Regime Change Option on the Table?

It has been clear from the beginning that Greece and its creditors were in a “Mexican standoff” situation. We already pointed this out shortly before Syriza won the election (see: Grexitology: A Mexican Standoff). 1. the “institutions” (formerly known as the “troika”) couldn’t possibly let Greece go, but could also not possibly give in and climb down from their demands and 2. Mr. Tsipras was in essentially the same situation; he couldn’t cross Syriza’s aptly named “red lines”, but defaulting and leaving the euro zone is likewise not palatable to him.


road closed

Moving too far to the left is unlikely to end well

Cartoon by Lisa Benson



The enfant terrible and his creditors.

Photo credit: Guido Bergmann / Reuters


In mid June, we speculated that given their perspective, the creditors may be considering an option that has already worked several times in the course of the euro area’s debt crisis: go for regime change.

Any concessions Tsipras happens to make are putting him on a collision course with Syriza’s left-wing hardliners, including his own wife. These people seriously believe that economic examples worth following are countries like Venezuela. In other words, they are hopeless ideologues supporting an economic model that has demonstrably and consistently failed for more than a century wherever it has been tried.

On the other hand, exiting from the euro means that Syriza would be in conflict with what the vast majority of Greek citizens wants, who understandably have no desire to readopt the drachma. Tsipras may be able to get the necessary votes for a compromise in parliament with the opposition’s help, but that would almost certainly lead to new elections, and very likely would split Syriza (which itself is a coalition of various leftist groups). We cannot imagine that a default and a subsequent euro exit wouldn’t provoke new elections as well.

As a result, the creditors may well be gambling on winning by confronting Greece with a “take it or leave it” offer, which they essentially appear to have done yesterday. If the offer isn’t accepted, the hope may be that a new government will subsequently come to power in Greece and prove easier to handle. In the meantime it has however emerged that the “differences between Greece and the EU have narrowed”, so maybe it won’t come to that.

As a side note: €7.2 billion in creditor funds are to be released if an agreement is struck, but Greece not only has a 1.544 bn. repayment to the IMF coming due on June 30, it also has altogether €6.934 bn. in repayments coming due in July. In short, by the end of July, more than the €7.2 bn. will be needed to make all these payments. The biggest chunks in July are €3 bn. in short term treasury bills, another €452 m. to the IMF, €2.096 bn. to the ECB and €1.361 to euro area national central banks. The bond repayments due to euro area central banks are the remnants that were exempted from the haircut imposed in the 2012 PSI (“private sector initiative”).

In recent weeks, deposit outflows from the Greek banking sector have accelerated markedly. We have updated our charts with the most recent available official data, which include the month of May, but not the panicked withdrawals of the past two weeks. One can probably deduct another €10 billion from private sector deposits to arrive at the current figure. This is pretty grim, as the banking system is undoubtedly running out of collateral (collateral presented for “ELA” is subject to very large haircuts). We are guessing that this may already have happened, and that the BoG is by now getting IOUs from the banks they issue themselves (this is how ELA worked in Ireland a few years ago).


Euro System LiabilitiesEuro system liabilities of Greek banks as of May (includes nearly €90 bn. in ELA funding) – click to enlarge.


Private sector depositsPrivate sector deposits in Greek banks at the end of May – back to 2004 levels – click to enlarge.


TARGET-2TARGET2 liabilities at the end of May – click to enlarge.


Tsipras Presents “Reforms” – Stop the Presses, we Agree with the IMF

What has been totally lost in all the haggling is the fact that the Greek economy needs to be reformed no matter what the outcome of the negotiations is. Greece has gained a bit in terms of competitiveness due to internal price and wage deflation, but since it isn’t a big export powerhouse, this is by itself far from enough. As we have previously pointed out, Greece remains hamstrung by an utterly inefficient and corrupt bureaucracy, regulations that would be funny if they weren’t so awful, a political culture that has by all appearances not changed under Syriza (helping one’s cronies is the top priority) and highly inflexible over-regulated product and labor markets.

No significant reforms have been undertaken in any of these areas. Naturally, every small reform has these days become a bargaining chip, which is in our opinion utterly absurd. Last week, Mr. Tsipras finally decided it was time to move a little closer to the creditors’ demands by offering a concrete reform package. Here is a list of the most important reforms he offered:


Athens accepts that negotiations over debt relief are to be undertaken after the implementation of new reform measures (previously the government insisted these had to be linked). The new post negotiations budget for 2015 would be voted on before 01. July and be valid retroactively

Value added tax: three different tax rates to remain (6, 13 and 23 percent), but more goods and services are to come within the ambit of the highest rate, and VAT rebates for islands are to be discontinued.

Pensions: de minimis changes in terms of cutting pensions, but contributions to the pension system to be raised by 3.9% and contributions to health care by 4 to 5%.

Company tax to be hikes by three percentage points to 29%, plus introduction of a special tax of 12% for companies making more than €500K per year. Anyone making more than €30K per year to pay a “solidarity levy”.

Labor market: demand to reintroduce collective bargaining dropped, but examination of “European framework conditions” with International Labor Organization ILO to be performed, which then are to be transposed to Greece.

Privatizations: resistance to privatizing certain state-owned companies dropped, but only modest revenue targets aimed for (meaning, they want to drag the process out as much as possible).


After studying the proposal, it was the IMF that came out with a proper assessment. According to the Washington-based bureaucracy, the Greek proposal “relies too heavily on new taxes on labor and capital”.

Indeed, this has been the problem with Euro area style “austerity” all along. Wherever governments were forced to do something to bring their budgets closer to the Maastricht deficit and debt targets, the preferred method has been to bleed the private sector dry with new taxes. No-one wants to reduce the size of the State – they would rather destroy what’s left of the market economy before doing that. Examples for this method are Italy under Monti and France under Hollande – and not surprisingly, the economies of both have been performing horribly ever since. Greece is most especially in need of shrinking the State. We have shown the chart below before, but it bears repeating:


greece-government-spending-to-gdpSpending by Greece’s government amounts to almost 60% of economic output. Admittedly GDP is a severely flawed measure of economic activity, but this is even higher than the corresponding ratio in France – click to enlarge.


Obviously, this cannot work. It is quite likely that once these tax hikes are implemented, tax revenues will decline instead of rising (apart from an initial bump as people rush into shops to beat the VAT increase). We would also point out that higher “taxes on labor” are not going to be paid by labor – they will be paid by companies. If one adds all of the above up, a company making more than €500K per year will be hit with a direct tax increase of 15%, its labor costs will rise by 7.9% – 8.9%, and in addition it will lose money on having to remit higher VAT prepayments henceforth.

To this one must consider that a €500K per year profit may well be achieved on razor-thin margins. It is easily imaginable that numerous companies could be immediately pushed over the edge by the additional labor costs alone. Even more jobs would likely be lost. Others may just decide to “go Galt” or relocate to a different country. Entrepreneurs not only have to take great risks, as a rule they also have to work long hours. Unless there is at least a chance that such efforts will pay off at the end of the day, they have no reason to do any of this.

Meanwhile, if the left wing of Syriza were to get its way, Greece would indeed end up a smaller version of Venezuela. As Mish notes here, the “Aristeri platform” of Syriza wants to go for an “Icelandic default”, nationalize the entire banking system and establish a new central bank with its own printing press. Due to the workings of the fractionally reserved fiat money system, banks are closely intertwined with the State (in the euro area this incestuous relationship is now at one remove, as the ECB is a supra-national institution). Even so, it can hardly be expected that a fully nationalized banking system would be superior to private banks. In fact, given the likely direction economic policy would take under Syriza, it is a good bet that such a nationalized banking system would be used to inflate all-out. Moreover, none of the urgently needed reforms of the Greek bureaucracy and regulations would likely ever take place if Greece were to go down this path.



All the parties involved in the haggling over the Greek extend-and-pretend scheme apparently can’t see the forest for the trees anymore. The actual goal should be to establish the foundations for sustainable economic progress in Greece. The debate over Greece’s debt seems actually secondary to this objective. Given how far into the future the bailout repayment terms stretch and how low the interest on this debt is, a big debt haircut via inflation is actually already baked into the cake. The focus on the debtberg and the associated can-kicking exercises ultimately means that the real challenges aren’t getting the attention they deserve.


The BuBa has recently complained about the ECB’s “bridge financing” of Greece via ELA. It is clear though that the ECB doesn’t want to provide the trigger for a collapse of the Greek banking system as long as negotiations continue. It would never be able to live that down.


Charts by: Acting Man, TradingEconomics




Emigrate While You Can... Learn More




Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.


Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA


Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Do You Hear a Bell Ringing?
      Do You Hear a Bell Ringing? The sun shines brightest across the North American continent as we enter summer’s dog days.  Cold sweet lemonade is the refreshment of choice at ballparks and swimming holes alike.  Many people drink it after cutting the grass, or whenever else a respite from the heat and some thirst quenching satisfaction is needed.   Regardless of whether companies were able to “beat estimates” (which as often happens, were revised lower just before the...
  • Sovereign Bonds – Stretched to the Limit
    Anti-Vigilantes We dimly remember when Japanese government debt traded at a negative yield to maturity for the very first time. This happened at some point in the late 1990s or early 2000ds in secondary market trading (it was probably a shorter maturity than the 10-year JGB) and was considered quite a curiosity. If memory serves, it happened on just one brief occasion and it was widely held at the time that the absurd situation of a bond buyer accepting a certain loss if the bonds were...
  • The Motte and Baley Fallacy - Precious Metals Supply and Demand
      Spoofers vs. the Underlying Trend The price of gold fell seven bucks, but the price of silver was up $0.16. In other words, the gold-silver ratio did a little more reverting to that long-forgotten mean.   Launceston Castle in Cornwall, an example of a motte and baley fortification. The castle was built in 1067-1071 AD, either by the Count of Mortain (the half-brother of William the Conqueror) or Brian of Brittany. [PT] Photo credit: P. Vincent   Some story or...
  • Global Stock Markets: Danger Lies Directly Ahead
      A Global Pattern You are no doubt aware of the saying “sell in May and go away”. It is one of the best-known and oldest stock market truisms.   Mark Twain's famous saying about stock market speculation (the other one was “There are two times in a man's life when he should not speculate – when he cannot afford it, and when he can”).  From a seasonal perspective he was definitely right about September and October. [PT]   The saying is in fact justified...
  • Bond Yields in the Netherworld - Precious Metals Supply and Demand
      A Record Amount of Bonds with Negative Yields to Maturity Last week the price of gold went up $22, while the price of silver dropped ¢17. The big news last week was that the yield on all German government bond maturities is now negative. They are also all negative in Switzerland. And in Denmark, all maturities out to 20 years are negative. Interest rates are dropping rapidly in the US as well.   More than $14 trillion in bonds now trade at negative yields to maturity –...
  • Writing on the Wall
    Not Adding Up One of the more disagreeable discrepancies of American life in the 21st century is the world according to Washington’s economic bureaus and the world as it actually is.  In short, things don’t add up.  What’s more, the propaganda is so far off the mark, it is downright insulting.   Coming down from the mountain with the latest data tablet... [PT]   The Bureau of Labor Statistics (BLS) reports an unemployment rate of just 3.7 percent.  The BLS also...
  • Retail Holders Sell Their Gold - Precious Metals Supply and Demand
      A Myriad of Reasons to Buy Gold – But Small Holders are Selling Big moves occurred in the prices of the metals last week, with that of gold up $57 and silver $0.77. We have now reached a price of gold (if not silver) not seen since 2013, when it was on the way down. What is causing this sudden spike in price and renewed interest in gold?   A well-known depiction of investor emotions over a complete market cycle. Interestingly, it appears as though many retail gold holders...
  • Rising Stock Market Volatility – Another Warning Sign
      Bad Hair Days Are Back We recently discussed the many divergences between major US indexes, which led us to expect that a downturn in the stock market was close (see The Calm Before the Storm for details). Here is an update of the comparison chart we showed at the time:   The divergences between various indexes seem to be resolving as expected.   The next chart shows analogous divergences between the S&P 500 Index and two major foreign stock markets:   US...
  • Getting to a Special State of Ugly
    Suspicious Phrases There are certain phrases – like “trust me” or “I got this” – that should immediately provoke one’s suspicion.  When your slippery contractor tells you, “trust me, your kitchen renovation will be done before Christmas,” you should be wary.  There is no way it will be done before late spring.   USD-CNH (offshore yuan) exchange rate – the support/resistance level at 7 finally breaks amid escalating trade war rhetoric. [PT]   Or...
  • Bitcoin – From Greed to Fear
      A Noteworthy Sentiment Change Bitcoin and other cryptocurrencies have declined quite sharply in recent days. Here is an overnight snapshot of the daily chart:   Bitcoin corrects again...   It is difficult to gauge sentiment on BTC objectively, but there is a service that tries to do just that. According to its greed & fear barometer, the recent decline seems to have triggered quite a bit of apprehension:   The BTC sentiment measure of has...
  • Interest Rate Watch and Bond Market Curiosities
    Things To Keep An Eye On Below is an overview of important US interest rates and yield curve spreads. In view of the sharp increase in stock market volatility, yields on government debt have continued to decline in a hurry. However, the flat to inverted yield curve has not yet begun to steep – which usually happens shortly before recessions and the associated bear markets begin.   2-year note yield, 3-month t-bill yield, 10-year note yield, 10-year/2-year yield spread,...

Support Acting Man

Austrian Theory and Investment


The Review Insider


Dog Blow

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts


Gold in USD:

[Most Recent Quotes from]



Gold in EUR:

[Most Recent Quotes from]



Silver in USD:

[Most Recent Quotes from]



Platinum in USD:

[Most Recent Quotes from]



USD - Index:

[Most Recent USD from]


Mish Talk

Buy Silver Now!
Buy Gold Now!