Why is a Grexit now likely?

Greece owes the IMF 1.6 billion euro that it doesn’t have but is supposed to pay by tomorrow. Unless the ECB lends it to the Greeks, effectively converting the IMF debt into an ECB debt, Greece is bankrupt tomorrow. In months to come, much bigger debt repayments are scheduled to the ECB-IMF in tranches of 4 billion, and Greece won’t have that money either as its economy is still contracting.

Greece didn’t have the money to pay off the previous debts in the last 5 years either though, and that just lead to more debts in return for symbolic reforms that weren’t implemented.

Why not muddle through then and let the Northern European politicians present a pretend-reform package to their population as a victory? And why would bankruptcy force a Grexit, given that there is no official mechanism to force any country out of the Euro, once it is in?

What is forcing it is the combination of the referendum on the symbolic reforms, together with the bank-run on the Greek banks that has this morning lead to capital controls. Let me explain how the two force a Grexit.

The referendum is called for this Sunday, one day before the banks re-open. The idea is that Greeks vote on whether to accept the current set of symbolic reforms, which would entail cuts to pensions and loss of employment of many civil servants. The government will campaign against them, and most of the Greek parliamentarians are with the government, successfully whipping the country into a ‘no austerity’ mood. There is hence no way that the Greek population would vote ‘yes’. And even if they did, the Greek government then would not implement reforms as its own backers would constitute the ‘no’ vote.

But the referendum also makes it impossible to agree on something symbolic beforehand: it binds the hands of the Greek politicians who called for it (almost surely so they wouldn’t be blamed for the coming Grexit). This means nothing can be offered to them that would prevent bankruptcy tomorrow.

Previous symbolic reform packages were not implemented, partly because the Greek governments didn’t want to implement them and partly because they couldn’t even if they wanted to. Tax collection, for instance, would take many years to clean up and, as a Greek economist told me recently, it is still normal to send Greek tax collectors home in an election year! But to the Northern Europeans, the Greek politicians at least pretended they were going to pay back the loans and reform. The referendum is now expressly fought on a platform of not even pretending either, taking away the much-needed fig-leaf that the Northern Europeans wanted.

Worst of all, the referendum is a slap in the face of the other politicians who were negotiating at this late hour with the Greek politicians on the terms of the next symbolic set of reforms. It is part of the rules of the game in Brussels that this was a real deadline that forced everyone to agree to some face-saving formula. The referendum has made this impossible: the Greek politicians won’t play by the European rule-book. No face saving, just Greek theatrics and grand-standing.

So the other European politicians have been sufficiently humiliated that they feel they need to be tough, an attitude you see most clearly in Christine Lagarde from the IMF who made it clear tomorrow’s deadline is not negotiable.

Hence the referendum will be followed by a continuation of the bank run next Monday by Greeks who calculate their country’s approaching bankruptcy, and this time there cannot be a bailout: the only bailout that is now possible within the Greek political system is one whereby the ECB lends money without symbolic reforms, an open loss for the Northern Europeans. That means there will be no bailout. In concrete terms, the Greek central bank will not be getting any more Euros to distribute amongst its banks. The Greek government wont be able to pay to its employees, welfare recipients, and other recipients of state money.

So the day after the referendum, neither the Greek central bank, nor the Greek government has money to prop up the Greek commercial banks nor pay its own workers. That is what will force the Grexit, I think, not the inability to pay back loans to non-Greeks: the slow bank-run, in which billions in deposits are withdrawn weekly from Greek banks, will force them into it.

If the Greek government does not introduce a new currency then it will have no means to prevent the bank-run and the Greek banks will run out of money and go bankrupt themselves. Without an intervention, that will wipe out all the savings in those banks and lead to a major disruption of the Greek financial sector and the Greek economy. Tax avoidance will go up as the visible money streams that go via the banks will stop and the remaining economy will go via invisible money streams that are harder to tax. Greek civil servants will not get paid, nor will welfare recipients get their payouts, meaning they will have no money either, forcing them to join the bank run to pay for groceries.

So the Greek government will face financial collapse the day after the referendum. Capital controls will slow the collapse down, but the only thing it can do, really, is to take over the obligations of the commercial Greek banks and pay its employees and welfare recipients with something else. That something else is a new currency, whether it starts life being called an I-Owe-You (IOU) or a Varoufakis-florint: it will have to be declared legal currency inside Greece so that one can make payments with it. Hence in order to save its own banks and thereby its depositors, Greece will have to Grexit.

Now, no-one can force Greece to give up the Euro, so Greece can in principle maintain a dual currency system for a long time, having both the Euro and the new currency. This is not abnormal, as Hong Kong airport has shown you can run a 3-currency system indefinitely: you can pay there with Honk-Kong dollars, Euros, and US dollars. Yet, if the state sector runs on fast devaluing drachmas and the rest on stable Euros then the Greeks will be incurring a lot of transaction costs.

It will not really matter whether Greece hangs on to two currencies or just the new one: with the re-introduction of a separate legal currency, Greece will have effectively left the Euro and become like Macedonia and Bulgaria, where you can also pay in lots of places with Euros but that are no longer official members of the Eurozone.

I wouldn’t be surprised if stacks of the new currency are already in Greece, ready to replace the Euro as the official currency, with contingency scenarios now being taken off the rack in the main financial European institutions (EIB, ECB, EU-C). This means a Grexit is also a physical possibility now whilst it probably could not have been done 5 years ago.

Is there a way to prevent the coming Grexit? Normally, I expect the political system in the EU to come up with a watery compromise at the last minute. The Greeks politicians have however, I think, made this impossible with a referendum that takes away the ability for compromises to be offered and accepted. Time will tell though.

Will the Grexit be good for Greece? In the medium-run, I do think so as the state-related sector takes a much needed price-correction vis-a-vis the exporting sector. In the short run, pain is coming though, I am afraid, particularly for the old and infirm in Greece dependent on the state. And the recovery will be hampered by the fact that the Greek economy is tied to the rest of Europe, whom they have just had a falling-out with.

Showdown at the Supreme Court corral

Queensland’s judicial system looks to be in quite a bit of strife at present. The former Newman LNP government’s ill-advised appointment of an utterly unsuitable Supreme Court Chief Justice in Tim Carmody is continuing to cause serious problems.

Mercifully, at least Carmody CJ has been belatedly bludgeoned by his judicial colleagues into recusing himself from further hearing an appeal against conviction by Brett Cowan, who was convicted last year of the murder of Daniel Morcombe.  Carmody CJ  grudgingly admitted when pressed that he had held a private meeting with Hetty Johnson, outspoken founder of child sexual abuse lobby group Bravehearts, while considering the Morcombe appeal.  Simultaneously the DPP is appealing Cowan’s sentence as manifestly inadequate.  Daniel Morcombe’s parents apparently don’t agree, but Carmody’s colleagues may have actually done them a favour.  Had he not recused himself, there is a significant probability that an appeal to the High Court on grounds of reasonable apprehension of bias would have succeeded. The Morcombe family would have been faced with a least a couple more years of litigation pressure and lack of “closure”.

Holding private meetings with parties and their associates during court proceedings is one of the classic bases for disqualification on bias grounds. Bias decisions on this ground almost always cite McInerney J in R v. Magistrates’ Court at Lilydale; Ex parte Ciccone [1973] VicRp 10; (1973) VR 122:

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More metadata musing

In answer to my post earlier today about the data retention bill, frequent commenter Patrick Fitzgerald made a rather important point about the data retention zeitgeist:

Embrace the panopticon Ken, buy yourself a webcam, attach it to your head and stream live 24×7. Plus for good measure get a fitbit with GPS and stream that live 24×7 too – that way at least your friends will know as much about you as your enemies, and you may kill at least one enemy through boredom ;)

As it was, I had already made pretty much the same point earlier in the day on Twitter in answer to a tweet from FOI guru Peter Timmins linking an article about the US situation regarding metadata retention.


 

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Upcoming event in Canberra

Fellow Troppodilians, especially those resident in Canberra, may I commend this production of Black Diggers to you. I saw it last year in Sydney at a packed out matinee (only tickets available) at the Opera House on Australia Day! It was electrifying: great script drawing on extensive historical research with a fine balance between humour and pathos. Great storytelling!

It is on at the Canberra Theatre Centre from Wednesday 25 to Saturday 28 March next week.

CTC Black Diggers

“Some of the most powerful and moving live theatre you’re likely to see this year.”
★ ★ ★ ★ ★ Daily Telegraph

Observations on a possible Grexit

After two weeks of a new government in Greece, a Greek exit from the Euro (termed a ‘Grexit’) looks more and more likely. The betting markets give it about 30% to happen this year, and Greece is the out and out market favourite to exit the Euro before any other country.

Though I have not followed it super-closely the last 2 years, I have some observations to offer:

  1. Greek politicians are very used to being in the situation of owing other countries money and negotiating more favourable terms. In a way, their hand is the easy one to play as they can credibly claim not to be able to pay back the debts and then offer to promise to pay back something, with the alternative being open bankruptcy for which they would then blame the lenders. If the lender is owed enough money, the lender often reluctantly plays along in the hope of getting something back. This strategy has worked well for the previous Greek governments, which have quite successfully in the last 7 years gotten 3 bailouts, and the current government should be favourite again in the current situation to come out with an even better deal than before.
  2. The political imperative to pretend that Greece will pay back its loans is diminishing on both sides of the loan relation because of increased concentration of debts. The Greek state now directly owes the rest of the EU in that 80% of its debt is mainly to tax-payer owned entities outside of Greece (EU governments, the ECB, the IMF, etc.). This puts Greece into a great position to get a better deal as the Greek state has taken over many of the debts owed by Greek banks (meaning bank collapses are less of a worry), and European tax-payer institutions can rationally hope to simply have the ECB print the equivalent amount of money that they would have to write off as lost Greek debts. This printing-to-cover-debts is already starting to happen as the ECB has announced it wants to buy up government bonds, effectively a form of money printing for governments. For Greece, this means that an official bankruptcy would save the Greek state close to 150% of GDP in terms of liabilities, without the Greek banks being as exposed as in 2007 (Greek banks owe the ECB around 75 billion euro in fairly low-interest loans).
  3. Previous Greek governments have successfully sabotaged many reforms they agreed to. Continue reading

Domestic Violence

Domestic violence is constantly in the news these days which can lead to the impression that the problem is increasing. To the extent that scrutiny and public discussion shines light in dark places, we might have expected the real underlying rates to be tapering.

So I was more than surprised when The Age reported figures from Victorian Police Family Violence statistics in the left section of the table below, along with the headline “Family Violence Epidemic.” They specifically highlighted the increases from 2011-2012 to 2012-2013. (Warning; This is a long post so set aside some time!)

table 1

Victorian Totals are taken from Police Crime Statistics.

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Contraception and the ‘underclass’ debate: from Keith Joseph to Gary Johns

Sir Sheath - Private Eye

When The Australian published Gary Johns’ opinion piece ‘No contraception, no dole‘ nobody should have been surprised by what happened next. On 7′s Sunrise program commentators described Johns’ proposal as "off the planet" and "outrageous and backwards" while One Nation founder Pauline Hanson called it “ridiculous”. On Channel 9′s A Current Affair one vox-pop interviewee described it as "Nazism." Even The Australian‘s Victoria editor Patricia Karvelas tweeted "I think the piece is mad".

Johns responded by insisting that contraception is a reasonable mutual obligation requirement that will reduce the number of children born into families that are unable to care for them properly. He says he’s not challenging people’s right to have children, only their right to receive income support without having to meet reasonable conditions.

But any proposal that makes it the government’s job to decide who should and shouldn’t have children is bound to run into controversy. There’s a long history of such proposals and good reasons why so many people in countries like Australia, the UK and the US oppose them. Johns’ proposal is also controversial because of its effect on remote Indigenous communities with few job opportunities.

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Being me

I meant to put this up earlier, but it’s sat in ‘drafts’ for a month or more.

Now it can be a new year’s present to yourself. If you missed it last year, make this Four Corners doco on transgender kids the first doco you watch this year. The kids, and one adult interviewed are remarkable people with a straightforwardness and clarity born of the simple courage of having to admit to themselves who they are, and confronting the inevitable pain and fear it causes them and those closest to them.

http://www.abc.net.au/4corners/stories/2014/11/17/4127631.htm

An MYEFO mystery: what’s with the resource tax?

It’s the time of the mid-year Economic Fiscal Outlook (MYEFO) and we’re told that we’re about 11 billion deeper in the red this financial year than we thought, with the treasurer blaming the dropping iron price and the reduced wage growth. I have gone over the MYEFO documents (which are an exercise in obfuscation if ever I saw one), found that wage growth and the dropped iron ore price would ‘only’ cost us 2.3 billion each in this financial year (2014-2015), noted that this was far short of the 11 billion headline, and thus went looking for the ‘real story’.

This threw up the mystery of the resource tax. Here is what it says on table 3.2:

Table 3.2: Impact of Senate on the Budget (underlying cash balance)
Estimates Projections
2014‑15 2015‑16 2016‑17 2017‑18 Total
$m $m $m $m $m
Impact of decision taken as part of Senate negotiations(a)
Repeal of the Minerals Resource Rent Tax and related measures -1,684 -2,334 -1,670 -947 -6,634

which seems to means that the repeal of the minerals resource rent tax (and related measures) is costing us around 2 billion per year. Yet, in the ‘Overview Part’, the MYEFO says “The repeal of the Minerals Resource Rent Tax and other related measures will save the budget over $10 billion over the forward estimates and around $50 billion over the next decade.”.

What is going on?

Update (thanks Chris Lloyd): it seems to be a language issue. Part of the story seems to be that the MYEFO is counting the repeal of the mining tax, which was an election promise, as something the Senate inflicted on the budget, so the 2 billion a year is ‘revenue foregone’. So the MYEFO is blaming the Senate for the outcome of an election promise, using an odd formulation to say that the repeal will save us 50 billion when it seems to imply it would cost us 50 billion. Weird.