appeared to calm.

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Live Feed:

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Late Friday night:

as we indicated to you above, the IMF held a very important document from the Greeks and for that matter from the rest of the world which basically stated that Greece was right, that their debt is unsustainable and that in order to survive, they needed a haircut.  Now we find that the USA pushed to have that IMF document released!

(courtesy zero hedge)

US Pushed For IMF Greek Haircut Study Release After Euro ‘Allies’ Tried To Block

The timing of the release of The IMF’s ‘Greece needs a debt haircut no matter what’ report this week was odd to say the least. Being as it confirmed everything the Greek government has been saying and provided the perfect ammunition for Tsipras to spin Sunday’s Greferendum as a Yes/No to debt haircuts – something everyone can understand (and get behind). It is understandable then that, as Reuters reports, Greece’s eurozone allies tried to block the release of the damning report this week but the Europeans were heavily outnumbered and the United States, the strongest voice in the IMF, was in favor of publication, sources said. While The IMF concluded, “Facts are stubborn. You can’t hide the facts because they may be exploited,” one wonders if this move merelyreinforces Goldman’s concpiracy theory.

 

Euro zone countries tried in vain to stop the IMF publishing a gloomy analysis of Greece’s debt burden which the leftist government says vindicates its call to voters to reject bailout terms, sources familiar with the situation said on Friday. As Reuters reports, publication of the draft Debt Sustainability Analysis laid bare a dispute between Brussels and the Washington-based global lender that has been simmering behind closed doors for months…

At a meeting on the International Monetary Fund’s board on Wednesday, European members questioned the timing of the report which IMF management proposed at short notice releasing three days before Sunday’s crucial referendum that may determine the country’s future in the euro zone, the sources said.

 

There was no vote but the Europeans were heavily outnumbered and the United States, the strongest voice in the IMF, was in favor of publication, the sources said.

 

The Europeans were also concerned that the report could distract attention from a view they share with the IMF that the Tsipras government, in the five months since it was elected, has wrecked a fragile economy that was just starting to recover.

 

“It wasn’t an easy decision,” an IMF source involved in the debate over publication said.“We are not living in an ivory tower here. But the EU has to understand that not everything can be decided based on their own imperatives.”

 

The board had considered all arguments, including the risk that the document would be politicized, but the prevailing view was that all the evidence and figures should be laid out transparently before the referendum.

 

“Facts are stubborn. You can’t hide the facts because they may be exploited,” the IMF source said.

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Quite simply this should be horrifying to not just The Greeks(who just discovered their supposed ‘allies’ tried to hide the truth from them and in fact negotiated in bad faith) but to all Europeans who by now must realize the union is not for them, it is for the few ruling elite and their corporate and banking overlords.

Isn’t it time to Just Say No?

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Of course, taking a step back from the table, it is clear that a forced decision by Washington against the interests of its European allies – that is likely to engender more chaos and strengthen Greece’s ability to destabilize Europe – must have been done for ‘another reason’. Perhaps after all is said and done, the powers that beneed chaos, need instability, need panic in order to ensure the public gratefully accept the all-in QE-fest that they want.

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OH OH!!

Friday night:  The gloves come off as the ECB is threatening depositors (anything over 8,000 Euros) with a bail in haircut of 30%

Greek Banks Considering 30% Haircut On Deposits Over €8,000: FT

Last week in “For Greeks, The Nightmare Is Just Beginning: Here Come The Depositor Haircuts,” we warned that a Cyrpus-style bail-in of Greek depositors may be imminent given the acute cash crunch that has brought the Greek banking sector to its knees and forced the Greek government to implement capital controls in a futile attempt to stem the flow.

Unfortunately for Greeks, the ECB has frozen the ELA cap, meaning that as of last Sunday, Greek banks were no longer able to meet deposit outflows by tapping emergency liquidity from the Bank of Greece.

Now, with ATM liquidity expected to run out by Monday and with the country’s future in the eurozone still undecided, it appears as though Alexis Tsipras’ promisethat “deposits are safe” may be proven wrong.

According to FT, Greek banks are considering a depositor bail-in that could see deposits above €8,000 haircut by “at least” 30%. 

Via FT:

Greek banks are preparing contingency plans for a possible “bail-in” of depositors amid fears

 

The plans, which call for a “haircut” of at least 30 per cent on deposits above €8,000, sketch out an increasingly likely scenario for at least one bank, the sources said.

 

A Greek bail-in could resemble the rescue plan agreed by Cyprus in 2013, when customers’ funds were seized to shore up the banks, with a haircut imposed on uninsured deposits over €100,000.

 

It would be implemented as part of a recapitalisation of Greek banks that would be agreed with the country’s creditors — the European Commission, International Monetary Fund and European Central Bank.

 

“It [the haircut] would take place in the context of an overall restructuring of the bank sector once Greece is back in a bailout programme,” said one person following the issue. “This is not something that is going to happen immediately.”

 

Greek deposits are guaranteed up to €100,000, in line with EU banking directives, but the country’s deposit insurance fund amounts to only €3bn, which would not be enough to cover demand in case of a bank collapse.

 

With few deposits over €100,000 left in the banks after six months of capital flight, “it makes sense for the banks to consider imposing a haircut on small depositors as part of a recapitalisation. . . It could even be flagged as a one-off tax,” said one analyst.

 

Earlier, via Bloomberg:

Liquidity for Greek bank ATMs after Monday will depend on the ECB decision, National Bank of Greece Chair Louka Katseli tells reporters in Athens.

 

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and this sequel to the above story!!

If the ECB garnishes the bank accounts of ordinary citizens, I can assure you there will be chaos on the streets, bankers strung up, as well as full contagion across the periphery:

Saturday morning:

One week ago, we first explained that as the Cyprus bail-in “blueprint” scenario unfolds, the one final, and most important, remaining variable in the ongoing Greek drama, soon to devolve to tragedy, is how big the ECB’s ELA haircuts would be in the case of a No vote, which would be the first catalyst of a depositor haircut.

Then, overnight, in a report since denied by both the Greek finance ministry and by the European Banking Authority Plan, the pro-Europe FT did yet another hit piece on Greece desperate to push those Greek voters on the fence ahead of tomorrow’s referendum to vote “Yes” (just think of the lost advertising revenue if say Deutsche Bank were to go under).

Greek banks are preparing contingency plans for a possible “bail-in” of depositors amid fears the country is heading for financial collapse, bankers and businesspeople with knowledge of the measures said on Friday.

 

The plans, which call for a “haircut” of at least 30 per cent on deposits above €8,000, sketch out an increasingly likely scenario for at least one bank, the sources said.

Ignoring whether the FT is now merely a venue used by conflicted parties to publish pro-Europe, anti-Syriza hit piecestthat benefit “bankers and businesspeople with knowledge of the measures” and are promptly refuted, the article does bring up a relevant point: if the ECB does escalate the ELA collateral haircuts, something we analyzed in our own piece last week, what kind of haircut scenarios are possible, and will “insured” deposits under €100,000 be indeed made whole, or will the bail-in affect, as the FT suggested, everyone with over €8,000 in savings?

Regarding the first part of the question, what are the possible scenarios, JPM had this to say yesterday when evaluating the history of bail-ins in Europe in recent years:

If the deterioration in asset quality means there is no sufficient collateral to cover ELA claims, either the ECB (via its ELA residual claim) or domestic depositors will have to suffer a loss. Our understanding is that there are no clear rules on whether this ELA residual claim will be ranked above depositors or not. In fact EU policymakers adopted different and inconsistent approaches in the past when faced with bank insolvencies:

1. In the case of Cypriot banks,depositors were hit while senior bond holders were spared, so seniority was not respected. ELA claims were also protected.
2. Deposits of foreign branches were protected in the case of Cyprus while deposits of domestic branches were hit.This is the opposite of what happened to Iceland.
3. In the case of Ireland, which also had a big banking system relative to the size of its economy, only sub debt holders, accounting for a very small portion of total creditors, were hit. No depositors were hit, in either domestic or foreign branches.
4. In the case of SNS, sub debt holders were wiped out and reports suggest that the Dutch government came close to imposing losses on senior bond holders and was only prevented from doing so because of unsecured intergroup loans between SNS bank and Reaal insurance that would be subjected to the same losses as senior bond holders.

In other words, Europe will do what it always does: make it up as it goes alone. However, one notable difference between Cyprus and Greece is that the former held the deposits of a number of wealthy Russian oligarchs, which skewed the deposit distribution a la the 80/20 rule, and permitted smaller depositors to be saved while the Russians took the bulk of the hits (an outcome which according to some led to the suicide of Russian billionaire in exile, Boris Berezovsky).

Unlike Cyprus, Greece does not have the luxury of several massive depositors. In fact, according to JPM, the distribution of deposits appears to be relatively flat. JPM continues:

… under a stress scenario of prolonged impasse, Greek depositors will be likely hit while ELA claims are protected. There is currently €120bn of deposits with Greek banks. A haircut increase on ELA collateral assets from our currently estimated level of 43% to 60%, for example, would require a €26bn deposit haircut or 20% of outstanding bank deposits assuming for simplicity no available buffer from shareholders or bond holders. A bigger increase in the collateral haircut, for example to 75%, would require a €50bn deposit haircut or 40% of outstanding bank deposits.

Whereas we disagree with JPM’s calculation due to our baseline assumption that the current haircut level is more in the 48% region, we do agree with the directionality.  As a reminder, this was our own math as laid out last week:

But what does this mean for ordinary Greeks, those who have negligible amounts still held by Greek banks despite our recurring pleas to withdraw their funds ahead of just this eventuality? Sadly, nothing good. Here is JPM’s conclusion:

Could deposits below €100k be protected as it happened in Cyprus? The answer depends on the total amount of deposits above €100k. If there are enough of these large deposits above €100k, then most likely any required deposit haircut will be inflicted on these depositors only. There are no recent data on how big this universe of large depositsis. The most recent data from the European Commission suggest that at the end of 2012, covered (i.e. those below €100k) represented 75% of eligible Greek deposits. We suspect this number is now significantly higher leaving little room for depositors with less than €100k to be spared. And the reserves that the Greek state has to back its bank deposit guarantee are miniscule, likely not more than a couple of billions euros.

Which means that unlike Cyprus, which was mostly a targeted punitive bail-in aimed almost entirely at Russian oligarchs, should the ECB indeed enact ELA haircuts which it may have to do as soon as Monday in the case of a No vote, it will be the ordinary Greeks who will see their already meager savings get haircut even more, anywhere between 30%, potentially up to 100% if the ECB were to announce the entire ELA no longer legal, pulls all funding and locks up Greek bank collateral.

Will the ECB do that? We don’t know, however the gambit is simple: should the ECB engage the full Greek haircut it risks a run on other peripheral banks and the true spread of Greek contagion to Italy, Spain, Portugal and all other economically crushed countries where an anti-austerity politician may a frontrunner for the next leadership position. Such as France..