Why the Beautiful New Greek Government Is Screwed

by Wolf Richter, Wolf Street

Greek Prime Minister Alexis Tsipras and Finance Minister Yanis Varoufakis, often in a good-cop-bad-cop manner, have been cruising through the media, lobbing a mix of admirable rhetoric, verbal hand grenades, and down-to-earth explanations. And they have become white-hot media darlings.

So Varoufakis was in Germany to meet with his counterpart, Wolfgang Schäuble, and they didn’t “even agree to disagree,” he said. He urged Germany to help end the “gross indignity” of the Greek debt crisis. The Troika’s austerity program had wasted “too much time, hopes, lives,” he said.

But it’s all about other people’s money.

They’d come to power with a pledge to wipe out half of Greece’s insurmountable pile of debt. Debt restructuring, debt exchange, more haircuts for bondholders, exit from the Eurozone… these are the kind of terms that Syriza party officials have bandied about before and after the election victory.

To show that this isn’t just talk, that the Greeks mean business, the government hired Lazard’s government advisory arm, headed by Matthieu Pigasse, master of sovereign-debt restructurings. And they made sure the media picked it up.

Syriza is also running a highly effective charm offensive. Not just words and smiles – but actions, or at least symbolic actions. It wants to show that it’s different from the prior succession of corrupt, self-serving governments.

And the Spiegel picked it up so that German taxpayers would get the drift: The entire fleet of official cars that prior cabinet members had used would be sold. Among them a custom-made bullet-proof BMW with satellite communications system, acquired for €750,000 by the government of George Papandreou, prime minister from 2009 to 2011 during the heady bailout days. It was last used by Evangelos Venizelos, finance minister during the bailout days and deputy prime minister and foreign minister until the election in January.

Tsipras, who is still driving his Audi A-4 that he drove as leader of the opposition, exhorted his ministers to avoid blowing a lot of money and if possible stick to economy class for official travel. So Varoufakis, who’s ostensibly getting around Athens by taxi or motorcycle, made sure the media depicted him during his whirlwind tour around Europe in economy class.

Georgios Katrougalos, deputy minister of administrative reform and in charge of selling these cars, told the Greek media that “ministers don’t need state luxury cars.” He’ll use his personal car, he said, a classic MG Roadster. Who can’t love these guys that have so much style?

And his personal security? “Why would I need police protection?” he said. “When I notice that someone wants to throw yogurt at me, I’ll resign immediately” – because that would mean, he said, that the people no longer wanted him as minister.

This is the sort of attitude we wish all politicians had. But it’s just part of the government’s charm offensive, where the goal is other people’s money.

So Thursday evening, thousands of Greeks amassed in front of the Greek parliament, not to protest against the government as they’d done in prior years – pictures of violence and fires still resonate through distant memories of the bailout years – but to support Syriza.

But it’s not working.

During the debt crisis years of 2010 to 2012, every time a Greek politician said something untoward about the euro, the Eurozone, or defaulting on the debt – all mild compared to what Syriza’s politicians are propagating these days – European stocks swooned.

I came to call it the extortion racket. Chancellor Merkel, like all successful politicians, governs with one eye on stocks. During the three summer months of 2011, the German DAX, which is the only stock index that really counts in this racket, crashed 30%.

German nerves were rattled. Then, in November that year, Prime Minister Papandreou dared to mention in an exasperated one-sentence comment that he wanted a “referendum” at home; Greeks themselves should decide if they wanted to keep the euro and subject themselves to the umpteenth austerity and bailout plan being concocted at the time. The EU deposed him and installed a caretaker government. Something needed to be done to calm the waters.

Taking down European stocks and bonds, and thereby hurting the wealth of powerful entities and investors has been the sharpest weapon available to the prior Greek governments. And it worked – to some extent.

It resulted in a remarkable socialization of losses. Not that the Greeks benefited. But banks, hedge funds, and other entities were able to unload their toxic Greek bonds onto the ECB, the IMF, and the European bailout mechanism. Together they currently hold 76% of the Greek debt. The remaining private sector bondholders had to take a big haircut. It also ensured that Greek politicians would get to keep their euro-denominated pensions, rather than pensions converted to dwindling drachmas.

If Greece defaults on its debt, it would mostly be taxpayers in other countries, particularly German taxpayers – but also US taxpayers via the IMF – that would eat the losses on deals banks and hedge funds had made a killing on.

Now the financial markets don’t care anymore. Despite Syriza’s financial firebrand rhetoric before and since the election, European stocks had the best January since 2011. The all-important DAX is a hair away from an all-time high.

The only market that has been hit by the pre- and post-election firebrand rhetoric has been in Greece.

Since June last year, Greek stocks have plunged 40%; half of that since early December. Greek bank stocks have been demolished. Now the ECB has cut off one of its funding mechanism, and they’re facing bank runs. The 10-year yield of Greek government debt spiked to 11% a few days ago and now sits at just under 10%, in an otherwise near-zero environment. Financial mayhem is breaking out in Greece, while investors elsewhere are raking in the QE-fattened bucks.

Every time Syriza’s politicians fire a verbal dart, they’re not sinking German assets and banks; they’re sinking Greek assets and banks.

And that’s why neither the ECB, nor the IMF, and least of all the German government show any appetite for officially telling taxpayers in Europe and around the world the obvious, that they were shanghaied into bailing out banks and hedge funds during the last few waves, and that now was the time to begin eating the losses.

Alas, debt that can never be repaid won’t be repaid. That’s the other side of the equation. Whatever “solutions” will be found – Greece’s more or less orderly exit from the Eurozone or some form of politically palatable restructuring of its debt – banks and hedge funds, and their investors, made off with the money long ago. And taxpayers outside Greece are left holding the bag, one way or the other.

The ECB is starting up its own QE, but won’t buy anymore Greek bonds. Its deposit rate is already negative. Other central banks around the world are falling all over each other lowering their benchmark interest rates. Which begs a big fat question.

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