Greek Margin Call



Triangle of Doom 060115

Figure 1: Triangle of you-know-what, continuous WTI futures contracts, chart by TFC Charts, (click for big). Petroleum price decline is just one piece of evidence for credit distress; another is the steady increase in bond yields which reflects the anxiety on the part of lenders that they might not be repaid.

It is difficult to make heads-or-tails out of the Greek melodrama playing out at this moment. To default or not default, in the eurozone or out. Who knows? Observers are confused and so are the participants, what is clear is that the stakes are very high. The group designated to absorb the hardest blows cling to the bottom of the economic mast; workers, pensioners, farmers, children, the ill- and disabled as well as ‘outsiders’. But maybe not. There is the chance of contagion, anything is possible including the chance that some tycoons might lose their fortunes.

Regardless of outcome, the politicians are winners. Even as their follies multiply they experience nothing in the way of personal discomfort. Walking on gilded splinters, they spend every moment within settings as extravagant as Hollywood sets, fawned over by hordes of lackeys. Stuffed like geese for foix-gras on mysterious ‘luxury food’, their greatest hazard is that they might get too fat … or that they might be revealed as libertines. When their crimes and blunders have ripened they are pleased to retire with billions they have stolen, enormous (borrowed) pensions, favorable (borrowed) business arrangements, excessive (borrowed) speaking fees and … (borrowed) … consulting jobs even as their constituents are hounded into penury so as to make the interest payments. Other winners include the ordinary ‘Brand X’ criminals who take ruthless advantage of the vacuum that results from the ineptitude of their betters. Misery multiplies … none of this is new. The die for the current round of crises was cast long before the turn of the millennium … there has been that long to do something about it.

Everything that is taking place at this moment in the credit markets in Europe and elsewhere are symptoms, not the disease. An analyst must observe carefully the larger trends and connect the dots. The world’s problem is not failure to properly apply the ‘modern’ model but problems with the model itself. It cannot offer a return, it can only turn valuable capital into waste. The human science experiment has become a gigantic organism that needs endless increase of capital to consume. The organism has reached physical limits — of water, fuel, soil fertility, waste-carrying capacity and credit. An allocation- or rationing process is underway. The means to access resources is by way of credit. Resource capital is indirectly rationed — in a rough and brutal manner — by way of access to loans. No credit = no capital, taking place under everyone’s nose is ‘Conservation by Other MeansTM‘.


The one fact about parties is that they all end. The cocaine runs out. Everyone has to go home.

In the Eurozone and elsewhere, the cocaine — cheap credit — is running out. What remains is the hangover and daunting task of sobriety. Along with the credit, goinge is the gasoline. Things will never be the same.

‘Never be the same’ are fighting words for the Establishment which entrenches itself more deeply into the present even as both it and establishment become less relevant. Because it has lost the ability to reform itself, the establishment lashes out in a reflexive attempt to preserve its vanishing prerogatives. This is self-evident: if reform was possible it would have already taken place, the reforms would have prevented the crises.

Reforms are absolutely necessary. Economic managers do not grasp the currency risk that emerges from both continued austerity programs or default. Economies are containers of social- and political values, shared understanding built upon edifices of trust. Within economies a collective suspension of disbelief takes place that insists bits of colored paper or electronic data are worth something. The trust emerges as more people share the same ‘worth’ idea and gain benefits from it.

Presently, administrators carelessly discount one group’s sense of worth then another’s. Today is Greece, who is on the spot tomorrow? When lost, trust evaporates in a heartbeat, with it goes that sense of worth. At that point, the economy is junk and so is the money, even if ‘the numbers’ indicate otherwise.

Germany cannot afford to gamble with euro risk even as it does so. It holds trillions of EU liabilities both in the form of currency and credits in its banking system along with ongoing business relationships with companies outside of Germany and the Eurozone. German wealth is nothing more or less than the trust earned over the entire 70 year post-war period. The ideal is that every European will collaborate with others; not just some some slaves and other masters, some paying while others collect. Germany pretends it controls its destiny but this is something it cannot guarantee. Trust cannot be directly inserted into the minds of others: what Germany has cultivated carefully with one hand it casually undermines with the other.

Right now Germany plays the part of enforcer for Europe’s bloated banks. As it acts out, every blow rebounds against itself. The outcome of this is suicide by a thousand cuts; self-liquidation taking place right now under everyone’s nose.

The impaired assets on European balance sheets outweigh investor equity and bondholder credit together. Europe is insolvent, liabilities are looking for a place to hide. The logical destination is Germany whether there be a euro or not. Within the euro, Germany cannot depreciate independently, as such it cannot escape the full weight of its neighbors’ liabilities. Consequently, it has no choice but to succeed at its unification endeavor … otherwise, the worthlessness of the others’ balance sheets will be marked up against its own.

German banks and industry are right now stuffed with euros but this is momentary. There is no way possible for the current conditions within German finance to survive the demise of the currency. Germany cannot simply pick up its luggage and move itself away from Europe taking its ‘wealth’ with it. There is no road map for Germany to get from the euro to a substitute currency space The Germans and other creditor countries frozen to the spot: any sign that the Germans might abandon the euro would be the alarm for the others to do the same, to the instant ruin of German creditors, who are owed tens of trillions of euros.

The end of the euro anywhere within the Eurozone would also cast into doubt the security of Germany’s bank deposits. Uncertainty would trigger a run on German banks just as there is a run on Greek banks today. Germany would find itself bound by domestic politics to defend the euro to the bitter end, to protect its depositors. By doing so, Germany would become the fool of the market, the dumping ground for all European liabilities. This is a fate it cannot avoid, because of its long-running success it is the only European country with any money!

To do otherwise would have Germany racing Greece and Italy out the door. The survivor would be the first to grab a lifeboat on the Titanic. This is the nature of unraveling Ponzi schemes where the winners get out early.

Add the currency trap to Keynes’ liquidity trap amplified by the political expediency trap. In its desire to party forever Europe is confronted with the persistence of liabilities that are generated along the way. These liabilities pitch Germany’s tent on the lip of the abyss. With the passage of time and accumulating mis-management, holders question whether euros are ‘worth the hassle’ and ‘worth the risk’ or not. This is not the proper sort of inner dialog to have about any currency.

Outside the euro, Germany’s option would be to depreciate. Doing so at a scale that would ‘manage’ liabilities would be default by another name with the costs falling on German depositors. To choose otherwise and not depreciate would leave Germany facing the same ruin as Greece faces right now; a massive and unsupportable demand for repayments in a foreign currency (euros), a shortage of money, the absence of liquidity and a breakdown of export trade.

The only way for Germany to manage EU-legacy repayment claims would be to re-denominate them from euro to d-mark and then somehow inflate them away against a background of economic growth. However, jettisoning the euro would cut Germany off from its now-captive European markets. This would eliminate the growth potential, there would be little or no inflation and Germany would be crushed by its debts.

As bad as conditions would be for Germany, they would be worse for the other European countries. There would be a scramble for hard currency: every man for himself. If this is to be a German currency there would be a shortage much worse than there is today’s. The Europeans would be faced with the task of reconstructing a monetary system while the rubble of the current mess collapses on its head. The problems in Europe are not a malfunction of the model but the model itself. Constructing a new model would require enormous investment of funds and good will; a breakdown would remove the possibility of both, there would be little in the way of resources with which to (re)build anything.

Germany is Europe’s responsible party, it is EU’s paymaster and the long-time primary beneficiary of the Euro-economic activity. Mercantile Germany sits at the center of Continental trade; German euro surpluses are the consequence of its partners’ deficits. Ironically, German currency risk is no different from Greek risk, because both countries do business in what amounts to a foreign currency. Germany holds a borrowing advantage at the moment but both are built with the same financial armature, the defects of one country are the defects of all the others. The idea that Germany can integrate Europe around its economy … then somehow pull up the ladder when convenient is a dream.

The euro monetary union has had obvious structural defects from the get-go as admitted to by the Euromasters themselves. Now there is resolute refusal to address these defects even as the entire European enterprise accelerates to destruction. If not now, when? Does Angela Merkel or Wolfgang Schäuble honestly believe the Greeks will ever trust the Germans again after such rough treatment at the hands of faceless Troika functionaries? What good can this portend for German business? How do German businessmen expect their enterprises to succeed, on what alternative planet?

Dire times are when political instincts abandon professional politicians at a moment when these instincts are necessary. The Germans refuse to share any of the hardships their policies inflict upon their neighbors. Germans whine but their finance industry underwrote the bad loans, with eyes wide open, for the benefit of German manufacturers … whose ‘goods’ cannibalize the trading partners’ capital. German finance ignored the risks as it ignores currency risk today.

There are depositors run from Greek- and other banks into Northern Europe. The ECB and the Bank of Greece are enabling this flight. Up until very recently funds were recycled back to Greek banks by way of the ELA … but this has been done to amplify the run! It is criminal business that the central banks would perpetuate what they are designed to prevent.

The run itself is a part of the long-standing flow of funds from the rest of Europe into Germany’s national account. The ‘First Law’ states that as surpluses increase, the cost of managing them becomes greater than the surpluses’ worth. This can be seen in Europe where cost of Germany’s current account surplus is a shortage of liquidity and broken markets. Germany must unwind its surpluses, reducing the costs to both its customers and itself. It can unwind its smug sense of institutional superiority at the same time.

The world falls apart, nobody has an idea what to do about it.

The only surprise about Greek default is that it has taken them so long. Europe as a whole has been in a finance crisis for years, there has been plenty of time to ‘innovate’ solutions. Sadly for the Euros, all of the real solutions require giving up something … which nobody wants to do. Instead there is punishment for workers, pensioners, students and suckers lured into investing in countries like Greece. The capital controls are a disaster as the only deposits left in Greek banks are payrolls and business accounts. Without funds the businesses fail. After the controls come the ‘bail-ins’ where remaining deposit funds are divvied up between bank depositors and lenders to the banks. The process destroys the businesses that make up what remains of the Greek economy! The template for this action occurred in Cyprus, it looks to be the plan for the rest of Europe. Here the bankers demand the Greeks their debts while the banks themselves refuse to do the same with their own clients.

Meanwhile, the German -slash- EU -slash- Greek bosses are unable to back themselves out of the corner of make-believe and self dealing they have painted themselves into. There is too much ego and pettiness invested in the current process.

Greece needs debt relief and stringent energy conservation. Default turns out to be the implement of conservation. Broke Greeks cannot drive, a Greece with its own worthless currency cannot import fuel. Instead of voluntary conservation where the citizens have some control over their own humble destiny, there is ‘Conservation By Other MeansTM‘. As elsewhere on planet Earth, fuel in Europe is being rationed by (non-)access to (non-)credit.

Finance dares not risk relief to Greece because it cannot withstand the losses. Relief to Greece means relief to all the other Euro-deadbeats. At the same time, no relief insures the collapse of the entire finance edifice as defaults proliferate and distrust spreads. What cannot be repaid by borrowers must be paid by the lenders. When neither can repay the costs are lodged against the entire credit system. Because the same system enables resource (capital) waste, fashionable distractions and nothing else, there is nothing that can be turned to the task of repayment. Finance turns to itself for more loans, that is all there is:

Fred GDP-debt 061515

Figure 2: US total credit market liabilities compared to US GDP, chart by @FRED. Economic activity (GDP) cannot retire the debts taken on to subsidize GDP. Consequently, debts can never be retired, only rolled over; credit expands exponentially as a result.

Between borrowers and lenders, there is no middle ground or room for compromise: borrowers become insolvent when they can no longer borrow; they are prevented from borrowing because they are insolvent! It is within this charmed circle the entire European economic management has trapped itself. Economists insist finance level debts must be retired by way depreciated human labor without suggesting how. Finance debts are too large: what pays is debt. Out of the shadows lurks the Minsky Moment, when the cost of servicing exiting loans requires the economy’s borrowing capacity.

Buying or not buying: at bottom economics is so simple, “the mind recoils,” as John Kenneth Galbraith once remarked. Credit distress constantly bubbles just beneath the surface because of the dependence upon the marginal customer who might at any time be insolvent. The increase of so-called ‘prosperity’ across expanding human populations guarantees an increase in these customers … those who decide or who have decided for them they will not buy something. No buying = no economy.

Notable is the absence of imagination on the part of European managers. There a million things that can be done, rather than adhere to the demands of lenders.

The Syriza government in Greece has played into the hands of forces intent on destroying it. Even as it default it begs for more loans. Greece needs to do for itself rather than beg. The Greek government can do so by issuing non-liability fiat euros — Greenbacks — and use them to retire euro denominated obligations on a fixed schedule.

Management must make its way to Greece, Italy, Spain and the rest to reassure the citizens of these countries that their sacrifices are not in vain, that there will always be a euro, that they will be a part of it, that there is some sort of light at the end of a long tunnel. Merkel and LaGarde and Draghi must go to the people and treat them as partners rather than subjects of the banking cartel.

So must the leaders in Washington, New York, in Japan and even China. The consequence of failure to reach out to their citizens is for the bosses to become bystanders in the affairs of their own countries.

The policy makers of the Eurozone must start holding the financiers accountable. The present criminal conditions cannot be endured any longer. If the establishment refuses to act the citizens will take matters into their own hands, there will be revolutions.

The policy makers must also toss outmoded sovereignty fantasies into the trash. The time for posturing is past, nobody is in a separate boat, there is not one labeled for Germans or Italians or ‘others only’. Like it or not Germany is a part of the world and must carry its burden of responsibility, which it currently refuses to do.

Germany can do with its auto tycoons what it has done with its nuclear variety and put them out of business. No country or economist acknowledges the ongoing drain of European wealth overseas in an endless stream for petroleum energy to run Europe’s toys. Running out is running out: the EU has run out of credit. In doing so it runs out of petroleum at the same time.

Whatever else Germany does it must affirm trust of others in itself, its leadership and its euro project above all else.

Analysts suggest the current crisis it is a matter of policy choices when there are no choices to be had. Austerity is a permanent condition, it is expanding and will engulf all of Europe. Europeans must borrow to buy fuel, the euro economy is borrowing and nothing more. Increased real credit costs direct the bulk of borrowed funds back to the lenders, there are no other returns available.

Driving in circles does not pay for the cars, nor does it pay for anything else. There is nothing for the Greeks but to conserve, one way or the other they will.

Indeed the chart is right to a point:

The euro = gasoline. No euro no driving, gas lines, rationing, etc. Underway in Greece is ‘Conservation By Other Means™’.

Conventional wisdom is the Greeks are shiftless thieves who love to spend others’ money and do nothing to earn it. What they are getting (robbed) from the EU and IMF is exactly what they deserve.

The Greeks are no different from the Germans or anyone else; everyone uses other people’s (borrowed) money. The shiftless thieves are the bankers who made loans to Greeks as soon as they had access to the euro. These loans were vender financing for German automakers who profited from the sales. Greece and the other European countries were — and are — economic captives of mercantile Germany. Where else can a Greek (or German) spend a euro but in Europe? What sort of good would he buy with the cheap German bank financing.

Sadly, the goods sold to Greece did not provide the means for Greeks to earn anything. Driving a car does not pay for it … nor does it pay for the fuel, the roads, the real estate … the Olympics. What pays is debt and lots of it. Right now Greece borrows millions of euros per day to hand over to Saudi Arabia … in order to keep its worthless fleet of style machines on the road. This is simply shoveling good euros down the rathole.

Now the piper must be paid, the absence of return has bankrupted Greece … along with Europe and the rest of the world. How the ruin plays out is irrelevant: what is underway in Greece is easier on the Greeks than alternatives. The Greeks can look toward Syria, Ukraine or Yemen. Not to worry: without some changes including stringent, voluntary conservation … war will come to Europe.

Coming to a suburb near you.