Why Greece's spillover across euro area will probably be contained this time

Greece on the brink: the political fallout
BUSINESS SPECTATOR JUNE 29, 2015 2:29PM

Stephen Bartholomeusz

Business Spectator Columnist
Melbourne
There’s been a growing sense of inevitability about the shutting down of Greece’s banking system and the imposition of capital controls that occurred at the weekend as it became increasingly obvious that Greece’s Syriza-led government wasn’t going to accede to its creditors’ demands.

In the six months since Alexis Tsipras and his leftist party came to power with their anti-austerity platform, his hard line approach to the concessions demanded by the rest of Europe for its continued and increasing funding has produced a hardening of attitude from Greece’s creditors, which have already extended more than €240 billion in exchange for commitments to austerity that the Greeks reneged on.

The confrontational nature and, to a degree, the political naivety of the Tsipras approach, played badly in the rest of Europe and has created a wider political dimension to the financial crisis facing Greece.

It forced leaders elsewhere in the eurozone to factor in the domestic political implications of extending an open-ended bailout for Greece without some austerity concession in exchange. It would encourage leftist parties elsewhere to exploit the anti-austerity sentiment in southern Europe while delivering advantage to the far-right elements in Germany and France.

Even as he unveiled his latest stunt, a referendum on the latest bailout offer extended by the eurozone authorities (an offer that will expire ahead of the referendum), Tsipras was still fanning the flames.

“The dignity of the Greek people in the face of blackmail and injustice will send a message of hope and pride to all of Europe,” he said.

If Greece’s problems relate to its economy living well beyond its means in the lead up to the 2008 financial crisis, Syriza has failed to acknowledge that it has been demanding the rest of Europe to continue financing a standard of living beyond the capacity of the Greek economy, instead using the threat of a fracturing of the eurozone to try to do some blackmailing of its own.

Greece is now very definitely on the brink. Whether that involves a default on its debts (which are now mainly to the IMF and the Eurozone’s institutions) or a “Grexit” isn’t yet clear.

There could still be a “one minute to midnight” compromise, given that the closest payment deadline is a June 30 payment of €1.5 billion due to the IMF. Technically, if that payment weren’t made, it wouldn’t constitute a formal default. The more significant deadline is on July 20, when a €3.5bn payment to the European Central Bank is due.

In the meantime, however, Greece’s banking system has been shut and capital controls imposed. It may not have the cash to pay public servants and pensioners.

With more than €1bn a day of bank deposits flowing out of Greece in recent weeks and the European Central Bank capping its supply of emergency liquidity, there was no other realistic option but to freeze its banking system.

The longer the capital controls remain in place, however, they will increase the sense of crisis and add to the pressure on Greece to quit the eurozone in the absence of a speedy and successful re-engagement with the European institutions.

If Greece were to default on its obligations it wouldn’t necessarily lead to a Grexit, but Greece would have to contemplate introducing a new currency in tandem with the euro to remain technically within the eurozone.

In a Grexit, Greece’s banks would be deprived of external funding. The system would effectively collapse, with the remaining deposits drastically devalued; a reintroduced drachma would be savagely depreciated; inflation would soar; and Greece would be plunged further into recession or, indeed, into depression.

The reinstatement of its own currency would eventually allow the economy to adjust more quickly but Greece has such a narrow economic base that a Grexit, the loss of eurozone funding and severe currency depreciation aren’t likely to provide a pathway to any kind of prosperity.

There had been a lot of discussion and forecasting of what might happen if the negotiations between Greece and its eurozone creditors did break down. The consensus view has been that it would have only minimal impact on the rest of Europe, given the length of the period of forewarning Europe has had to ready itself for a breakdown.

That didn’t prevent a massive sell-off in the euro, even though private sector exposures to Greek debt, whether public or private, are modest, or ripples of volatility through global financial markets.

There will be some concern about financial contagion in the rest of Europe — in Portugal, Italy and Spain, for instance — but the rest of the eurozone would be far more concerned about keeping those countries within the fold than Greece. The direct channels between the banking and financial systems of Greece and the rest of Europe are limited.

There could, however, be short-term (at least) spikes in the yields on issues of sovereign debt by other southern European economies.

There is also a possibility, albeit a small one, that in a world increasingly nervous about the unintended consequences of the unconventional monetary policies being pursued by the key central banks, the uncertainties generated by the stand-off between Greece and the eurozone authorities could trigger some unforeseen and wider consequences of its own.

The longer-term issues generated by the Greek crisis, whether it is ultimately resolved through a compromise that keeps Greece within the eurozone or not, will be the potential for political contagion and the illustration it has provided of the structural fissures within a eurozone where the only real and binding commonality is the currency.

Nearly seven years since they were first exposed by the financial crisis, those fundamental flaws in the foundations of the eurozone are no closer to being properly addressed. They remain a source of continuing vulnerability, not just for Europe but for the global economy and financial system.

Business Spectator

Jun 30 2015 at 9:32 AM Updated 9 mins ago
Greek debt crisis: Rio Tinto boss Sam Walsh fears contagion

Rio Tinto chief executive Sam Walsh meets Chinese Premier Li Keqiang in Brussels on Monday. Supplied


by James Chessell
Rio Tinto chief executive Sam Walsh has urged Greece to end months of uncertainty and remain part of Europe, warning the impact of a 'Grexit' could be more dire than global markets are expecting.

Mr Walsh, who is Australia's most senior Europe-based business leader, arrived in Brussels on Monday to discuss the European Union's trade relationship with China but found discussion was dominated by the Greek debt crisis.

Describing the mood of the EU capital as "highly uncertain", Mr Walsh said there was "a bit of incredulity" over Greek prime minister Alexis Tsipras' shock decision to hold a July 5 referendum on the terms of a critical bailout deal.

The snap ballot has put Greece on track to default on a €1.5 billion ($2.2 billion) payment owed to the International Monetary Fund on June 30 and could trigger its exit from the common-currency eurozone and even the EU altogether.

"All the cards were thrown in the air," Mr Walsh said of a breakfast meeting of business leaders ahead of trade talks with European Commission President Jean-Claude Juncker and Chinese premier Li Keqiang.

"We were meant to be talking about the EU-China relationship. Couldn't get the topic off Greece. The truth of the matter is nobody actually knows. There's a lot of uncertainty. People are hunkering down and dealing with it as best they can. There's a bit of incredulity that it's reached this point."

While the referendum will decide whether or not to accept further economic reforms known as austerity measures tied to a €7.2 billion tranche of desperately-needed bailout aid, European leaders have attempted to frame the vote as decision on the Greek membership of the eurozone.

The poll sent global markets tumbling on Monday and increased fears the impact of a "Grexit" could spread beyond the Mediterranean nation. Greece accounts for just 2 per cent of the eurozone's total economic output but there are concerns its bankruptcy could lead to widespread financial and geopolitical instability.

"I think people need to get real and realise Greece needs the EU as much as the EU needs Greece. Cutting itself off and floating off into I don't know where - I don't believe that's going to work," Mr Walsh said.

"It is something we [at Rio] are very much going to be focused on. Greece is 2 per cent of the EU's total GDP.

"Intuition tells you it is going to be a ripple. But there are a number of people who said the same thing about sub-prime debt prior to the global financial crisis. It is more about contagion. It is more about the mood and confidence and so on. Certainly we have seen the impact in the markets in Asia and Australia. It is creating uncertainty and that's the issue.

"Coming in to the GFC there was a big debate on the interconnectedness of the global economy. I think the lesson we all learnt from that was that it is very much a connected global economy. We can all sit here and say it shouldn't have an impact but it most likely will."

The London-based Rio is Australia's second largest resources company behind BHP Billiton. Europe accounts for about $US5 billion in annual sales of commodities such as iron ore, copper and coal compared with $US19 billion for china.

Mr Walsh nevertheless described Europe as "an important market to us".

"We have employees in the UK, France, Netherlands, Spain and Belgium," he said. "We have operating assets right across Europe."

Mr Walsh said the Greek crisis was a reminder Europe needed to "look east" for trade. "China is a big opportunity," he said.

I believe Greece is a non event except within Europe.

I just dont understand why people who are knowledgeable in fiscal, monetary areas are not explicit in explaining consequences to ordinary people.

They mention many times about "difficulties", " it will be painfull".
These are very broad descriptors.
Being more informed with data and historical examples, they could predict with more certainty what an ordinary Greek could face.

Take the reader through each stage:

-When funding from ECB stops, this is the effect on the banking system.
-when the banks are at this stage... you will encounter this....
-Petrol stations will...
-Supermarkets will...
-Pharmacies will..

People do not understand, appreciate the implications because its all very distant.
The relevance to their lives is very abstract.

I suppose the media too is just taking the opportunity to allow the drama to unfold in order to gain higher readership.

Take the uncertainties out and the drama dissipates.

I think Japan, UK and USA all have serious debt issues. The world is at a critical stage where debt is weighing down on growth. Companies and household are deleveraging and govs have taken all the debt in the balance sheet and it will be harder for them to have the financial power to 'rescue' in event of a crisis. Greece is a reminder and a catalyst what can happen once people start losing confidence in countries ability to repay debt. The sand castle piles up, but nobody knows which grain however small can start the avalanche. I think it is pretty clear every decent fund manager and central bank employee knows Greece in terms of GDP does not have a significant effect to the world.. China also having its problems.
my 2 cents worth

(30-06-2015, 10:13 AM)Porkbelly Wrote: I believe Greece is a non event except within Europe.

I just dont understand why people who are knowledgeable in fiscal, monetary areas are not explicit in explaining consequences to ordinary people.

They mention many times about "difficulties", " it will be painfull".
These are very broad descriptors.
Being more informed with data and historical examples, they could predict with more certainty what an ordinary Greek could face.

Take the reader through each stage:

-When funding from ECB stops, this is the effect on the banking system.
-when the banks are at this stage... you will encounter this....
-Petrol stations will...
-Supermarkets will...
-Pharmacies will..

People do not understand, appreciate the implications because its all very distant.
The relevance to their lives is very abstract.

I suppose the media too is just taking the opportunity to allow the drama to unfold in order to gain higher readership.

Take the uncertainties out and the drama dissipates.

I suppose a grexit is the best long term decision for Greece. Somehow EU doesn't want that ending yet, suggests to me that the creditors might be fearing short term repercussions instead.

In the end corporations and organizations are supposed to be long term strategic entities but unfortunately rum by short term people interested in their own self interests. Likely can will be kicked down the road again.

Sent from my D5503 using Tapatalk

O$P$ but this chow kah is really hanging tough... the tail of the wolf is coming out...

Greece considers legal action to stop expulsion from Eurozone
AFP JUNE 30, 2015 4:58PM

Greece could seek legal action to stop the country being forced out of the eurozone if it fails to seal a debt deal.

Greek Finance Minister Yanis Varoufakis.
“The Greek government will make use of all our legal rights,” Greek Finance Minister Yanis Varoufakis told the London Daily Telegraph.

“We are taking advice and will certainly consider an injunction at the European Court of Justice. The EU treaties make no provision for (a) euro exit and we refuse to accept it. Our membership is not negotiable.”

No country has ever withdrawn from the common currency, but the prospect of Greece crashing out of the euro has grown after its long-running debt crisis took a dramatic turn over the weekend.

Talks between Greece and its international creditors collapsed after Athens rejected demands for austerity measures in return for cash and announced it would hold a referendum on the deal on Sunday.

European leaders have urged Greek voters to back the hotly disputed terms, warning that rejecting the proposals would be a vote against staying in the eurozone.

Greek Prime Minister Alexis Tsipras has left open the door for further talks, while making clear that Greece cannot make a 1.5 billion euros ($A2.20 billion) payment due to the International Monetary Fund tonight, when its international bailout program expires.

The Greek government imposed capital controls and ordered banks and the stock exchange to close for a week, with long queues forming at the ATMs in the country.

EU leaders have indicated they are still open to an agreement to avoid a Greek exit, which would leave a permanent scar on the 28-member bloc.

Anxious pensioners swarmed closed bank branches and long lines snaked outside ATMs as Greeks endured the first day of serious controls on their daily economic lives ahead of the referendum that could determine whether the country has to ditch the euro currency and return to the drachma.

Mr Tsipras was defiant, urging voters to reject creditors’ demands, insisting a “No” vote in next the referendum would strengthen Athens’ negotiating hand.

“We ask you to reject it with all the might of your soul, with the greatest margin possible,” he said on state television. “The greater the participation and the rejection of this deal, the greater the possibility will be to restart the negotiations to set a course of logic and sustainability.”

Greece’s bailout program ends tonight, when the country is unlikely to make its repayment to the IMF but Athens and creditors from the IMF and the eurozone failed to agree on the terms of an extension.

Mr Tsipras called the referendum over the weekend, arguing that demands for tougher austerity measures could not be accepted after six years of recession.

The move shook world markets, saw Greek borrowing rates skyrocket, and set off a credit downgrade further into junk status from Standard & Poor’s rating agency, which said it now sees a 50 per cent chance of Greece leaving the eurozone.

The Australian sharemarket was trading in the red at noon, after fluctuating throughout the morning, following heavy losses in offshore trade.

There aree also some early warning signs that Greece’s problems may prove contagious — the borrowing rates of other highly indebted eurozone countries such as Italy and Portugal inched up slightly.

Investors are worried that should Greece leave the euro and say it can’t pay its debts, which stand at more than 300 billion euros, it will be forced into a chaotic return to the drachma — developments that could derail a fragile global economic recovery, as well as raise questions over the long-term viability of the euro currency itself.

“The major market concern is that if Greece were to default and/or exit, then it might encourage others to do the same,” said Gary Jenkins, chief credit strategist at LNG Capital. “Thus it puts the entire eurozone project at risk of collapse.”

Demonstrators rally in Athens overnight ahead of Sunday’s referendum.
Demonstrators rally in Athens overnight ahead of Sunday’s referendum.
That message was hammered home by European leaders.

French President Francois Hollande said: “What is at stake ... is knowing whether the Greeks want to stay in the euro” ... or they take the risk of leaving.”

Italian Prime Minister Matteo Renzi tweeted: “The point is: Greek referendum won’t be a derby EU Commission vs Tsipras, but euro vs drachma. This is the choice.”

According to a poll conducted by Kapa research for the Greek weekly Vima before the referendum was called, 47.2 per cent of Greeks were for the bailout and 33 per cent against with 19.8 per cent not expressing an opinion.

A second poll, conducted by the Alco firm found an even higher majority in favour of a deal with Europe: 57 against 29 per cent.

Throughout Greece, massive queues formed at gas stations, with worried motorists seeking to fill up their tanks and pay with credit cards while they were still being accepted.

Although credit and cash card transactions have not been restricted, many retailers were not accepting card transactions. Electronic transfers and bill payments are allowed, but only within Greece. The government also stressed the controls would not affect foreign tourists, who would have no limits on cash withdrawals with foreign bank cards.

For emergency needs, such as importing medicine or sending remittances abroad, the Greek Treasury was creating a Banking Transactions Approval Committee to examine requests on a case-by-case basis.

AFP, AP

Jun 30 2015 at 5:19 PM Updated 1 hr ago

Greece's biggest problem is not paying tax, says Con Makris

Billionaire Con Makris came to Australia as a 16-year-old with no money. David Mariuz
by Simon Evans

Greek politicians have been too lax over the years in ensuring people pay their taxes, billionaire property developer Con Makris says.

"If you want to live in a democratic country then you have to pay taxes," Mr Makris said. "That's been the problem for so long."

He likened it to the dysfunction that would eventuate in Australia if people decided they wouldn't pay taxes for a year. "Can you imagine what would happen then?" he said.

Makris is the wealthiest person of Greek extraction in Australia, with an empire worth $1.03 billion, putting him at No 47 on the BRW Rich 200 list.

He said Greek Prime Minister Alexis Tsipras was being very street smart and he thought ultimately Greece would remain in the European Union, because the rest of Europe couldn't afford for Europe to unravel.

"They can't afford for Greece not to be a part of Europe," Mr Makris said on Tuesday from Singapore before boarding a flight to Italy, where he will spend a couple of days before heading to Greece, where he has a luxury yacht moored.

But just in case things did unravel, Mr Makris said he would be stocking up much more aggressively at the ATMs in Milan with cash before he headed to the country that he left in the 1960s as a 16-year-old to come to Australia.

He built his wealth from modest beginnings running barbecue chicken shops, before branching out into property development and shopping centre ownership in the 1980s, mainly in South Australia and Queensland.

"I've got a boat in the Greek Islands," he said.

The mooring fees were an indication of where Greece had gone wrong over the years, he said. If his boat was moored in Croatia or in France he would be charged 100 times more than he was in Greece.

Greece would need to ensure the tourism industry ran smoothly and that infrastructure was kept in good order because that would continue to be an important economic driver, but the government was in a bind because there were few assets left to sell, Mr Makris said.

"They have to look after the tourists."

Mr Tsipras was doing the right thing in standing up to the rest of Europe and trying to extract the best deal, he said.

"He is very clever. He's the only one that has stood up to the European Union."

Mr Makris is the first Greek migrant to reach billionaire status in Australia. He said he doesn't own any businesses in Greece, after selling the Greek second division soccer club Panachaiki in 2009 after owning it for four years.

Mr Makris said he arrived alone as a 16-year-old in Australia and worked 12 hours a day, seven days a week to build up his businesses. That was the type of hard work that was required for success.

"You've got to work hard and keep on going," he said.

O$P$... no $ how to pay... play games lah... nothing new...

http://www.cnbc.com/id/102801387

Greek letter: Are the concessions enough?
Holly Ellyatt | @HollyEllyatt
13 Mins Ago
CNBC.com
15
COMMENTSJoin the Discussion

European markets rose on Wednesday after a letter from Greek Prime Minister Alexis Tsipras to creditors boosted hopes of a deal on reforms, but analysts warned that investors could be getting ahead of themselves.

Tsipras sent the letter on Tuesday as part of a request for further financial aid, although it only became public on Wednesday.

The Greek leader appeared to offer some concessions on reform plans, but also stuck to his guns on other proposals, such as maintaining a 30 percent discount on the VAT (sales tax) applied to Greek islands which lenders want abolished.

Read MoreTsipras letter suggests Greece climbdown

European equities rallied 2 percent on the news, first reported by Financial Times, but analysts were divided on whether the concessions would be enough for a deal with creditors.

Peter Chatwell, an interest rate strategist at Mizuho International, said the letter was "not the climbdown that it seems."
"I strongly doubt Europe will accept this proposal and if Europe sticks to its guns and waits for the referendum, the greater the chance that the government fails," he said in a note.

While Carsten Brezski, senior economist at ING, told CNBC the letter was "another tactical move to stay ahead of the euro zone in the ongoing blame game, rather than a serious change of mind."

"In my view, the euro zone will not move any more ahead of the referendum," he added.

However, Craig Erlam, senior market analyst at forex trading platform OANDA, argued that the letter marked "an incredible U-turn from the Greek Prime Minister."

"Of course, the acceptance (of creditors' demands) does come with conditions attached which is hardly surprising, but they do appear to be watered down compared to previous demands," he said, adding that lenders might be willing to consider the proposals.


Greece is currently stranded in financial no-man's land, without a bailout program -- which expired at midnight last night -- and heading towards a referendum on whether to accept more austerity. If Greeks vote "no" to the reform proposals on Sunday, the county could leave the euro zone.

The Eurogroup will hold a conference call on Greece at 4.30 p.m London time on Wednesday to discuss the situation.

Third bailout coming?

Also crucial for Greece, whose banking system has been paralyzed by capital controls imposed to prevent mass deposit withdrawals, is a meeting of the European Central Bank (ECB) on Wednesday. The bank is expected to review its emergency liquidity assistance (ELA) for Greek lenders, which it capped this weekend.
The ECB is also likely to take into consideration the fact that Greece effectively defaulted on a large debt due to the IMF on Tuesday, and has a payment due to the ECB in July.

Read MoreGreece crisis: Athens asks for new bailout, Merkel hits the brakes
The IMF confirmed on Tuesday that Greece did not make the 1.5 billion euro ($1.7 billion) debt repayment and was now "in arrears." Spokesman Gerry Rice said Greece would only receive further IMF funding when the arrears were cleared.

The missed payment was widely expected following the collapse of talks at the weekend between Greece and its international lenders on reforms. Had the negotiations succeeded, Greece could have received a last tranche of bailout aid with which to pay its debts

'No future outside EU'

Rather than capitulate to lenders after five months of fraught talks, Tsipras at the weekend made the surprise move of calling a snap referendum on Greece's bailout program and austerity measures. Ahead of the vote on July 5, both anti-austerity and pro-European protests have been taking place in central Athens, with tens of thousands of people in attendance, according to media reports.

Poll: How should the Greeks vote in their bailout referendum?

Yes
No
VOTEVote to see results
A poll by published in the broadly pro-government newspaper Efimerida ton Syntatkton on Wednesday found that 54 percent of Greeks would vote "no" to the bailout proposals, but the lead was narrowing.

However, Anna Diamantopoulou, president of Greek think-tank To Diktyo, told CNBC Tuesday that the "yes" vote – which would mean accepting austerity measures, such as pension and wage cuts, and remaining in the euro zone -- would "win at the end of the day."

"This is because Greek people, even in this difficult situation, are still very much pro-European and they do believe that Greece has to be part of the European Union," Diamantopoulou, who is the former education minister for Greece's PASOK party, said. "There is no life for Greece outside the European Union."

-CNBC's Julia Chatterley contributed reporting to this story by Holly Ellyatt, follow her on Twitter @HollyEllyatt. Follow us on Twitter: @CNBCWorld

Holly Ellyatt
Assistant Producer, CNBC.com

Greece blinks first in the game...

Markets rally on report Greece accepts creditor terms

LONDON (July 1): Eurozone stocks and peripheral bonds rallied on Wednesday, extending gains after a report that Greece was ready to accept most conditions from its international creditors in order to reach a deal over its debt crisis.

Greek Prime Minister Alexis Tsipras was prepared to accept creditors' demands for a bailout with only a few minor changes, the Financial Times said.
...
http://www.theedgemarkets.com/sg/article...itor-terms

I suppose Greece is working hard to do that, renegotiating the debt(s), with whatever feasible means...

Argentina recalls its financial crisis, advises Greece

BUENOS AIRES (Argentina) —As Argentines closely watch the financial turmoil in Greece recalling their own worst crisis 14 years ago, the architect of the South American country's recovery has a message for the European nation: Renegotiate your debt.
...
http://www.todayonline.com/world/america...ses-greece