Greek Left Over-played Their Hand–Now Desperate for EU Debt Deal

The leftist Greek government’s debt re-negotiation strategy was aimed at stretching the crisis out and making the risk from a messy “Gr-exit” so big that the European Union would grant huge concessions to avoid a Greek collapse that would topple falling dominos across the economically-depressed continent. However, none of the leftists seemed to understand that lower oil prices would be the capitalist cure to restart European growth.Konstantinos Venetis of Lombard Street Research points out that the combined economies of the 28-nation eurozone are outperforming most of the world, due to the impact of lower oil prices and a falling exchange rate. He reports that eurozone GDP “is finally breaking out of its multi-year rut,” with growth averaging a 1.6 percent annualized rate in the first quarter.

Venetis observes the decline in oil prices and weaker currency “have lifted household real incomes at the fastest pace since before the [2008] crash” and encouraged a pickup in spending.” Pent-up consumer demand after years of stagnation has been strong in Germany, France, Spain, and even in Italy recently.

The European Central Bank (ECB) bond buying program, called quantitative easing, has driven down the value of the euro currency, boosting corporate profits and making exports more competitive. Stronger productivity and subdued wages could serve as a “catalyst for a revival in capex” and turn the European economic expansion into a boom.

Lombard expected the Greek government would be “taking negotiations down to the wire” in order to maximize the pressure on the ECB to cave and grant Greek demands for debt forgiveness without cuts in government employment and spending. But with the “endgame approaching,” it is the Greek negotiating position that is collapsing as their economy is back in recession, bank deposits are fleeing, and the government is desperately scrambling for cash to make payroll.

This “Gr-accident” caused the interest rate yields on Greek two-year bonds to hit 23.68 percent Monday morning as the domestic banking system remains under severe strain. The decline in bank deposits continued as $8 billion was pulled out in April. Cash is so tight for the Greek government that it pressured state-related entities to transfer their cash balances to the Bank of Greece, further accelerating the pressure on the commercial banks. With the Greek government needing a deal in the next two weeks to access new ECB and IMF loans, the run on the banks will accelerate.

The ECB is supporting Greek banks, but has the “discretion” to cut off liquidity any time it decides to “deem” the banks insolvent. Lombard comments that roughly 50% of Greek banks’ collateral pool comprises state-guaranteed securities. With banking viability Greece’s “Achilles Heel,” the Leftists are being pressured to do a deall

Greece’s expanding economy in 2014 actually generated a slight primary surplus of a 0.5% of GDP, or about $1 billion, that could have been used to borrow more money and pay debt service. The Leftist government elected in January claims its enlightened economic management has pushed up the primary surplus to $2.5 billion through April. But Lombard reveals this was only accomplished with the smoke and mirrors of a $2.2 billion “domestic default” as the Greek government failed to make payments to government vendors. That strategy contributed to a jump in Greek non-performing bank loans and an inability for domestic businesses to obtain credit at almost any cost.

The leftists’ brinkmanship failed due to economic improvement in the other 27 eurozone countries, undermining the threats of a “Gr-exit.” The Greeks have played the “Great Game” poorly. T
here still is a window of opportunity for Greece to strike a deal with its creditors that might allow Greece to operate with a lower primary surplus requirement and delayed personal tax increases. But the IMF, EC, and ECB now have the power to choose if doing a deal or throwing Greece out of the eurozone is in their best interest.