Mientras esperamos el resultado del plebiscito propuesto al pueblo griego por su gobierno (aceptar las condiciones impuestas por la troika para la refinanciación de su deuda, sí o no), reproducimos esta nota aparecida hoy en Zero Hedge. Los dominós, como venimos sosteniendo desde hace un tiempo. Acá va:
Título: The Greek
Bluff In All Its Glory: Presenting The Grexit "Falling Dominoes"
Texto: Earlier
today, Yanis Varoufakis reiterated his core thesis driving the entire Greek
approach from day 1 of its negotiations with the Eurogroup: "Europe
[stands] to lose as much as Athens if the country is forced from the euro after
a referendum on Sunday on bailout terms."
This is merely a
recap of what we said 4 years ago when in July of 2011 we explained "How
Euro Bailout #2 Could Cost Up To 56% Of German GDP", recall:
the bottom line
is that for an enlarged EFSF (which is what its blank check expansion today
provided) to be effective, it will need to cover Italy and Belgium. As AB says,
"its firepower would have to rise to €1.45trn backed by a total of €1.7trn
guarantees." And here is where the whole premise breaks down, if not from
a financial standpoint, then certainly from a political one: "As the
guarantees of the periphery including Italy are worthless, the Guarantee
Germany would have to provide rises to €790bn or 32% of GDP." That's
right: by not monetizing European debt on its books, the ECB has effectively
left Germany holding the bag to the entire European bailout via the blank check
SPV. The cost if things go wrong: a third of the country economic output, and
the worst case scenario: a depression the likes of which Germany has not seen
since the 1920-30s. Oh, and if France gets downgraded, Germany's pro rata share
of funding the EFSF jumps to a mindboggling €1.385 trillion, or 56% of German
GDP!
Several years
later, in anticipation of precisely the predicament Europe finds itself today,
the ECB did begin to monetize European debt, which has since become the biggest
European risk-shock absorber of all, and the one which the ECB is literally
betting the bank on: just count the number of times the ECB has sworn it has
the tools and can offset any Greek risk contagion simply by buying bonds.
Unfortunately, it
is not that simple.
The reason is
precisely in the contagion threat inherent in Europe's alphabet soup of bailout
mechanism as we explained four years ago in the post above, and as Carl
Weinberg of High-Frequency Economics did hours ago in today's edition of
Barrons. Here is how the Greek contagion would spread, laid out in all its
simplicity, should there be a Grexit, an outcome which the ECB could catalyze
as soon as Monday in case of a "No" vote by raising ELA collateral
haircuts:
The [Greek]
government appears ready to renege on its debt obligations. So Greece’s
creditors are going to lose money—a lot of money. Since these creditors are
public entities, the losses will be borne, initially, by the public.
This crisis is
about managing the resolution of bad Greek assets in a way that inconveniences
creditor governments the least, forcing the least net new public borrowing, and
minimizing financial system risks. The best way to do that is to avert a hard
default, even if it means kicking the can down the road.
That, once again,
is the Varoufakis all-in gamble, a gamble which assumes the ECB will be
rational enough (in a game theory context) to appreciate the fallout of a
Grexit on Europe's creditors. Here is a qualitative determination:
Consider the ESM,
Greece’s biggest creditor. Under its previous name, the European Financial
Stability Facility, it loaned Greece €145 billion. If Greece defaults, the ESM,
a Luxembourg corporation owned by the 19 European Monetary Union governments,
will have to declare loans to Greece as nonperforming within 120 days.
Accounting rules and regulators insist that financial institutions write off nonperforming
assets in full, charging losses against reserves and hitting capital.
Here’s the rub:
The ESM has no loan-loss contingency reserves. Its only assets—other than loans
to Greece—are loans to Ireland and Portugal. Its liabilities are triple A-rated
bonds sold to the public. How do you get a triple-A rating on a bond backed
entirely by loans to junk-rated sovereign borrowers? Well, the governments
guarantee the bonds, and because they are unfunded off-balance-sheet
liabilities, they aren’t counted in their debt burdens—unless borrowers
default.
If Greece
defaults hard, governments will be on the hook for €145 billion in guarantees
on those loans to the ESM. We expect credit-rating agencies to insist that
these unfunded guarantees be funded. After all, unfunded guarantees are
worthless guarantees.
And the
punchline:
The strength of
these guarantees is untested. Would the German Bundestag vote tomorrow to raise
€35 billion by selling Bunds, the government debt, to cover Germany’s share of ESM
losses on Greek bonds? That seems improbable. Bund sales of that scale, if they
did occur, would flood the market, raising yields and depressing prices. If,
instead, the Bundestag refused to cover its guarantees, then we would see a
legal dust-up on a grand scale. With the presumption of valid guarantees,
credit raters would have no choice but to downgrade ESM paper. Then losses
would be borne by bondholders, and the ESM—the euro zone’s safety net and
backstop—couldn’t raise money in the capital markets.
In other words,
Grexit would usher in a pandemonium of unheard proportions because when the
ESM, EFSF and countless other bailout mechanism were postulated, none even for
a minute evaluated the scenario that is being flouted with ease, and,
paradoxically, by the ECB itself most of all: an ECB which stands to lose the
most...
A hard default
would produce other losses to be covered. The ECB would have to be
recapitalized after it writes off the €89 billion it has loaned the Greek banks
to keep them liquid. The ECB would need to call for a capital contribution from
its shareholders—the governments.
... not to
mention any last shred of confidence it may have had.
But wait, there's
more:
And don’t forget
that Greek banks owe the Target2 bank clearinghouse, a key link in the
interbank payment system, an estimated €100 billion. The governments are on the
hook to make good that shortfall, too. The cash required to cover these
contingencies would have to be funded with new bond sales.
The conclusion is
incidentally, identical to what Zero Hedge said back in the summer of 2011:
"the ultimate loser in a Greek default would be the euro-zone
sovereign-bond market, which is already vulnerable. " The only difference
is that this time, yields are near all-time lows, and durations are high.
Ironically, even the smallest fluctuations in yield mean a volatile response in
prices, and an immediate crippling of the bond market. Perhaps most ironic is
that Europe's bond market is far less prepared to deal with Greek contagion now
than when Italian bonds were blowing out and trading at 7%, just because
everyone has double down and gone all-in that the ECB can contain the
contagion. If it can't, it's very much game over.
This is what
Varoufakis' likewise all-in gamble on the future of Greece boils down to.
And just so we
have numbers to work with, here courtesy of Bawerk's fantastic summary, is a
way to quantify what a Grexit and the resultant falling dominoes would look
like for Europe:
Simplistic
representation of falling dominos not enough? Then here is the full breakdown
of implicit exposure every Euro Area country has toward a Greek exit, because
it is not just the EFSF dominoes, it is also SMP, MRO, ELA, Target2, and oh
my...
And tying it all
together, here is some more from "Eugen von Böhm-Bawerk":
The Germans,
French and IMF alike reluctantly admit so much, but they cannot give the Greeks
any debt relief because as soon as Greece starts to default on their
obligations on the off-balance sheet guarantees extended by the euro countries
the whole system could fall like dominoes.
The problem,
however, is that the IMF already did admit that Greece does need at least a 30%
haircut, implying that at least one member of the grand status quo, under
pressure form the US, already got the tap on the shoulder and has been told to
prepare for more falling dominoes. Which leads to even more questions:
What would happen
if Italy suddenly got an extra funding requirement of more than €60bn? Every
euro apologist point to Italy’s primary surplus, but what good does that do
when your debt is over 130 per cent of GDP and rising? The interest payment on
that gargantuan debt load means Italy must cough up more than €75bn a year just
to service liabilities already incurred. A primary surplus is a useless concept
in a situation like the one Italy finds itself in. Adding another €60bn to
Italy’s balance sheet could very well be the straw that breaks the Italian
camel.
The French would
be on the hook for around €70bn just when they have agreed with the European
Commission to “slash” spending to get within the Maastricht goal of 3 per cent,
in 2017!
Imagine the
German peoples wrath when they learn that Merkel defied their sacrosanct
constitution; a constitution that clearly state that the German people, through
its Bundestag, is the sole arbiter of any act that have fiscal implications
regarding the German people. The Bundestag did not approve the €42bn of ECB
programs that have funded the Greek states excessive consumption.
All this is
purely theoretical. For the practical implications of the above "falling
domino" chain, we go back to Carl Weinberg:
What if a
downgrade of ESM paper causes a hedge fund to fail, which triggers the demise
of the bank that handles its trades? The costs of fixing failed institutions
will also, of course, fall on governments. The ultimate cost of Greece’s
default is yet to be seen, but it is surely larger than it seems.
Contained? We
think not. And neither does Varoufakis, which is why he is willing to bet the
fate of the Greek people on that most critical of assumptions. The only
outstanding question is what does Mario Draghi, and thus Goldman Sachs,
believe, and even more importantly, whether the Greek people have enough faith in
Varoufakis to pull it off...
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