Greek PM: Deposits are safe

Reuters reports that the Greek PM is saying that uninsured deposits in Greek banks are safe due to the planned recapitalization of the Greek banking system.

The PM made the statement because of concerns raised by a merger of two Greek banks being called off due to the lack of new equity from private investors. [Regular readers know that the lack of new equity from private investors reflected the lack of transparency into the banks and the inability of the private investors to assess the risk and or solvency of the banks.]

Of course, the Greek PM has to say this.

The question is where is the proof that this is true.

If the Greek banks have been successfully recapitalized and all their losses recognized, then the banks disclosing their current global asset, liability and off-balance sheet exposure details should simply confirm this fact.

The absence of the banks providing ultra transparency so that the safety of uninsured deposits can be confirmed is a big red flag.  Uninsured depositors should see this red flag waving and recognize that their deposits are at risk of a Cypriot style haircut.

Greek bank deposits are safe and the country's lenders are protected due to a recapitalization scheme which will be completed by the end of April, Prime Minister Antonis Samaras said on Saturday. 

In an interview with Imerisia, Samaras ruled out a tax on deposits over 100,000 euros ($131,000) allaying fears of austerity-hit Greeks that their savings may be at risk after a raid on Cyprus depositors as part of the island's bailout. 

"No, I'm categorical. There is no such issue. We have no reason to think about it," he said. "The Greek banking system is shielded due to the recapitalization."...

The banking sector was shaken this week by the unexpected suspension of National Bank's plans to integrate its newly acquired rival Eurobank after the lenders said they were unlikely to raise enough capital to stay private. 

Samaras said the deal depends on the recapitalization. Under the terms of the plan, a minimum amount of new equity must be raised from the market for the banks to remain privately run. 

"If the two banks raise the funds to recapitalize alone, then they will decide if they still want to merge. If they don't raise the demanded funds they will fall under the control of the Hellenic Financial Stability Fund which will decide if their merger is beneficial," he said.

Greek banks say they need more money for their recapitalization

Ekathimerini (hat tip Zero Hedge) reports that Greek banks say the current funds for their recapitalization are inadequate and that they need more money.

And why do they need more money?

Two reasons:

• The level of non-performing loans greatly exceeds the level estimated by BlackRock; and
• Loss of interest income on Greek sovereign debt that was written down as part of the latest Greek sovereign debt restructuring.

Regular readers know that your humble blogger predicted that BlackRock's estimate would not just be wrong, but that nobody outside of the financial regulators would care about it.  As a result, any payments made for this estimate was a waste of Greek taxpayer resources (the same was true in Ireland).

In addition, regular readers know that there is no reason to bailout a bank.  A modern banking system is designed so that banks can operate with low or negative book capital levels.  

Banks can do this because of the combination of deposit insurance and access to central bank funding.  With deposit insurance, taxpayers effectively become the banks' silent equity partner when they have low or negative book capital levels.

So long as banks are able to generate earnings before banker bonuses, they have a franchise that is capable of rebuilding their book capital levels.  This can be done by retaining 100% of pre-banker bonus earnings until the desired level of bank book capital is achieved.

As a result, there is no need to bailout the banks and the Greek government should instead use the funds it has received to support the Greek citizens by implementing programs that support growth in the real economy.

The country’s main banks are considering requesting additional funds for their recapitalization. 

Senior bank officials say that the rapid deterioration in financial conditions caused by the back-to-back elections in mid-2012 has led to a greater increase in nonperforming loans than originally foreseen in the BlackRock report a year ago. 

They add that banks should proceed to greater share capital increases in order to respond to the new reality. 

Ernst & Young estimates that nonperforming loans in Greece approached 24 percent of all loans at the end of 2012.

Who could have guessed that nonperforming loans would skyrocket with the government having adopted austerity measures and the economy plunging into a depression?

The bond buyback dealt another great blow to the credit sector that has made a revision of the capital requirements necessary. 

The Bank of Greece had estimated that operating profits for National, Alpha, Eurobank and Piraeus for the 2012-14 period would amount to 11.09 billion euros, which had been excluded from the calculation of the lenders’ capital needs. 

One of the main sources of those future revenues would have been the interest from the bonds amounting to 16 billion euros that banks had in their portfolios. However, the so-called voluntary sale of the bonds entailed a loss of those revenues for the banks. 

According to estimates for the country’s four main banks, the buyback signifies a revenue reduction of at least 1.5 billion euros, thereby increasing their capital requirements.

Actually, there is no need for more capital.  These banks should generate 9.5 billion euros in operating profits (11.09 - 1.5).

All the loss of revenue on the sovereign debt means for the banks is it will take them longer to rebuild their book capital levels while they retain 100% of their operating profit.

The Bank of Greece has announced that the four systemic banks will need in the region of 27.5 billion euros for their recapitalization, but if that estimate on the buyback is upheld, the bill will reach up to at least 29 billion euros. 

The four lenders’ losses from the credit risk (including loans in Greece and abroad) are estimated at 14.58 billion euros, but if the deepening of the recession is factored in, the losses would grow by about 10 to 20 percent and the capital needs would expand by between 1.5 and 3 billion euros. 

As a result the capital stock of 5 billion euros formed by the Bank of Greece for future needs may have to be used immediately by the big banks, eventually taking the total bill of the recapitalization process to over 30 billion euros.

Portugal president warns Europe's leaders to back off austerity demands

Picking up the baton from the leaders of Greece and Cypress, Portugal's president has come out and said that Europe's leaders need to back off their austerity demands as there are limits to what is economically and socially sustainable.

Austerity is a policy promoted by Germany that results from the choice of protecting bank book capital levels and banker bonuses under the Japanese Model for handling a bank solvency led financial crisis.

This choice puts the burden of the excess debt in the financial system on the real economy.  At best, this results in a never ending Japan-style economic slump.  At worst, this results in a depression and a rewriting of the social contract as the real economy is unable to generate enough capital to cover both the debt service burden and existing needs for reinvestment and social programs.

Regular readers know that there is an alternative to the Japanese Model that protects the real economy and does not require austerity or re-writing the social contract.  That choice is the Swedish Model under which the banks do what they are designed to do and recognize upfront the losses on the excess debt in the financial system.

Banks are able to do this because they can operate with low or negative book capital levels.  Their ongoing operations are supported by the combination of deposit insurance and access to central bank funding.  With deposit insurance, taxpayers become the silent equity partners while banks are rebuilding their book capital levels.

As reported by the Telegraph,

President Anibal Cavaco Silva called for urgent action to halt the “recessionary spiral”, warning Europe’s leaders that the current course had become “socially unsustainable”. 

In a speech to the nation, he said Portugal would “honour its international obligations”, but in the same breath called for a tough line with the European Union-International Monetary Fund Troika over the pace of fiscal tightening under Portugal’s €78bn (£63bn) loan package. “We have arguments, and we should use them firmly,” he said. 

“Fiscal austerity is leading to declining output and lower tax revenue. We must stop this vicious circle,” he said, cautioning the Troika that there would be no way out of the crisis until policy was set in the interests of the “Portuguese people” as well as foreign creditors.... 

Please re-read the highlighted text as Mr. Silva summarizes the argument that your humble blogger has been making.

Pursuing the Japanese Model, including fiscal austerity, does not work.

The Swedish Model balances the interests of the Portuguese people and foreign creditors.  Creditors take the losses they should take for extending too much credit.  The result of this write-down is the Portuguese people are left with debt that they can afford to repay.

Portugal’s jobless rate has risen from 13.7pc to 16.3pc over the past year, reaching 39pc for youth, even before the full impact of austerity hits....

Clearly, Portugal is in a severe recession that austerity would only make worse.  This in turn would decrease the ability of the Portuguese people to service any debt and increase the losses for the creditors.

The strategy with the best outcome for both the Portuguese people and the creditors is to forget about implementing austerity and rather write-down the debt.

“There are well-founded doubts over whether the distribution of sacrifice is just,” he said.... 

Popular anger is building over the over the Troika’s fiscal shock therapy, which will push up average income tax rates by 3.4 percentage points and bring in a plethora of surcharges and fees. It aims to cut the budget deficit to 4.5pc this year, largely through tax rises. 

Markets have so far brushed off worries that the country risks a Grecian vortex as austerity bites in earnest. ... 

“Investors are willing to give Portugal the benefit of the doubt right now, but the country still hangs in the balance,” said David Owen from Jefferies Fixed Income. 

“Our concern is that the fundamental economic situation is still getting worse. The European Central Bank’s policy is still too tight. They need to do quantitative easing and cut overnight rates below zero,” he said....

Adding austerity to a situation with deteriorating fundamentals in not a prescription for improvement.

Portugal has taken its medicine with stoicism until now, winning praise from the EU leaders for sticking to its bail-out terms. But Troika officials fear that “social cohesion” is fraying as the slump deepens. The country saw the biggest street protest this autumn since the end of the Salazar dictatorship.

As Ireland has shown, there is no benefit to stoicism as frankly Germany's leadership cares more about the book capital levels of its banks than the people of any debtor country.

Greek banks confirm that bailouts are unnecessary

The Wall Street Journal carried an article on how Greek banks need at least $36 billion of new capital in order to meet international capital standards.

Please note two very important facts:

• Despite low or even negative book capital levels, the banks are continuing to operate and support the Greek economy; and

• The capital injection by the government simply reduces the amount of time until the banks meet international capital standards.

The fact that the banks can continue to operate while they have low or even negative book capital levels is the result of how a modern banking system is designed.  This occurs because the banks have access to the combination of deposit insurance and access to central bank funding.

With deposit insurance, the Greek taxpayers are the banks "silent" equity partner when they have low or negative book capital levels.

Without the bailout, the banks would have to retain 100% or their pre-banker bonus earnings until such time as they have rebuilt their book capital levels.

Since the banks are already operating, all the bailout does is reduce the amount of time until the banks meet international capital standards and banker bonuses can once more be paid.  The downside of bailing out the banks this way is that it consumes government funds that could be better used to stimulate the real economy.

Greece's four largest banks need a capital boost of €27.4 billion ($36.29) to overcome the impact of the country's sovereign debt write-down as they battle to stem growing losses in the rapidly shrinking domestic economy. 

A mammoth €200 billion debt restructuring completed by the country earlier this year wiped out the capital base of Greece's top lenders—National Bank of Greece SA, Eurobank Ergasias, Alpha Bank AS and Piraeus Bank SA —forcing them to appeal to the government for help.

Note despite the massive losses, the banks continue operating.

On Friday, NBG said it requires a capital boost of €9.7 billion while Alpha needs a capital injection of €4.6 billion. This comes after Eurobank and Piraeus Bank said Thursday they need €5.8 billion and €7.3 billion respectively. 

"The total number seems to be at the high end of expectations," said Panagiotis Kladis, an analyst at investment services company National P+K. 

"This is a lot of money and investor interest in these banks will be determined by economic conditions prevailing in coming months and the economy's broader outlook."

Actually, investor interest in these banks is going to be a function of the ability of investors to assess the risk of each bank.

Investors know that the Greek economy is spiraling down into a Depression.  The question investors have is what exposures do these banks have.

The only way to answer that question is for the banks to provide ultra transparency and disclose their current global asset, liability and off-balance sheet exposure details.

Without this information, investors are being asked to blindly bet on 'black boxes' whose contents are primarily exposed to a depressed economy.  Not exactly an attractive gamble.

As part of Greece's second €173 billion bailout package from international creditors, Athens has earmarked about €50 billion for a bank recapitalization plan. 

Under the terms of the plan, Greece's bank-rescue mechanism, the Hellenic Financial Stability Fund, will underwrite coming rights issues and effectively take control of the four big banks, which combined account for three-quarters of the banking system's assets. 

Greek banks will use a mixture of common shares and convertible bonds in order to meet international capital adequacy requirements....

Standards that neither depositors nor investors care about.  Recall that Dexia went bankrupt with one of the highest Tier 1 capital ratios in the EU.

With the country grinding through its fifth year of recession, NBG and Alpha reported growing losses on rising bad loans and falling income levels. 

NBG showed a nine-month loss of €2.45 billion, versus a €1.34 billion loss last year. Net interest income fell 11% on the year to €2.5 billion while loan provision charges jumped 43% to €1.87 billion. 

"Against this stressed environment, our efforts focused on fortifying our balance sheet by carrying out provisions of circa €1.9 billion in the nine months of the year…defending our key sources of liquidity, and curtailing operating costs," said NBG Chief Executive Alexandros Tourkolias in a statement. 

Alpha Bank said its loss for January to September hit €711.8 million, up from €566.7 million last year. Its net interest income dropped 16.4% on the year to €1.1 billion while loan loss provisions hit €1.17 billion, up 41.5% on the year.

Greek leader calls for conference saying only viable solution is 'haircut' for southern periphery debt

As reported by the Guardian, the leader of Greece's opposition party, Alexis Tsipras has called for a conference to 'haircut' the debt for all southern eurozone periphery countries and tying future debt repayment to economic performance.

Regular readers will immediately notice that Mr. Tsipras is effectively calling for adoption of the Swedish Model for handling a bank solvency led financial crisis.

Under the Swedish Model, banks are required to recognize upfront the losses on the excess debt that they would otherwise realize going through the long process of default and foreclosure.  With the banks absorbing the losses, the real economy and the social contract are protected.

Only weeks after the EU and IMF announced a third plan in as many years to rescue Greece from insolvency, the country's most popular party – its radical left opposition – has called for a European debt conference to "finally" settle a crisis it claims is no nearer to being solved. 

Regular readers know that the financial crisis has never been solved since the policy makers adopted the Japanese model for handling a bank solvency led financial crisis.

Under the Japanese Model, bank book capital levels and banker bonuses are protected at all costs.  As a result, the burden of the excess debt is placed on the real economy.

As demonstrated by the eurozone's southern peripheral nations, this burden is too great for their economies as it diverts capital needed for reinvestment and growth to debt service payments.  The result of this diversion of capital has been a recession.  This has been compounded by the adoption of austerity policies to create a depression.

In an exclusive interview, Alexis Tsipras, who heads the stridently anti-austerity Syriza, insisted that with the debt drama spreading it was vital that foreign lenders take a leaf out of the history books by dealing with the eurozone's crisis-hit southern periphery in much the same way that Germany had been treated after the second world war. 

"It is quite clear that the latest agreement was a compromise that will only perpetuate the uncertainty … Merkel has to say to her people before [the 2013 German] elections that the programme is not working," he told the Guardian. 

"The only viable solution is a haircut not only for Greece but the entire southern periphery," said the leader, emphasising that the longer creditors postponed writing off a significant portion of Athens' staggering debt the greater the cost both socially and economically.

Please re-read the highlighted text again as Mr. Tsipras as this is the argument your humble blogger has been making about why it is necessary to adopt the Swedish Model today and drop pursuit of the Japanese Model and its related policies.

"That is why we are proposing a conference along the lines of the one that took place in London in 1953, which relieved Germany of around 60% of its debt. We want to agree with our lenders on a credible solution. It doesn't matter where it takes place but it should happen as soon as possible." 

As an allied power, Greece, ironically, had been present at the conference whose debt agreement would go on to lay the foundations for Germany's post-war economic miracle. 

The pact had allowed Hitler's destroyed country to not only repay its debt over a 30-year period but had also stipulated that its financial obligations would also be dependent on Germany's economic performance. 

If Greece's shattered economy was ever to recover, Tsipras said it was crucial that it, too, was also given "a growth clause" that would likewise tie the repayment of Athens' debt load to its ability to pay. 

"We are also asking for time, a moratorium, of servicing the debt so that we can redirect that money to growth," he said, adding that the suspended interest payments, projected to amount to about €13 every year, would be used to kick-start the moribund Greek economy. "It would be a win-win solution."

Regular readers will recall that in adopting the Swedish Model, Iceland also focused on having the banks recognize losses that were consistent with the borrower's ability to repay without creating 'equity' for the borrower.

The charismatic politician ... insisted that the piecemeal approach of international creditors to resolving the crisis would not only destroy Greece but the entire continent. 

"There are two pillars to Europe's economic problem, the first being the debt which has to be made viable and the second being austerity which has to finish. If we continue with such measures it is like putting oil on the fire," he said....

Japan has shown over the last 2+ decades that without making the debt viable the economy will remain in a prolonged economic slump.

This slump will get worse every time the government adopts austerity policies.  This is true even if these policies amount to nothing more than ending expansionary policies and returning to pre-financial crisis levels.

Greece's pursuit of austerity in the name of brutal fiscal adjustment has created record levels of poverty and unemployment, trapped it in recession and repeatedly resulted in missed budget targets that have plunged the country into an ever-deeper death spiral. 

It had opened up bottomless pits in Europe's south that taxpayers in the north were then called to fund.

Please note what happened to Greece as a result of the Japanese Model and its policies being pursued.  A bad situation was made worse.

Although the latest rescue includes a complex bond buyback scheme, which will shave about €30bn from the country's €340.6bn debt pile, it was, he argued, still a case of creditors "buying time" and, as such, was far from adequate. 

"When the crisis began in 2009 our debt stood at 120% of our GDP. This year it is projected officially to be 175.6 %. And now they [EU-IMF] say that to make the debt viable we must hit 124% of GDP by 2020," he said, shaking his head in disbelief. 

"Let's suppose they are right – but how do they want to get there? After 12 years of catastrophic austerity and measures totalling €19bn Greece will have become a no-man's land."

Germany's trouble with the truth

In a der Spiegel column, Stefan Kaiser explains why the German government will continue to resist recognizing the losses on the Greek debt, but how eventually, only after the size of the losses has gotten bigger, the losses will have to be recognized.

His argument suggests that the transition from the failed Japanese Model for handling a bank solvency led financial crisis to the Swedish Model is inevitable.

Under the Japanese Model, bank book capital and banker bonuses are protected at all costs.  By definition the policies pursued under this model do not allow for losses on bad debt to be recognized.

Under the Swedish Model, banks are required to recognize upfront the losses on the bad debt in the financial system.

I agree that adoption of the Swedish Model is inevitable.  However, Japan shows that while it is inevitable, at the urging of the bankers, policy makers will push the moment of when the Swedish Model is adopted as far as possible into the future.

This delay guarantees maximum damage to the real economy and the social contract it supports.  It also guarantees maximum bonuses paid to bankers.

At some point, even the best tricks -- the aimless chatter of "other solutions," the putting-off of painful decisions -- don't help any longer. 

At some point, Greece's rescuers in Berlin, Brussels or Paris will have to admit that saving the country is going to cost a lot of money..... the money will simply be a loss for Germany and the other creditor nations. 

They'll have to make it up some other way, such as raising taxes or cutting expenditures.

Under the Japanese Model, the only options for making up a loss from writing down bad debt hurt the taxpayers:  either through higher taxes or less government expenditures.

Under the Swedish Model, a third option for paying for the losses is introduced.  An option that doesn't hurt taxpayers at all.  That option is that banks "pay" for the losses.

The way that banks pay for the losses is through retention of 100% of future earnings to rebuild their book capital levels.

It is common sense that the banks should pay as nobody forced them to extend credit beyond the capacity of the borrower to repay.

There's just one problem, though. This moment of insight and clarity is still a long way off.  

For the time being, it seems as though the euro-zone countries are just going to keep carrying along as they have been. That is, muddling onward and delaying reality for as long as possible. 

This pushing off adopting the Swedish Model is extremely expensive.

It shifts the burden of the excess debt onto the real economy.  As your humble blogger predicted at the outset of the financial crisis, until the losses are realized, the global economy will be in a Japan-style economic slump with a bias towards spiraling downwards that is periodically interrupted by fiscal and monetary stimulus programs.

Angela Merkel is the master of this strategy. The German chancellor wants to push back Greece's necessary payday by at least 10 months. That's because she hopes to be re-elected in the fall of 2013.... 

That means when the euro finance ministers meet on Tuesday to free up the next tranche of Greece's second rescue package, they will only resolve as much as is absolutely necessary to get through the next months. 

They would also rather not have to ask the question as to where the additional nearly €33 billion that it's going to cost by allowing Greece to push back its savings targets again is supposed to come from. And they're less willing than ever to think about long-term solutions, like a debt haircut. 

But this is cowardly and dishonest. Citizens are only going to grow angrier with their politicians....

In Japan, this anger is shown by the high turnover in prime ministers.

In the EU, this anger is being shown by protests.

Like no other government, Germany has stirred up sentiment against Greece and produced arguments about how important it is to be tough on countries in debt. Now it will be that much more difficult for Germany to explain why it all of a sudden makes sense to give money to the very same places.

This is one of the many problems associated with pursuing the Japanese Model.  It is very difficult for a politician to acknowledge that they were wrong in pursuing the Japanese Model even when the facts are clear to the electorate.

Unfortunately, there is no reason to believe that the Germany government is capable of handling the truth about the debt situation in Greece, Portugal, Spain, France, the UK and the US.

More unfortunately, in their unwillingness to acknowledge the truth, the German government is managing to jeopardize the German real economy and Germany's social contract.

The only hope for an end to this mess is the International Monetary Fund (IMF), which obviously takes its principles seriously. For example, the IMF may only give money to indebted countries if they can foreseeably repay the credit and, at the end of the lending program, be able to look out for themselves once more.

How ironic that the IMF is the only hope.  As Asian and Latin American countries will tell you, heading into the financial crisis the IMF's role was to collect sovereign debts for the large western economies regardless of the pain inflicted on their real economy and society.

But this is exactly what Greece cannot do. By all economic logic, the country won't be able to reduce its debt load to 120 percent of its gross domestic product (GDP)by 2020 as planned. At the moment, the country's debt burden lies around 177 percent, and by 2014 it will even be up to 190 percent. 

To recover from such monumental numbers, neither lowering interest rates for old credit nor other tricks that the government is suggesting will work. 

It will actually take either a gigantic economic boom or a so-called debt haircut. This means that the creditors, chief among them the euro countries, would have to release Greece from a big segment of its debts. 

As there isn't an economic boom anywhere in sight, another haircut is going to be the only way out. At least, that's how the IMF and virtually every serious economist sees it. Only the politicians responsible for the situation want to see it otherwise. 

There is no way around it, though. Germany and the other creditor countries will have to pay for Greece. Whether it's called a haircut, bankruptcy, debt forgiveness or a transfer is irrelevant. The only important thing now is that the policymakers find the courage to reveal the truth to their people.

Which means explaining that the Japanese Model and its related policies have failed.  In place of the Japanese Model, the government is going to pursue the Swedish Model and its related policies going forward.

Self-deception in Berlin impedes resolving Greek problem

Der Spiegel carried an interesting article on how the German government's unwillingness to face up to the losses on Greek debt is causing it to throw good money after bad even when other EU countries and the IMF are saying debt reduction is the way to go.

Regular readers know that Germany's leadership has chosen to implement the Japanese Model for handling a bank solvency led financial crisis.  Under the Japanese Model, policies are adopted to protect bank book capital levels and banker bonuses at all costs.

Bailouts of first banks and then sovereigns are an example of these policies.

Please note that under the Japanese Model debt does not go away.  Rather, the burden of debt service on the excess debt in the financial system is transferred to the real economy.  This deprives the real economy of the capital it needs for reinvestment and growth as capital is instead diverted to paying on the debt.

The alternative to the Japanese Model is the Swedish Model.  Under the Swedish Model, the banks recognize upfront their losses on the excess public and private debt in the financial system.  This protects the real economy and the social contract.

A modern financial system is designed to support the Swedish Model.  Banks with low or negative book capital levels can continue in operations and support the real economy because of the combination of deposit insurance and access to central bank funding.

Deposit insurance effectively makes the taxpayers the banks' silent equity partner when they have low or negative book capital levels.  As a result, there is no need for policies like bailouts to "protect" the financial system as the financial system is designed to be robust in the face of losses.

With elections approaching in 2013, Berlin is blocking a workable solution for Greece. German leaders are eager to avoid angering voters by giving more money to Athens, but their European partners are losing their patience. 

Wolfgang Schäuble is as master of portraying political chaos as a strategy. "We need a solution that lasts for a while with Greece," the German finance minister announced last Thursday. But the truth is that he is determined to continue pursuing Germany's approach of muddling along through the euro crisis, much to the annoyance of Germany's partners. 

In Brussels and at the International Monetary Fund (IMF), there is a growing realization that it's time for honesty, especially because the German government also wants Greece to remain in the monetary union. "Things cannot go on this way," says a European Union diplomat. The IMF is openly demanding a "real solution," and yet that is precisely the opposite of what is happening at the moment.

The Greek rescue is a tale of self-deception.

The Japanese Model is built on self-deception.

In May 2010, officials said that a bailout package worth €110 billion ($140 billion) was sufficient. It is now clear that even the second bailout package, worth a total of €130 billion, is too small -- and this is based on calculations that are only about six months old. 

But now there is another shortfall, this time of €33 billion. It's a disaster for Schäuble and Chancellor Angela Merkel. In the run-up to German parliamentary elections next year, both politicians are determined not to confront taxpayers with a real, and therefore expensive, summary of costs.....

A similar type of self-deception is also going on in the US where politicians are trying to argue that the taxpayer broke even on the bailouts.  In the US, the analysis always conveniently ignores that direct cash injection was only one form of bailout (artificially low interest rates being an example of an indirect bailout).

In the midst of all this, it is clear that Greece cannot support its debt burden, most recently more than €300 billion, in the long term. 

Greece is not alone.  There is also Ireland, Portugal, Spain, France, the UK and the US.

The existence of this debt burden which cannot be supported in the long run is is why I continue to say that every day policy makers have the choice of abandoning the failed Japanese Model and adopting the Swedish Model.

But the chance of eventually recouping the money it lends is the IMF's condition for continuing to take part in the bailout program. IMF Managing Director Christine Lagarde has made it clear that she has had enough of deceptive maneuvers in Europe. 

For Merkel and Schäuble, an IMF withdrawal would be tantamount to an admission of failure, and not just because it was the German government that once insisted that the respected organization participate in Europe's programs. It would also signify the loss of close to €20 billion in promised aid for Greece. The euro countries would have to jump in, with Germany alone having to contribute about €6 billion. Even a political grand master like Schäuble probably couldn't spin that as a strategy anymore.

Debt sustainability requirement means Greece will never receive next bailout

The Guardian reports that the eurozone ministers and International Monetary Fund have made it clear that Greece will not receive any future bailout money unless it is on a path to debt sustainability.

Regular readers know that until such time as Greece's debt is dramatically lowered by being written off it will never be on a path to debt sustainability.  Currently, under creditor enforced austerity policies, Greece is heading into a worsening depression.

If the eurozone ministers and IMF stick to the debt sustainability requirement, Greece will not receive more bailout money (technically, it is the creditors that receive the bailout money).

This is a great outcome.  This outcome forces both the public and private sector holders of Greek sovereign and private debt to write-down this debt to a level that Greece and its citizens can afford to service.

By relieving the Greek economy of the excess debt, capital that is currently being used for debt service can be used to purchase goods and services.  This ends the depression in Greece and restores growth to the economy.

In effect, by insisting that Greece be on a path to debt sustainability, the eurozone ministers and IMF are insisting that Greece abandon the Japanese Model for handling a bank solvency led financial crisis and adopt the Swedish Model.

Out is protecting bank book capital levels and banker bonuses.  In is protecting the real economy and Greek society.

Greece cannot receive its much-delayed and critically-needed bailout tranche of €31.5bn (£25bn) unless its national debt level is deemed to be on a path of eventual sustainability, but Athens will not be allowed to default on €5bn of debt that needs to be redeemed next week, a senior eurozone official said on Friday.... 

The long-awaited report on Greece from the troika of IMF, ECB, and European Commission officials is expected at the weekend before Monday's meeting. 

It will report on Athens' compliance with the bailout terms and also include a "debt sustainability analysis" which is the main sticking point and the focus of the row between the IMF and the Europeans. 

At IMF insistence, the bailout terms stipulate that Greek national debt may be no higher than 120% of gross domestic product by 2020 to qualify for the verdict of being sustainable. The troika report is certain to state that this goal is unachievable.... 

Nor will it ever be achievable given the current austerity policies and deepening depression.

That said, I am sure it is possible to create a spreadsheet that will show the debt could be repaid.  However, the assumptions underlying the spreadsheet would have no basis in reality.

Despite IMF pressure on the eurozone and the ECB to write down their loans to Greece and take losses, the official said the ECB "won't tolerate any haircuts on its Greek bond holdings." The German government takes a similar stance.

The German government's stance reflects its desire to protect its banks from recognizing the consequences of their poor judgement when it came to extending credit to Greece and its citizens.

Since the German government is willing to protect the banks from the consequences of Greece, it must be assumed by Spain, Italy and France that the German government intends that they too go through the Greek experience.

Why would any government put its economy and citizenry through the Greek experience?

IMF and EU engage in brinkmanship while Greek bailout fails

The IMF upped the ante in its efforts to get the EU to address the fundamental problems underlying the financial crisis.

Specifically, it called for government institutions, like the ECB, that hold Greek debt to grant Greece debt relieve by writing down this debt.

Naturally, the EU refused.

As the Guardian's Ian Traynor discussed,

The eurozone and the International Monetary Fund are engaged in a dangerous game of brinkmanship over how to respond to a Greek bailout that is going off the rails. 

It is now clear that Athens is highly unlikely to achieve the key IMF benchmark on the rescue of getting its national debt down to a "sustainable" 120% of gross domestic product by 2020.

The IMF came to this conclusion when it realized that the impact of adopting austerity in a recession for a country in a currency union resulted in a 3x greater contraction in demand than originally thought.

The word in Brussels, based on assessments from the troika of European commission, European Central Bank and IMF officials scrutinising Greece's compliance with the bailout terms, is that Athens could overshoot the sustainability target by as much as 25% on current trends, begging the question of whether the IMF will remain a party to the rescue. Figures circulating in Brussels estimate Greece's national debt will be between 130-145% of GDP by 2020 on current trends. 

The showdown between the eurozone and the IMF is being described as eyeball-to-eyeball, a shouting match, and a contest to see who will blink first. It is expected to come to a crunch next month. 

The IMF is insisting that the eurozone and the ECB resort to a new policy of Official Sector Involvement (OSI), meaning a writedown or writeoff of Greek debt to its official creditors, a move that the ECB and the German government are resisting fiercely....

Please remember that had the Swedish Model been adopted at the beginning of the financial crisis, there would be no need for the Official Sector to writedown or writeoff Greek debt.  The debt was held by the private sector, with a majority held by the banks.

It is as a result of five years of bailing out the banks that the Official Sector now has a sizable exposure.

This exposure exemplifies the pursuit of the Japanese model for handling a bank solvency led financial crisis which is designed to socialize the losses and privatize the gains.

Greece needs a bailout disbursement of more than €30bn (£24bn) next month, without which it will go bankrupt. It is certain to get the money, it is said in Brussels, since, following chancellor Angela Merkel's fraught visit to Athens this week, no one in the eurozone or in Washington wants to let Greece go bust or exit the common currency....

With a funding gap opening up in the Greek bailout trajectory of up to €30bn, the IMF is said to be arguing that the Europeans should foot the bill by writing down Greece's official debt. Other ideas being mulled over are to "extend" the €130bn bailout (Greece's second) or concoct a third rescue, all deeply unattractive options for Merkel who would need to return to an increasingly recalcitrant parliament in Berlin in an election year. 

The row comes as divisions open up in public between the IMF and eurozone leaders over the merits of austerity, after an IMF study released this week found that it had underestimated the impact that fiscal cutbacks have on economic growth. 

This study has been rebuffed by some eurozone leaders, with commissioner Olli Rehn arguing that it would be a mistake to change course. "The EU cannot be making swift turns, rather it is a convoy and you have to carefully consider which policy turns are best," he said. 

The best policy turn is to adopt the Swedish Model with both ultra transparency and the European Stability Mechanism becoming a backstop for each EU country's deposit guarantee.

BoE's Paul Tucker sees 'uncontainable' backlash to another bank bailout

In a speech to the Institute for International Finance, the Bank of England's Paul Tucker, the favorite to become the next governor, observed that the backlash to another bank bailout would be 'uncontainable'.

Given that Spain is under enormous pressure from Germany to bailout its banks, we are going to test his theory shortly.  As regular readers know, Spain's financial system is designed so that it doesn't need to bailout its banks.

It needs to adopt the Swedish Model with ultra transparency.  This results in the banks absorbing all the losses in the Spanish financial system and providing the data to prove the point. As shown by Iceland several years ago, this solution protects the real economy and Spanish society and sets the stage for growth.

Mr. Tucker includes many recommendations for what banks could do to make themselves less likely to need a bailout including living wills (which won't work in a financial crisis) and breaking up into smaller banks (which bankers won't do because it would cut their pay).

Completely absent from the list was the one solution that would work:  require the banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

With this information, banks and other market participants could  independently evaluate the risk of each bank and adjust the amount of their exposures to each bank to what they can afford to lose given the risk of the bank.

This ends the risk of contagion and with it any justification for bailing out the banks.

Mr Tucker ... said it was in the industry’s own interests to set up so-called “living wills” that would help regulators manage a “speeded-up Chapter 11 [bankruptcy] and recapitalisation” programme that would protect taxpayers from another round of multi-billion pound bail-outs. 

He also made a veiled attack on the concentration of power in Britain’s big four banks, saying that more operators and more competition would be better for financial stability and the economy. 

The UK taxpayer is still propping up the banking system with £228bn of loans and guarantees, according the National Audit Office, and the rescue drained £2.4bn of cash from the public purse last year....

A number that is similar in size to what UK bankers paid themselves in bonuses. 

 “The objective is to get to a position where public money is never used to provide solvency support for a bank failure. This is hugely in the interests of the industry because the effect is to politicise banking. 

If the objective is to never use public money, the only way to achieve that is by requiring the banks to provide ultra transparency.  It is only by ending the risk of contagion that bankers are stripped of their ability to 'scare' policymakers into bailouts.

“If there is to be another episode of massive taxpayer solvency support to sort out a crisis once we’ve eventually got through this one I think the backlash would be almost uncontainable.”

Clearly, Greece is showing what happens when policymakers go to the bailout trough once to much.

Spain is on the verge of providing further confirmation that we have reached the end of the line bailing out the banks.

Your humble blogger has said repeatedly that bailouts are the wrong solution.  Apparently what is needed to get policymakers attention so they stop listening to the banks is literally massive protests and social upheaval.

Bank resolution plans are also vital to lowering the levels of capital that they must hold, he added. Without such a safety net, “the capital surcharge would be considerably bigger than it is going to be”.

This is a classic example of using complicated rules and regulatory oversight in place of transparency.

Outside of the regulators, no one believes that resolutions plans will prove effective in a time of crisis.  Resolution plans suffer from the simple problem of in times of crisis, there are very few buyers and the price they are willing to pay for assets drops precipitously.  This suggests that capital needs to be even higher to absorb the losses, not lower as Mr. Tucker indicates.

Frankly, bank resolution plans are not preventative.  The crisis has to hit first.

Transparency is preventative.  Market participants adjust their exposure to what they can afford to lose before the crisis hits.  This makes it very simple to close a bank as everyone knows what its exposures are worth.

Central to resolution regimes will be new forms of bail-in debt that would convert into equity and recapitalise banks in place of taxpayer money. “This is for real. This is going to happen,” he said....

Another example of substitution of complex rules and regulatory oversight for transparency.

In the absence of ultra transparency, who is going to buy bail in debt?  No independent third party would buy bail in debt without the ability to independently assess the risk of the bank.

We know that the independent assessment cannot take place by the simple fact that the interbank lending market is frozen.  Banks with deposits to lend do not have the information they need to assess the risk of the banks looking to borrow.

This is no surprise as the Bank of England's Andrew Haldane calls the banks 'black boxes'.

Having bankers buy bail in debt is no solution.  Bankers are smart enough to make it an addition to their current compensation packages and not a replacement for 95% of their compensation.

Greece put through a "Great Depression" needlessly

The Telegraph reports that according to Greek Prime Minister Antonis Samaras Greece is in a "Great Depression".

Regular readers know that to the extent this Great Depression is the result of too much debt, it was completely avoidable.  Specifically, the modern banking system is designed to absorb the losses on the excesses in the financial system and protect the real economy.

By design, banks have deposit guarantees and access to central bank funding.  As a result, they are able to operate and support the real economy even if the banks have negative book capital levels.

The reason banks can continue to operate is that taxpayers are their silent equity partners.  They effectively are putting up the equity through the deposit guarantee while the bank has negative book capital levels.

To the extent that banks are not recognizing the losses on and off their balance sheets, they are effectively putting a burden on the real economy to carry the excess debt.  A burden that redirects funds from being reinvested into growing the real economy to being used to pay off the excess debt.

Starved of funds for growth, the real economy shrinks and the result is a Great Depression.

As I said, this Great Depression is avoidable if policymakers allow the banks to do what they are designed to do and absorb the losses on the excesses in the financial system.  With the real economy protected, funds are instead reinvested in growth and the Great Depression is ended.

Your humble blogger predicted that continuing to pursue the Japanese model under which bank capital is protect and the losses on the excesses in the financial system are placed on the real economy would lead to significant economic problems.

Greece is further along the road to these problems having entered into a Great Depression than Spain, but Spain is also traveling down this road.

There is a way to stop going down this road and it doesn't cost taxpayers anything.  That way is to adopt the Swedish model and require the banks to perform their function of absorbing the losses on the excesses in the financial system.

I know I have said this before, but I prefer that banks absorb the losses and banker cash bonuses are cut to zero well before the real economy and society suffers a Great Depression.

Greek bank deposit run continues despite bank recapitalization as election approaches

Bloomberg reports that despite a bank recapitalization, the Greek bank deposit run has continued.

This is further confirmation that bank book capital levels and solvency are irrelevant when there is an implied or explicit sovereign bank deposit guarantee.

It also confirms that the Greek bank deposit run is a result of the EU policymakers' threats to kick Greece out of the EU and force Greece back onto the drachma.  Depositors are responding to the potential for having their savings converted into the lower valued drachma and are moving their money to avoid this devaluation risk.

Greek deposit outflows have accelerated before this weekend’s elections, two bankers familiar with the situation said, on concern the nation may move closer to abandoning the euro. 

Daily withdrawals have increased to the upper end of a 100 million-euro ($125 million) to 500 million-euro range this month, one banker said, asking not to be identified because the figures aren’t public. A second banker said the drawdown may have exceeded 700 million euros yesterday. ... 

Greek banks are under strain after individuals and companies withdrew about 72 billion euros since the nation triggered a region-wide sovereign-debt crisis in October 2009. While lenders have access to European Central Bank funding, an exit from the euro would cut them off. Depositors are seeking to preserve their cash on concern Greece may adopt a new currency that would immediately drop in value....

EC plot to use competition rules to close down EU banks

According to a Telegraph article,

The European Commission is threatening to use EU competition rules to close down the failing Greek, Spanish and Portuguese banks that have pushed the eurozone into a new crisis, with Greece's ATEbank the first in its sights. 

EU state-aid rules, designed to stop government subsidies distorting competition, give the commission sweeping powers to impose restructuring conditions on bank bailouts or even to block the rescue. 

Over the past two years, the rules have been interpreted generously to allow government bank bailouts to go ahead in return for commitments to restructure failing financial institutions but the mood in Brussels has hardened since the initial credit crunch of 2009. 

”We are moving into a new phase with Greece, Portugal and Spain,” an EU official told Reuters. “Some banks are going to be squeezed. Some are going to be closed down.” 

Regular readers know that the banks that should be closed down are the one's that do not have a franchise that is capable of generating the earnings needed to rebuild the bank's book capital level after it has recognized all of the losses on and off its balance sheet.

For example,

Commission officials are pressuring Greece to wind down failed banks, including its fifth-largest lender ATEbank, by threatening to refuse a bailout on competition grounds. 

If the EU was to block an ATEbank rescue it would mark a policy shift and a more aggressive stance in tackling weak European banks at the centre of a dangerous new moment in the eurozone crisis. 

”If you have a financial stability component, then you could be prepared to rescue a bank, but we are beyond that point now in a number of countries,” the official said. “ATEbank will have to be closed or wound down over time.” 

ATEbank, the Greek central bank and the Greek finance ministry have declined to comment.

Police urge Greeks to keep money in banks (as it is easier for the EU to take that way)

Faced with the prospect of significant losses from the forcible conversion of their savings from euros to drachmas, Greek depositors are naturally withdrawing their money from the banking system.

According to the Guardian,

Police are urging Greeks to keep their money in bank accounts rather than putting it at risk of theft, amid further uncertainty about whether the austerity-struck country will remain in the eurozone....

Greece's national police spokesman, Thanassis Kokkalakis, told Reuters: "Many people have withdrawn their money from the banks fearing a financial crash, and they either carry it on them, find a hideout at home or in storage rooms. 

"We urge people to trust the banking system, leave their money there, or at least in a safe place, not hide it at home, where they must anyway take the basic security measures."...

It appears that the money in the Greek banks is also at risk of theft.  Theft by the EU by forcing Greece off the euro and back onto the drachma.

The question that a Greek depositor faces is which has lower risk:  their mattress or the bank.

ECB increasingly concerned over aid to Greek banks

Der Spiegel ran an interesting article on the current state of the Greek banking system.  The article confirms several of the points that your humble blogger has been making since the start of the financial crisis.

• In a modern banking system with deposit guarantees and access to central bank funding, banks can continue to operate even when they have negative book capital levels.

• Depositors do not run on the banks or even jog so long as they think the sovereign can perform on the deposit guarantee.

• Depositors will jog if not run to the bank if they think that the deposit guarantee will be honored with a new currency worth substantially less than the currency the deposit was originally made in.

According to Der Spiegel,

The European Central Bank is keeping Greek banks afloat with emergency assistance even though urgently needed banking reforms have been put on hold in the election campaigns. 

As Greeks withdraw money from the banks amid fears of a euro exit, the ECB's own risk exposure is mounting. 

When the head of Greece's central bank, George Provopoulos, recently met with his European counterparts, the session turned into a confession. His fellow Greeks had just withdrawn €800 million ($1.022 billion) from their bank accounts, within just a few days....

Most Greek banks are currently cut off from the usual ECB lines of credit. They no longer have sufficient collateral. A number of banks are even currently operating without sufficient capital as a risk buffer for their activities. Indeed, Provopoulos had to accept last week that yet another crop of Greek banks were branded as unfit for ECB refinancing.

The points in the highlighted text are crucial.  The reason that Greeks are withdrawing their deposits is not  that banks are operating without sufficient capital.  It is the fear of having their deposits devalued through substitution of drachmas for their euros.

These zombie banks are being kept alive with help from the so-called Emergency Liquidity Assistance (ELA) -- a rescue aid program managed by Provopoulos. At every session of the Governing Council, he has to have these special allocations approved. 

For the time being, he has succeeded. Last Tuesday, the ceiling for the amount of aid that Provopoulos is allowed to give his banks was even raised again, from roughly €90 billion to €100 billion. But the Council is harboring increasing doubts about this permanent subsidy.... 

At the same time, the risks are mounting on the central banks' balance sheets. 

Already back in February, Greek banks had accumulated more than €106 billion of debt alone in the TARGET2 internal payment system of the euro zone's central banks.

Debt that is backed by the best collateral that was held by the Greek banking system.

But the central bankers are particularly annoyed as they once again have to play the role of major bankroller because the political system is failing to address the problem. Indeed, in the Greek election circus, it looks like the issue of urgent reform of the country's ailing banks may be given short shrift. 

Nevertheless, funds are available: The most recent bailout package for Greece includes €50 billion to recapitalize the financial sector. The euro partners have even already transferred half of this money to Greece. 

The legal conditions for the bailout have not been clarified, though. Originally, private banks were supposed to raise roughly 10 percent of their recapitalization from private investors, or run the risk of being nationalized. Investors are, however, hard to find.... 

By the end of last week, not even an initial bridge financing of €18 billion had flowed to the banks -- funds which the interim government under Loukas Papademos had approved in a rush before the election on May 6....

Not using government funds to bailout the Greek banks is a good thing.  The investment of these funds in the banks would have no impact on the on-going run on the banks by depositors.  These funds could be better used elsewhere.

According to an analyst with the Moody's rating agency, the Greek banks have in the meantime become "economically insolvent," and thus urgently rely on assistance from the rescue fund....

Regular readers know, and the Bank of England's Mervyn King's shouting from the rooftops has helped, that EU banks are insolvent.  The market value of their assets is less than the book value of their liabilities.

Greek banks may have never indulged in high-stakes gambling on the US real estate market, but after they entered the euro zone, they aggressively expanded their lending operations. 

Now, they are threatened with massive defaults. 

Furthermore, the country's financial elite is closely linked to the political arena. At the beginning of the crisis, this prompted the banks to purchase huge amounts of sovereign bonds. The partial debt waiver by private investors a few weeks ago suddenly took an enormous bite out of the banks' remaining capital reserves. This so-called haircut cost the country's four largest banks alone €24 billion. 

To make matters worse, nervous customers have been pillaging their bank accounts since the beginning of the crisis. The banks have already lost one-third of all their deposits.

Some of Europe's central bankers are nevertheless no longer willing to allow themselves to be endlessly tapped for cash. Belgian Luc Coene has already openly warned that even the ELA payments must "absolutely" be stopped if the Greek banks are actually hopelessly bankrupt, and not merely illiquid.

As part of rebuilding the Greek banking system, Greek banks need to provide ultra transparency and disclose their current asset, liability and off-balance sheet exposure details so that market participants can assess exactly what is the true condition of the banks.

Those that are hopelessly bankrupt and do not have a franchise that would allow them to generate future earnings to rebuild their book capital levels should be closed.  The rest of the banks the ECB should continue to support.

"Contrary to widespread belief, monetary policy is not a panacea," wrote Jens Weidmann, the head of Germany's central bank, the Bundesbank, in a recent newspaper article. 

Zero interest rate policies have demonstrated that monetary policy is not a panacea.  However, what we are talking about here is a central bank performing as a lender of last resort.

He is primarily concerned with the lax approach to the collateral that the banks use to acquire fresh money. Standards have been repeatedly lowered during the crisis. According to an Athens banker, the regulations are now "very relaxed." 

The banks have simply submitted massive quantities of their own bonds to the central bank -- after the government stamped them with a state guarantee. 

But what will this guarantee still be worth if Greece becomes insolvent? The dubious bank bonds along with Greek government bonds make up roughly 60 percent of the collateral that Greek banks have supplied to obtain cash injections.

At first blush, this appears worrisome.  The reality could be quite different.

Remember that central banks do not lend 100% of the value of the collateral.  Instead, they apply a haircut.  It is entirely possible that the market value of the collateral that the Greek banks have pledge still exceeds the amount of money the Greek banks have borrowed. 

Greece's Alexis Tsipras: 'It's a war between people and capitalism'

The Guardian ran a very interesting interview with Alexis Tsipras, the leader of Syriza party in Greece, who wants to require the lenders to recognize their losses on the Greek debt, end the policy of austerity and implement a growth agenda.

He wants to abandon the Japanese model and pursue the Swedish model for handling a bank solvency led financial crisis.  He wants the banks to absorb the losses on the excesses in the financial system and protect the real economy and its citizens from the devastating consequences of trying to support the excess debt.

For regular readers, there is a certain sense of deja vu as this theme appeared in an April post (If Greece's government cared about its citizens, it wouldn't bailout the banks), a March post (Under the Japanese model, Greece is heading for hell) and a February post (Do nations exist for capitalism or their citizens?).

"I don't believe in heroes or saviours," says Alexis Tsipras, "but I do believe in fighting for rights … no one has the right to reduce a proud people to such a state of wretchedness and indignity." 

The man who holds the fate of the euro in his hands – as the leader of the Greek party willing to tear up the country's €130bn (£100bn) bailout agreement – says Greece is on the front line of a war that is engulfing Europe. 

A long bombardment of "neo-liberal shock" – draconian tax rises and remorseless spending cuts – has left immense collateral damage. "We have never been in such a bad place,"... "After two and a half years of catastrophe Greeks are on their knees. The social state has collapsed, one in two youngsters is out of work, there are people leaving en masse, the climate psychologically is one of pessimism, depression, mass suicides." 

Please re-read his description of the social costs of implementing the Japanese model and protecting bank book capital levels at all costs.

But while exhausted and battle weary, the nation at the forefront of Europe's escalating debt crisis and teetering on the edge of bankruptcy is also hardened. And, increasingly, they are looking towards Tsipras to lead their fight. 

"Defeat is the battle that isn't waged,"...

"You ask me if I am afraid. I'd be afraid if we continued on this path, a path to social hell … when someone fights there is a big chance that he will win and we are fighting this to win."... 

The enemy is not Berlin, until now the biggest provider of the monumental rescue funds keeping the debt-stricken economy afloat. 

"It is not between nations and peoples," he says. "On the one side there are workers and a majority of people and on the other are global capitalists, bankers, profiteers on stock exchanges, the big funds. It's a war between peoples and capitalism … and as in each war what happens on the frontline defines the battle. It will be decisive for the war elsewhere." 

Greece, he says, has become a model for the rest of Europe because it was the first country to fall victim to the enforcement of hard-hitting 'growth through austerity' policies pursued in the name of resolving the crisis....

These policies are needed to support the Japanese model.

Under the current rescue plan, which has seen Greeks being subjected to relentless spending cuts and tax increases – including a dramatic drop in pay and pensions – it is the international financial system, and more especially banks, that are gaining most, he insists. 

"Who is surviving, tell me?" he asks. "Greeks aren't … The loans are going straight to interest payment and banks."

The only winners under the Japanese models are the bankers.

The other point that Tsipras wants to make is that he is not against the euro or monetary union. Fears that the country is about to exit the eurozone are about terrorising people to keep the status quo. They are why the country has seen "more then €75bn" of cash taken out of Greek banks since the outbreak of the crisis in Athens in December 2009....

Faced with possibility of having bank accounts that are currently in euros converted to drachmas that are worth half as much, naturally Greeks are taking money out of their banking system.

Notice, it is the threat of the currency conversion that makes the depositors nervous and not the simple fact that all the Greek banks are insolvent.

"We are not against a unified Europe or monetary union," he insists. "We don't want to blackmail, we want to persuade our European partners that the way that has been chosen to confront Greece is totally counter-productive. It is like throwing money at a bottomless pit." 

Over the past two years Athens had received two bumper bailouts from the EU and IMF: €110bn in May 2010 and then €130bn in March this year but the stringent fiscal adjustment programmes demanded in return for the aid are clearly not working, he says. 

"In six months we will be forced to discuss a third package and after that a fourth," he predicts, if the emphasis is not now put on re-energising Europe's most moribund economy through development and growth. 

"European tax payers should know that if they are giving money to Greece it should have an effect … it should go towards investments and underwriting growth so that the Greek debt problem can be confronted because with this recipe we are not confronting the debt problem, the real issue."....

Actually, the bailouts of Greece are really just an unnecessary bailout of the EU banking system.

As run on banks accelerates, Greek banks face collapse

As reported in the Telegraph, the run on the Greek banks is accelerating and may have reached the point where it cannot be stopped.

Quite simply, the run is not a function of depositors concern over the solvency of the banks.  As your humble blogger has said many times, depositors do not care about a meaningless bank capital level.

The run is a function of the perception that deposits left in Greek banks will be converted into Drachma.  A currency that will decline by 50% against the euro as soon as it is issued.

To avoid this loss, Greek depositors are withdrawing their money.

Economists warned that the Greek financial system could crumble within weeks or days unless the European Central Bank steps up support. 

President Karolos Papoulias told party leaders that banks had lost €700m in withdrawals on Monday alone as citizens rush to pre-empt capital controls and a much-feared return to the Drachma. 

He cited central bank warnings that "great fear" might soon escalate to panic. The leaked details lend credence to claims that capital flight by both savers and firms have reached €4bn a week since the triumph of anti-bailout parties on May 6. 

Steen Jakobsen from Danske Bank said outflows are becoming unstoppable, not helped by open talk in EU circles of `technical’ plans for Greek withdrawal. 

"This has a self-fulfilling prophecy built into it and I don’t think we can get to June. The fuse is burning and the only two options now are a controlled explosion where Germany steps in to ensure an orderly exit, or an uncontrolled explosion," he said.... 

The crisis is replicating the pattern of fixed-exchange ruptures through history.... Greek banks have lost 30pc of their deposits since late 2009. The total fell to €171bn in March. 

"The surprise is that there is still so much left. I can’t believe it will stay much longer," said Simon Ward from Henderson Global Investors.

As I have explained, depositors will keep their money in a bank so long as they think the deposit is explicitly or implicitly guaranteed by the government.  When this guarantee is doubted is when the run on the bank occurs.

Now, the EU has managed to overlay the idea that not only is the deposit guarantee not good, but that good deposits will be replaced with Drachma that are worth half as much.

Given this situation, if you had deposits in a Greek bank, you would run to withdraw them too!

The ECB is holding the line with an estimated €100bn of Emergency Liquidity Assistance (ELA) for lenders, channeled through Greece’s central bank. Supplicants must pawn their loan book in exchange. 

"The risk is that banks will run out of collateral since these are low quality assets with haircuts of 50pc or more. The ECB could relax the rules but they would have to take an active decision to do so," said Mr Ward.

JP Morgan said Greek banks have already exhausted their collateral. 

A refusal by the ECB to ease rules would amount to expulsion, forcing Greece "to issue its own money." 

The ECB said it had stopped routine operations with certain Greek banks with depleted capital buffers, but underscored that they are still able to access the ELA scheme....

Julian Callow from Barclays Capital said the ECB risks grave contagion if it lets go of Greek banks....

Slow capital loss from Club Med is showing up in the ECB’s Target2 data. The central banks of Italy and Spain have built up liabilities of €279bn and €284bn, partly reflecting bank withdrawals. This is owed to Germany, Netherlands, Luxembourg, and Finland. 

Italy’s banking lobby said foreign deposits at Italian banks were down 20pc in March. The good news is that the Libor-OIS spread -- the "stress gauge" for banks -- has not risen in this latest spasm of the crisis, suggesting that Club Med deposit flight remains modest for now. 

That could change fast if a Greek exit shatters the sanctity of monetary union.

Run on the Greek banks begins in earnest

The Telegraph reports that the run on the Greek banks has accelerated.

Karolos Papoulias, the Greek president, warned party leaders that their continued failure to agree was risking “fatal consequences”. 

Citing a secret government document, he said Greeks were already pulling £80 million a day out of the country’s banks. Almost €1 billion (£795 million) has been withdrawn since the last elections on May 6. 

“The extension of political instability will lead to fatal consequences. The absence of government is a serious risk to the financial security of the Greek people and our national existence,” the president was reported as saying. 

Mr Papoulias said he had been warned by the central bank and finance ministry that the country faced “the risk of a collapse of the banking system if withdrawals of deposits from banks continue due to the insecurity of the citizens generated by the political situation”. 

Some economists have suggested that a euro exit could be done in an orderly way by closing Greek banks while the country prepares to reissue the drachma. Costas Simitis, a former prime minister, said that would spark panic, warning that Greeks would rush to withdraw money from banks. “If they close more than three days there will be a bank run,” he said. 

This reaction by Greek depositors is completely predictable.  Deposits stay put so long as the depositor thinks that the government will ensure the depositor can get their money back.  Depositors run to the bank to withdraw their money if they think they might only get 50% of their money back.

A report in Germany’s Wirtschaft Woche magazine forecast that a Greek bankruptcy and exit from the euro would cost the governments of the single currency’s 17 members £240 billion, pushing the eurozone and European economy into a crisis not seen since the 1930s.

My question is why anyone believes that the run on the Greek banks will stop in Greece and not spread immediately to say Spain, Italy, Portugal and Ireland?  There is no chance that those countries economies will not be seriously hurt if the collapse of the Greek economy results in a recession in the EU.

Greek voter rejection of bailouts and austerity is itself rejected by politicians who adopted these policies for Greece

To no one's surprise, the politicians who signed on for subjecting Greek citizens to austerity while banks are bailed out, are rejecting the idea that there is a mandate to find an alternative solution that does not involve austerity and bank bailouts.

This rejection comes in spite of the fact that Greek voters overwhelmingly voted no on austerity and bank bailouts by voting into office a majority that is against austerity and bank bailouts.

As reported by Bloomberg,

Alexis Tsipras became the surprise package of the Greek election by telling Angela Merkel to get lost. 

“The people of Europe can no longer be reconciled with the bailouts of barbarism,” Tsipras, 37, said on state-run NET TV late yesterday after his Syriza party unexpectedly came second in the country’s election. “European leaders, and especially Ms. Merkel, should realize that her policies have undergone a crushing defeat.” 

Tsipras’s calls to tax the rich, delay debt repayments and cut defense spending struck a chord with voters angry at austerity measures imposed by the European Union and the International Monetary Fund in return for bailouts. 

As far as euro membership is concerned, Tsipras told voters that a Greek exit would put the currency itself in jeopardy and they shouldn’t feel “blackmailed” into more austerity. 

The result put Syriza ahead of the Socialist Pasok party, potentially derailing efforts to implement the terms of the country’s financial lifeline. Syriza, which means Coalition of the Radical Left, won 16 percent of the vote, projections showed. That exceeded the 13 percent won by Pasok, one of the two pillars of the political establishment since 1974....  

Greek voters flocked to anti-bailout parties, official results showed yesterday, as the country balks at an unemployment rate of almost 22 percent. That’s throwing doubt on whether, New Democracy and Pasok, can form a coalition to implement spending cuts to ensure the flow of bailout funds. 

Pasok party leader Evangelos Venizelos, the former finance minister who negotiated the second rescue packages, said the electorate had provided no clear mandate and called on a pro- European national unity government to be formed....

It is a question of interpretation whether there is a clear no austerity and no bailout mandate when the parties that reject this idea represent the majority.

Bowing to German austerity, Greece agreed to impose pension and wage cuts in return for two international rescues worth 240 billion euros ($312 billion). Greece must continue spending cuts to keep disbursements flowing. Failure to do that may determine whether the country has a future in the euro area. 

For Tsipras, a civil engineer by training, the question of Greece’s continuing membership of the euro is overstated because its exit could mean an end to the currency itself. 

“The crisis isn’t just Greek, it’s European,” he said on April 22. “There will either be a collective, sustainable and fair European solution to the public debt issue or it will collectively fall apart. The Greek people should understand that this blackmail is false and they must stop blackmailing them with a supposed exit of just Greece without the destruction of the euro.”

Regular readers know that what is driving austerity was the adoption in 2009 of the Japanese model for handling the bank solvency led financial crisis.  Under the Japanese model, bank book capital levels are protected at all costs.

As a result, rather than the banking system absorbing the losses on the excesses in the financial system, the real economy has to absorb these losses.  One of the ways for the real economy to absorb the losses is austerity.

Regular readers also know that modern banking system are designed to absorb the losses on the excesses in the financial system and protect the real economy.  Hence, austerity is optional.   Which raises the question of why any politician would vote for it.