The absurdity of the Greek "bailout" setup is in the news once again. The New York Times reports Athens No Longer Sees Most of Its Bailout Aid
In an elaborate payment system that began after the May 6 election that brought down the Greek government, and is meant to ensure that the Greeks do not touch the cash, the big three creditors are now wiring bailout payments to an escrow account in Greece. There the money sits for two or three days — before much of it is sent back to the troika as interest payment on the Greek bonds that Europe accepted under terms of the bailout deal struck in February.
“Greece will not default on the troika because the troika is paying themselves,” said Thomas Mayer, a senior advisor at Deutsche Bank in Frankfurt. “Why are we doing it like this?” Mr. Mayer said. “Because we’re Europe.”
A Greek government advisor who spoke anonymously, for fear of alienating the European lenders, said of the troika: “They made sure that the sum for domestic spending is kept small enough to force Greece to dramatically raise its own revenues.”
On its face, the situation seems absurd. The European authorities are effectively lending Greece money so Greece can repay the money it borrowed from them.
“You send the money, you call it a ‘loan’ — you get it back and call it an ‘interest rate,”’ said Stephane Deo, global head of asset allocation in London for UBS.
Since May 2010, Greece has been sent €141.7 billion in European taxpayer money to keep the country afloat and ward off a bigger meltdown that might threaten the entire currency union. Of that amount, a full two-thirds has gone to pay off bondholders and the troika.
Only a third has been earmarked to finance government operations, with only a tiny sliver spent on stimulus projects for the anemic economy.
Greek bonds are a profitable investment for the E.C.B. as long as Greece continues to make interest payments. The E.C.B. exempted itself from the debt restructuring deal. And Greek bonds were already trading at a big discount when the E.C.B. started buying them. As a result, the central bank is earning an effective interest rate of 10 percent or so.
Non-Interest on Non-Loans
If the money never gets to the borrower, then it's not a loan. Scam is a more appropriate word. Of the €141.7 billion bailout, only €47.2 can be construed as a loan all of which nearly all went to government operations, none to the average Greek citizen.
As for Mayer's statement “Greece will not default on the troika" we will see about that. Nearly three-quarters of Greece’s debt, or €182 billion, is now effectively owned by the EU the ECB or the IMF, according to estimates by the investment bank UBS.
If Syriza party leader Alexis Tsipras wins the June 17 election, the Troika is going to take a big hit. The ECB's share is estimated to be between €35 billion to €55 billion.
Interest rates on the 10-Year Spanish bond touched 6.7% today after the ECB shot down prime Minister Mariano Rajoy's Ponzi plan to recapitalize banks.
The Spanish banking condition is in such precarious shape that Matthew Lynn of Strategy Economics proposed 'Spexit' Will Come Before a 'Grexit'.
“The euro debt crisis, like any really spectacular geo-economic event, is spawning its own special vocabulary” said Matthew Lynn of Strategy Economics on Wednesday.
We can now add Spexit to a list which includes Merkozy and Grexit, and Lynn believes the chances of Spain leaving the euro are now higher than those of Greece leaving.
“The Spanish are a lot more likely to pull out of the euro than the Greeks, or indeed any of the peripheral countries” said Lynn.
“They are too big to rescue, they have no political hang-ups about rupturing their relations with the European Union, they are already fed up with austerity, and there is a bigger Spanish-speaking world for them to grow into,” said Lynn.
“One in four Spanish households now have no bread-winner. Retail sales are falling 10 percent year-on-year. Yet the prescription from Brussels and Berlin is precisely the same as it has been for every other country struggling with the euro. Endure a deep recession. Let unemployment rise. Allow wages to fall until you claw back competitiveness," he said.
6 Reasons Spain Will Leave the Euro First
On MarketWatch Matthew Lynn gives 6 Reasons Spain Will Leave the Euro First.
The Grexit, short for Greece finally giving up on the single currency, has been trending for the last few weeks. And coming up next: the Spexit.
In Greece, people have just about put up with it — until now. So have the Irish, the Portuguese, and the Italians. The Spanish won’t. Here’s why.
One: Spain is too big to rescue.
Two: Spain has tired of austerity already. Remember, the protests against cuts began in Madrid a year ago with the “indignados” movement, which started sit-ins across major cities in 2011. The protests spread from there to Greece, and other euro-zone countries. The austerity had hardly even begun, yet already it has provoked strong opposition.
Three: Spain has a real economy. The Greeks understandably feel nervous about life outside the euro zone. They don’t really make anything. Spain is a successful economy with a perfectly respectable industrial base – its export to GDP ratio is 26%, similar to the U.K., France or Italy. Only last week the Japanese car-maker Nissan announced a major new investment there.
Four: Spain is politically secure. For many countries, euro membership is more about politics than economics. The Greeks stay in because it locks them into Europe (rather than being part of the Turkish sphere of influence). Latvia wanted in because it made it part of the EU rather than being dominated by Russia. For the Irish, it is about separating themselves from Britain. The Germans stick with the euro because the EU still represents a break with its troubled past.
Five: Spain has bigger horizons. The Spanish economy looks partly to Europe. But it looks just as much to the booming Spanish-speaking economies of Latin America (and indeed the huge Hispanic market in the U.S.). Rather like the U.K., Spanish business has always looked to the global rather than the European market. Why tie yourself to a failing project when there are much bigger opportunities out there?
Six: The debate has already started. There is already a serious discussion underway in Spain about the future of the currency. Plenty of mainstream economists and pundits are arguing that the real problem is the euro, and Spain will only recover once it gets the peseta back. The taboo has been broken. That isn’t true in Greece, where even the far-left Syriza party still clings to the idea that it should stay in the euro.
Debate in Spain
Proving point number six above, El Economista picked up on the story in Comes Spexit: Spain's Euro exit before Greece?
If prime minister Rajoy refuses a bailout by the Troika, what other options does Spain have? Is another puppet government like we saw in Greece and Italy coming up?
The sooner Spain sees the light and gets out of the euro that is strangling it, the better off Spain will be.
Mike "Mish" Shedlock