CNBC just reported that the likely new Greek leader is willing to gamble with the Euro to get what Greece needs:
“The head of Greece’s Radical Left Coalition, Alexi Tsipras, told CNBC Thursday that he will “go as far as I can” to keep Greece in the euro zone despite declaring earlier this week that the Greek bailout agreement is “null and void” and should be abandoned.”
It’s about time that someone step up to the Germans and start pushing back. For years now, I’ve been trying to explain why Germany is NOT in the driver’s seat. Why you ask? It’s simple. So, they’re all involved in a single currency. So there’s no floating exchange rates to balance trade. There’s also no currency sovereignty so each of the nations are susceptible to solvency crisis. So what happened was the trade deficit nations inevitably had to borrow from the trade surplus nations to fund their continued spending. Who was doing most of this lending? Germany’s banking sector of course. So, the two are inextricably linked. If Italy, for instance, defaults, it will kill the German banks. Additionally, because Germany is the primary trade surplus nation in the region they are enjoying the benefits of the single currency system. If Italy were to bring back the Lira in this environment the Euro would soar against the Lira making Germany less competitive with Italy. So, Germany has A LOT to lose here. In fact, I’d argue that it’s the periphery holding all the cards here.
This should have happened years ago, but it’s about time someone like Tsipras steps up to the plate. He should not even bluff with Merkel and the Germans. He should walk right up to the Germans and tell them how it is: “we are going to blow this whole thing up if you don’t start giving us what we want”. Then the ball’s in Germany’s court. Maybe they leave the Euro? Maybe they succumb to the pressure and move towards something resembling a fiscal union? Maybe they give in on E-bonds? Who knows. But someone needs to push back because the current construct isn’t working and isn’t going to work.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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Hardly ever does media include in the quotes from German officials their words about needing reform. Non-profligacy will not work without reforms, just like it won’t in the U.S. The German authorities know this and say so. For some reason everybody only wants to talk monetary, sovereign debt, and banks. I guess things like sticky wages and prices, crony government, and social engineering as a drag on an economy are too hard to deal with.
“Periphery”. I think perhaps almost without realising it that the “periphery” is actually more of Europe than the so called core. By that I mean more of Europe are bound by the same debt/growth problems than are not.Outside of Germany and it’s small satellite German speaking countries exactly which countries of any magnitude do not fall into the same camp ?
We need to drop the word “periphery” and “core” and find anew term to describe the two differing camps ,haves and have nots?
As for telling Germany how it is I think it’s already on the way as Germany are looking increasingly isolated.
Well now it’s getting interesting. Would of course be better if I wasn’t trapped in Europe.
Easy for me to spout off from Southern California, huh?
Well at least what little money I have isn’t in Europe. It’s stunning that Germany is still holding up so well with the other countries doing worse and worse, sooner or later losing those customers should hurt this country. I’m far more worried about Spain though, they look at lot like Weimar Germany.
Actually, you’re not that far off, just the names have changed … how about a rallying cry for a trade war against China …
“… it’s about time someone like Gingrich steps up to the plate. He should not even bluff with the Chairman and the Chinese. He should walk right up to the Chinese and tell them how it is: “we are going to blow this whole thing up if you don’t start giving us what we want”.”
;-}
Although admittedly, the US is already doing it a bit with the big deficits.
A lot more meat to that comment than you possibly meant Cullen.
Seems to me in our hyperfinancialized world we have way too many instances of people simply playing in bond/funding markets making statements about what should be done (slash workers pay, or fire workers). Bond traders in NewYork should get a lot less say in what happens in Greece, Italy, Ireland or Spain. Its passed time for this neoliberal world to make a near180 degree turn.
Its really easy for the bond traders in penthouses to tell politicians what they need to do when they dont live with those decisions themselves.
Well, if we, as a society want Wall Street to start making less money we need to stop obsessing over their services. Unfortunately, a lot of people don’t seem to understand that and they think these bond traders are being paid for no good reason. No, they’re being paid because these firms are servicing clients due to extremely high demand for wealth protection and other services. I totally agree with you that people trading bonds and getting paid 7 figures a year isn’t adding much to society, but the firms these guys work for aren’t making piles of money for no good reason….This society is obsessed with Wall Street, becoming the next Warren Buffett and anyone who seems to be able to generate alpha. And that’s not likely going away which means the demand for Wall Street will continue to be huge and the revenues will subsequently follow which will result in ever higher pay for these traders….
A lot of people don’t want to admit it. They think banks are the bad guys, but then they go home and turn on CNBC, check all the finance blogs, log into their bank and brokerage account and see how they can make some money. Hypocrites.
Cullen I totally agree with you here;
“Well, if we, as a society want Wall Street to start making less money we need to stop obsessing over their services.”
Doesnt this result from the TINA mindset about finance? Neo liberal indoctrination it seems has created this idea that nothing productive can happen without Wall Streets blessing. You may think form my comments on your blogs that I hate Wall Street and see nothing good form them. Thats not how I feel. But someone needs to restore sanity, balance to the economy so that every activity does not become a tool for some third party to extract a toll form the middle class consumer. THIS is the road to serfdom in my view, paved by Wall St geniuses (with an assist from their govt puppets)
” Unfortunately, a lot of people don’t seem to understand that and they think these bond traders are being paid for no good reason. No, they’re being paid because these firms are servicing clients due to extremely high demand for wealth protection and other services. I totally agree with you that people trading bonds and getting paid 7 figures a year isn’t adding much to society, but the firms these guys work for aren’t making piles of money for no good reason….This society is obsessed with Wall Street, becoming the next Warren Buffett and anyone who seems to be able to generate alpha. And that’s not likely going away which means the demand for Wall Street will continue to be huge and the revenues will subsequently follow which will result in ever higher pay for these traders….”
So are you agreeing that TINA? We are stuck with what we got?
I agree with you SS.
Whine about the banks but then hope your BOA stock doesnt take a hit. My solution is not to own any stock right now.
Its like the people who are insisting that certain OTHER workers take pay cuts. Everyone ELSE is an overpaid, entitled whiner…. ME Im worth every penny I earn!
‘Tis all true. Though it would also be nice to hear some real practical talk of economic reform back in Greece. Something … anything. It seems to be missing from the ‘monologue’.
I disagree. Greece is too small to have an impact on German banks so the Germans don’t really care if Greece leaves the Eurozone. As for the banks, Germany is in a much better position than France, Switzerland or the UK. See http://www.zerohedge.com/sites/default/files/images/user5/imageroot/madoff/Banks%20As%20%25%20Of%20GDP.jpg
That’s where the “contagion” comes in. If Spain or Italy (or France?) sees Greece default and go through major credit writedowns (a la the “bond tax” Mosler has discussed), they may decide that is a better option than continuing under austerity regimes.
Phil-
Why would Merkel spend so much time on something that politically makes her look bad. Why if Greece was of little conern would she try and save something that her citizens don’t want her to?
One of the more memorable story lines from Dave Rosenbergs..”Breakfast with Dave” which I no longer subscribe to is the following:
Time and time again market pundits discuss how little Greece’s impact is to the market. He then responds with the Asian Crisis. For those who are not familiar with how the Asian Crisis started…it was a small Island country that Wall St. dismissed as too small.
Further..what’s really funny Phil..is the chart you just posted. Do you see you did that chart? NOW please go and look at the SPX futures market…and please tell me why the SPX futures market looks the way it is. It has alot to do with that littl company who produced a chart about why Greece is nothing. Funny…maybe they should talk to their derivtives arm
oh, that was priceless VII! this whole argument about “too small” reminds me of that small little Left Anterior Descending (LAD) coronary artery that is of little consequence in comparison to a big ol’ aorta. Body doesn’t work too well if it gets clogged……….
U know what doesn’t work to well it it gets clogged….The Exit door.
The price action is moving through levels like butter..just slicing through 1370-1363-1355-
I honestly can not believe we are sitting here today still talking about Greece. I can not believe how much time and peoples lives have been wasted discussing an issue they had no intention of solving.
The market tells me what matters and what doesn’t. Something matters..right now.
Those were important levels that the SPX just blew through rather quickly.
As much as I love this stuff…I have to wake up at some point and figure out how and when to get back in. Ay Vay..pimping ain’t easy. None of this matters if I let an opportunity pass me by. Here we go again.
I think you are right, Cullen
And, Tsipras seems like the right guy to deliver the message.
his demands are not really radical or unreasonable at all.
The MOU was a big mistake…..It,s basically a 43page ransom note
I hope you will look over parts of the memorandum of understanding , the so called austerity measures, and post some of it on your site with comments.
Cullen Roche: ” In fact, I’d argue that it’s the periphery holding all the cards here.
This should have happened years ago, …”
So then why didn’t this happen a few years ago, if periphery holds all cards?
Maybe they were too lazy? Just kidding.
If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.
– J. Paul Getty
German, French, and other banks were buying greek, italian ans spanish debt because there was no currency risk and they were reaching for higher yields. And allowed the PI(I)GS to live well beyond their means for a while.
A fiscal union won’t work unless southern Europe impose the same stringent tax-system and tax control mechanisms. A lot of italians, greek own swimming pools and luxury cars but yet when one looks at their tax return they seem to have a meager income.
What Tsipras wants is simple plain blackmailing the germans and he hopes to squeeze as much money out of Germany before leaving the Eurozone. I don’t think he’s REALLY determined to stay in the Eurozone.
“we are going to blow this whole thing up if you don’t start giving us what we want”
You nailed the issue here Cullen. But the questions are what exactly do they want and will Germany oblige? It seems what they want is a transfer union – the ability to do their own thing as they like and have their current account deficits equalised by capital account payments from Germany (i.e. “fiscal union”). I respect you feel this is where we’re headed, but I just don’t see it. I understand Germany has a lot to lose through a breakup, but they don’t have the social and political will to unify Europe in the same way they unified east and west Germany – its just not going to happen – the costs to them are unpalitable.
For now, the bailing and kicking goes on…until one day it doesn’t…
Yes, well, greeks can talk but when it comes to actually doing something it is usually only germans who follow through. I am not impressed with the talk. Given the riots in Greece they have no choice but to quit Eurozone.
There are multiple possibilities. Here’s an alternative one. Why would Germany allow Greece to set a precedent establishing that threats work?
Greece says no to continued austerity, and the Germans put their wallets back into their pockets. Greece ends up dropping the Euro, and their economy completely falls apart. Portugal tries the same approach, with the same result. Spain and Italy see the handwriting on the wall, and back off, keeping the Euro. Greece may be playing poker, but the Germans are playing bridge.
Cullen good post showing how interconnected the issues around the Euro is. The German banks, especially the Landesbanken, is a real headache for Germany.
@Rich – good comment.
What really surprises me is that Germany is made out to be the bad dictator in Europe and all the other countries are suffering as a result.
As the recent political changes have shown people are not willing to lower their income 10% to 20% under the Euro but would be more than willing to do so 40% or more going back to a currency their government can freely print.
What is the alternative to austerity if a country is over indebted and closed out from the bond market and cant print? Get your own currency and learn a few tricks from Argentina?
Remember Germany went through a really touch time in the 2000′s when workers willingly increased the numbers of hours worked, gave up 13th and 14th salary payments to make the companies competitive again. And it worked.
No one else seems to be willing to do it apart from complain that Germany does not want to give it money without any conditions.
As you know Germany’s debt situation is also not pretty especially if you consider its dreadful demographic profile. So its resources are limited.
Rich is right. Maybe Greece must leave the Euro so everyone can see that an economy falling apart looks like. Banks gone, pensions gone, new currency worth nothing, no one willing to lend them anything and the printing press running full steam.
Simplistic and missing the important point. Actually Germany did take hard reform measures ,but they did it over many years whilst the rest of the world was in expansion mode!! They presume to use the same formula for indbted Europe over a couple of years when the world economy is slowing from deleveraging!.
Germany are not bad guys they are just rather limited in thir analysis of what is required and what will work given the different circumstances.Pavlov would have loved them.
Thanks for fantastic update info. I understand Germany has a lot to lose through a breakup though Greeks can talk but when it comes to actually doing something it is usually only Germans. And allowed the PI(I)GS to live well beyond their means for a while.
I wonder how long Spain will put up with the suffering. They put up with 4-5 years of double-digit unemployment in the 90s (although it’s significantly worse now). As well, they put up with Franco for 40 years (hard to imagine that there were dictatorships in Europe in the 70s … also Yugo etc.!) On the bigger picture, I’m also wondering whether Europeans are not questioning of authority enough to force the whole union to the precipice in the next 6 months; this could drag on for a while … the Euro crisis will be the “IRA” of the millenials. (For social change you don’t just need angry protesters, you also need a massive underlying sea change in the attitude to the state.)
Cullen,
with all due respect, we all know that the optimal time for a strategic default is when you manage a balanced primariy budget. With Greece having not achieved this yet, they are far away from “holding” all the cards. Instead it is truely revealing that Greece is not even able to deliver this minimum effort for a sustainable situation without riots and bashing the ugly Germans (and of course other foreigners).
Seems the germans have a different opinion. The german finance minister (Wolfgang Schäuble) has clearly said that Greece can leave the Eurozone if they want to. And Germany is NOT the only one that shares this opinon. A number of european countries is simply fed up with Greece, as well. And Tsipras is – IMO – aware of that. But – IMO – no one wants to be blamed for pulling the plug on Greece. So, it depends on Mr. Market (no, not me. The real Mr. Market). If/when the SPD wins the next german regional elections then that could force Germany’s hand.
The REAL target is the ECB. They’re caught in the middle. They’re getting flak from both countries (Greece and Germany).