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Tuesday, June 16, 2015


Tuesday, June 16, 2015

Stand Still...and who Holds the Cards: Greece or Troika ?


Plug To Be Pulled On Greece
Then after the FOMC announcement, on Thursday EU financial ministers meet. There is a good chance that they will finally pull the plug on Greece. 
I keep focusing on Greece, Eric, because it is a land mine just waiting for someone to step on. When they do, the political ramifications could blow up the euro and maybe even ECB itself because it has so much exposure to Greece compared to its capital base. 
The underlying problem is that financial decisions at the ECB are being made for political reasons. Politicians are trying to pretend that the ECB can continue to create money out of thin air be keep giving Greece a liquidity lifeline. This misguided thinking has consequences, and reality is about to hit home, which raises an interesting question.

But Greece Holds The Cards
Which side is closer to reality? Greece or the so-called troika of the IMF, ECB and EU? I think Greece holds all the cards. 
Greece is still generating income from tax revenue, even in its weakened economic state. The problem Greece faces is that it cannot possibly meet its social spending commitments as well as carry its crippling debt burden. 
The lenders have refused to grant Greece any debt relief, which was the basic plank of Greece’s negotiating stance with the troika. The troika opposed debt relief because if they grant it to Greece, for the sake of European unity it will need to be granted to every other overleveraged welfare state, which is more than half of the countries in Europe.
Greece can go it alone. It won’t be easy, but it can be done. And it will be much easier to accomplish without the €320 billion debt burden hanging over its head. Greece can just walk away, like Greece and many other countries have repeatedly done throughout history. 
Greece wouldn’t be able to borrow again for a long while, but it probably shouldn’t anyway because it has learned its lesson – debt can be unmanageable.
Greece Preparing For Default
There is one last point about Greece worth mentioning, Eric:  Greece is clearly preparing for a default. 
The Athens government has asked all cities and other governmental bodies to move their available cash into accounts at the central bank. This is being reported in the mainstream media as a way for the central government to get its hands on more cash, but that is not correct. 
It is to prevent the ECB from taking this cash of governmental bodies when the ECB finally bails-in the private Greek banks. In other words, in a bail-in the ECB takes the euros deposited in private banks, but not the euros deposited in the central bank. So by putting their euro deposits into the central bank, Greece’s governmental bodies can keep their money out of the hands of the ECB. It’s just more evidence that Greece – not the troika – holds all the cards."
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