103 Months of recovery, what could end it

After years of single-direction trajectory for the markets, the recent correction has jolted people from their complacency. Well, many people. The subsequent rallies are proof to one set that pressure has been taken out of the markets, and the upward track can restart. To others, the expression "dead cat bounce" continues to be the phrase of the week.

Being very clear, I do not know if the top has been reached, or is there more headroom in this market. I have no idea. None. Also being clear, while the discussion focuses on the US markets, there is nothing in here that either does not have or is not impacted by events and economic situations in other countries.

If the markets continue their advances, how far can they go, and for how long? Is theUS in the "demographic sweet spot" that I wrote about in August 2017? I asked if the fall in the US labour market participation rate had been strong enough to create sufficient pools of surplus labour to allow for multi-year growth as that surplus labour drip-feeds into the workforce. If it is, then there may actually be a few more years of growth in the economy and the markets. If not, then the third longest recovery in US history may come to a sudden end.

So what happens when this recovery comes to an end, and the US enters recession? At 103 months as of writing, this recover is the third longest since the end of theGreat Depression, and only 4 months short of being the second longest. The fourth longest was only 92 months, and the fifth a mere 73. This recovery is almost a year longer than its number four, and two and a half years longer than the fifth. Interestingly the longest lead up to the “dot-com” bubble and subsequent crash. Does this recovery have another 17 months, another year and a half, of additional steam, to tie the longest recovery? And if so, will we see continued growth in bubbles that we saw leading up to 2000? Or, do we have enough bubbles already?

Again, I cannot answer that because I simply do not know. The recent market "correction" was a wake-up call, and a reminder that it is not all "sunshine and lollipops". There are systemic pressures building up, and one day, the markets will switch from Bull to Bear. What might make that happen?

There are a number of potential catalysts that could provide the tipping point, and with that a sustained downward trajectory for the markets. The following list is not complete by any means, but gives an idea of the range of potential situations that could, once the fall is well underway, be pointed to as the catalyst.

Most important, there is not one situation that will cause the coming crash, and all are interlinked and interdependent. Each can, and probably will, impact and potentially exacerbate another or multiple others. If housing starts collapse, so will house prices, and with that the “wealth effect” tripping over into consumer credit (although in this example, consumer credit may stabilise instead of continuing to grow) and potentially rising default rates.

I will delve deeper into each one of these in coming posts, but for now, the following outline of each should serve to set the scene, so to speak.

Interest Rates: Off the back of rate hikes by the Fed, the Feb rate could reach as high as 3.25% or even 3.5% by late 2018. This will flow into the 10-year Treasury, already hovering around 2.9% up from a low of 2.06% only six months ago. Should the rate continue to rise, the flow-on effects will be felt throughout the debt-driven economy. At some stage, the forward potential negative impact on consumer credit creation and utilization capability will strike, and with that a sudden loss of confidence.

Inflation shock: Years of QE, QEII, Twist, Abbenomics, and ECB purchases has flooded the system with new money. Where has it gone, what why hasn't inflation appeared as so frequently predicted? Countering the assumption that the new money should be driving inflation, there is an argument that surplus labour is keeping wage inflation in check, and with the, general economy-wide inflation. If they are not making more money, then the average worker cannot drive up prices. What happens when a really bad inflation number prints - in the US, UK or Germany for example?

Budget deficits: But what is the single event that is used by media pundits to 20/20 explain what happened. Could it be a Congressional Budget Office projection stating that servicing of the national debt will exceed 8% of the 2019 federal budget (from a current 6% of the federal budget)? Or could it be a projection for $1 trillion budget deficits for the next four years? After all, no one believes the projected temporary increase in spending followed by a drop to a balanced budget level.

External Shock: Or maybe the markets will react to an external event or geopolitical risk event, such as a US strike against the nuclear capabilities or Iran or North Korea. The intervention in northern Syria by Istanbul has already resulting in a sharp drop in the Turkish stock markets. Such a shock could undermine confidence in international trade or fuel expectations of increased in input costs and commodity costs. The markets have been remarkably resilient to geopolitical risk over the past year, so any shock will probably need to be a big one. Ultimately, the list of potential geopolitical shocks is as long as you wish to spend reading or writing.

We should not forget that there are a number of major economies each under their own strains, with many of those strains being similar to those witnessed in the US economy. The UK has suffered a 5.7% drop in year on year private auto sales, with predictions for a further drop in car sales in 2018. And before saying "but they are a small country" remember that they represent 65 million people, and that this slowdown will impact German auto makers as well, providing some stress, albeit minor, to the German economy. 

Housing market: Bad news in the housing market could tip the scales, and send the marketing into a self-reinforcing negative spiral. This potential shock is tied closely to underlying interest rates, inflation, and the Wealth Effect based on an ever-raising stock market. A multi month sustained drop in housing starts, completed sales, or house prices could shock the markets, and become the 20/20 hindsight event that causes a crash.

Automotive Loans default rates: Current default rates are increasing, and the total outstanding loan period is also at a record high. In 2016 the average outstanding car load was 5.5 years. It is possible to get an auto loan at 72 or even 84 months duration. In addition, over 30% of used car trade-ins areunder water. Combine the two, and the consumer is likely to become trapped in the vehicle they are in, and with that trap will come a reduction in car sales, and an expectation of future poor performance by the automotive section, a sector that accounts for X% of the US economy.

Credit Card default rates: The American binge on consumer credit continues, and in fact never really stopped. Net savings rates are at historic lows of around 2% (average across the entire economy) while credit card debt continues to rise. This is unsustainable. The only questions are, what is sustainable and when will the bubble pop, and will we recognise that it has popped. A failure in confidence that consumers will be able to afford the current credit load will not come as a slow dawning, but will come as a sudden shock, and that shock could rock the markets.

Productivity: Linked so closely with that credit crisis is the concept that worker productivity will continue to improve. Yet for the past few quarters that has not been the case, or has been true at a much reduced level. A failure to continue to increase productivity will directly impact worker wages, company profitability and therefore achievement of earnings expectations. Again, a sudden realisation of future down-trend impact on company values may arrive as a shock, and may be the catalyst for a market collapse.

Environmental event: To this point I’ve focused purely on potential economic events or situations, and have avoided environmental events. These could range from the hurricane that breaks the insurance industry, storms in Europe that result in a short term economic downturn, or a major earthquake on the West Coast of the US. I’m ruling out volcanos and meteors, as the probability is simple too low. I’m not ruling out Climate Change related events or situations, major droughts, or resource depletion such as a collapse of the water table in the San Joaquin valley of California.

Maybe the "dead cat bounce" is just a slightly longer bounce, and the fall is already coming.

Whatever the trigger, when the fall in the markets come, it will be steep and quick, followed by months if not quarters of a cyclical bear market. And while I am writing based on the US economy and markets, the same issues highlighted above are true for so many economies, and any individual large economy could provide the trigger for a global rout.

Grexit: The "Left" Failed Again, and Europe continues to fail Greece.

Soon, the Prime Minister of Greece will be forced to accept that capitulation did not save Greece, and that he has failed. Not only did he fail, but he failed in every way. Not only did he not achieve any concessions from Europe (read Germany), the IMF, ECB or European Parliament, he also failed to deliver the mandatory legislative changed demanded by the creditors. He failed to reform the Greek government, and instead has spend nine months perpetuating an already disastrous status quo.

Sadly his personal failure to stand by his values, and more importantly to meet his obligations to the 61% of voters who said "OXI", will taint not only his memory, but the entire "Left" for years to come. Meanwhile for his failure of nerve, the Greek people have lost a year of potential recovery, or at least the additional pain before the recovery has been postponed by a year, and the base from which they will begin their recovery has been reduced even further.

But nobody should be of any doubt, there will be a Grexit.

The Greeks know that the only way is out. Is Tsipras simply trying to hold power long enough to feather his nest (and create a future personal revenue by 'saving' the EU)? Does he really think that he will be loved for his treason?

How much longer before tractors blocking highways and undertakers going out in sympathy strikes leads to mass demonstrations in downtown Athens? Riots of farmers are already happening in Athens. General Strike anyone?

Greek Tractors about to block the highway

Greece's masters, also known as the European Commission and the Reichstag, meanwhile vilify Greece for its response to the flood or migrants (oops, refugees) that pour across its borders from Turkey, their NATO ally.

So while we have two themes here; subjugation by European powers, and exploitation by a NATO ally, the core problem is the treason of the Prime Minister. He claims a "mandate" from the post-treason snap election, an election in which the choice was the current traitor, or the previous traitors.

And in the snap election, the voter turnout dropped significantly from the referendum, to just over 50%. Looks more like voter apathy then a mandate.

Meanwhile the Center (Brussels and Berlin - if two places can be "the Center") lambaste Greece for not spending their last Euro on stopping migrants from getting in, and then moving on to wealthier European countries. After all, would you want to be an economic migrant to Greece right now?

Migrants are coming in through Greece because it is the "easy" route, and appears to have the defacto blessing of the Turkish government in their 2500-year war against Greece. If, in the logic of the Center, Greece can stop boats from landing on their islands (or sinking part way with the Greeks being the ones expected to pull the living and the dead from the water), then surely a country that is not broke, that is getting massive aid to address their refugee / migrant crisis, can afford to run a basic police force that can identify the starting and gathering points for people smugglers on their own territory.

Unfortunately the only thing that Tsipras is accomplishing is delaying Greece's recovery, while making the starting point even deeper.

Why Everyone Wants a Grexit

All the wrangling and grandstanding in Europe today has one purpose; to force Greece out of the Euro while convincing all other countries to stay in the Euro. The Germans and the Troika want Greece out, even though they cannot say it out loud. The Greeks want out, even though they cannot say it out loud. And they all want the Grexit for their own reasons, little of which have anything to do with the good of Europe of the Euro per se.

So Wow, OXI (No) won, and by a landslide. Surprised? Then again, anyone listening to anything coming out of Greece should have expected it. With the deal off the table, a Yes vote would have been the equivalent of signing up for German Language lessons. A Yes vote was simple capitulation to Berlin and Brussels, even if dressed up as a vote for stability. OXI was an affirmation of the independence of Greece and the Greek people.

I wrote on April 15th, 2015 that the Grexit was inevitable, and it still is. Sure, there is another conference, and there will be another after that. Nothing will be achieved in these conferences; if the Greek government does not agree to capitulate to serial defaulter Berlin and Brussels, aka The European Branch of Goldman.

And nothing will be agreed because it is already accepted that the loans cannot be repaid, that the debt is unsustainable. Therefore, asking Greece to demonstrate how they can pay back loans that they cannot repay is asking them to lie, again. If the Troika, Germany and the rest of Europe are willing to pretend, then maybe. But nobody is pretending any longer.

And while Prime Minister Tsipras insists that he does not want to leave the Euro, those statements are for the "centre-left" of his party and the wider population, as they face insult after insult from their European brothers. In reality, Tsipras has no intention of staying in the Euro, and is actively creating the situation that enables an exit that can be "blamed" on the Troika, Germany and France.

Greece’s prospects of staying in the eurozone have dwindled further after the Prime Minister Alexis Tsipras arrived at an emergency summit of his fellow eurozone leaders in Brussels without a concrete plan to resolve his country’s debt crisis.

Eurozone leaders and ministers struggled to contain their incredulity as Mr Tsipras and his new Finance Minister, Euclid Tsakalotos, could only offer oral outlines of their request for another bailout, despite the EU’s demand for fresh proposals after last Sunday’s referendum rejected the previous bailout terms. The Independent

All Tsipras need to do now is wait for the news to gets out that Europe will demand that all Greek bank accounts be raided in a "Depositor Bail-in" - the numbers vary from as little as 30% of all account values greater than €8,000 up to "What have you got, hand it over". This would see what little is left in any Greek bank account confiscated. Think Cyprus without any mercy.

Once that is presented as part of the in-or-out proposal from the Troika, Tsipras, with no money left in the banks, will have the support he needs to introduce a New Drachma.

Two Options, One outcome

Because we need to be clear, there are, from the Loan Sharks perspective, only two options. I'm sure they've gamed this out already, but I see only one longer-term outcome.

1. Write a deal that will save Greece, and watch the other countries demand the same.
2. Punish Greece, leading to the introduction of IOUs (also known as New Drachmas) and force Greece out of the Euro.

Both of these lead to the same longer-term outcome: death of the Euro, but option 2 pushes it out to someone else's watch. With option 1, the demanded bailouts and write-off of the other countries will bankrupt Europe. With option 2, Greece does an "Iceland" and after more pain, begins recovering, though from a lower base, resulting in evidence that there is successful and meaningful life after the Euro.

There is no 3rd option, the "do nothing" option, because "do nothing" resulting in the actualisation of option 2.

It is important to remember that the decisions that are being made by all sides are NOT about saving Greece or the Euro, or France, Spain, or any of the rest. It is all very personal. It is about saving the stashes of dosh that these people have made, saving their status, and saving their jobs. And this goes for everyone involved in this.

Greek Political Unity

Tsipras is doing what he's doing because this is the only way that he saves Syriza from political oblivion. The other Greek parties are supporting him because (unsubstantiated, but my own guess) they know that if they do not, there are "perp walks" in their futures. If there wasn't the implied threat from the Greek Parliamentary Committee on the debt, then they would each be doing everything they can to undermine Tsipras and Syriza.

Beyond the threat of the Parliamentary Committee findings, there is the "Lost List" (the ""Legarde List") of individuals with significant bank account at the Geneva branch of HSBC in Switzerland, a list of 1991 names that then Finance Minister Giorgos Papaconstantinou, um, lost. There is a much longer list of 80,000 names that Syriza is looking at. There will be plenty of politicians and various ministry officials on that list.

So the deal is pretty simple, support Syriza in getting Greece out of the Euro and implementing a recovery programme, or go to jail. I think we have the basis for a Greek Government of National Unity, headed by Syriza and Mr Tsipras. We might even see the return of "V for Varoufakis".

The Loan Sharks

The Loan Shark enforcers are in a difficult position and must decide which will be worse, general rebellion across the Zone from a "saved" Greece option, or a punished Greece facing more pain as a warning to France, Spain and the rest. It must be difficult to know that whichever choice you make, in order to save your own stash of dosh gained through screwing Greece in the first place (the lenders AND the Greeks who did the deals), more suicides, closed businesses, lost futures, are on your head. But hey, you were (and are) just "doing God's work".

So there is no way out for any of them. Save Greece, lose the Eurozone. Kill Greece, save your stash and kick the dead-Eurozone can into the next guy's term in office. Then, like the Dark Lord Cheney, you can blame your unmitigated disaster on the next poor schmuck.

Greek Bankers and former MPs are going to jail

This might just be Syriza's "way out" of the Grexit, and the way they can stay in the Euro, while destroying PASOK and Nea Democratea's (ND) ability to regain power. Earlier this week, on 17th of June 2015, a special committee of the Greek Parliament released their report, and in so doing, have put Greek bank executives, Finance Ministry heads and MPs from the former ruling parties on notice: you have iron bars in your future.

Rewind to earlier this year, when Syriza established a Parliamentary Committee, the “Debt Truth Committee” to determine how much of the €320 billion debt is legal, and recommend how much of that debt to unilaterally cancel as illegal. On the 17th the committee reported their findings. In perhaps the biggest non-surprise of the saga, the committee has reported that the "Troika’s arrangements is a direct infringement on the fundamental human rights of the residents of Greece. Hence, we came to the conclusion that Greece should not pay this debt because it is illegal, illegitimate, and odious."

This provides the Greek Parliament with a legal opinion to allow them to abrogate the loans. Wipe the slate clean. Clear the ledger. Stop the payments. Thank you, it's been fun.

This also gives the Greece government the authority to arrest Greece Finance Ministry officials and politicians. And under EU law, the Greek government could issue an arrest warrant for IMF and ECB officials. Would an EU arrest warrant for IMF chief Christine Lagarde be honored next time she gets off an airplane in Europe?

The Troika's objective

As I posted a couple of days ago, the "end of history" crowd needs the elected government of Greece to fall, to ensure the myth of the eternal victory of liberal western capitalist democracy as the sole survivor of Cold War One (CW1).

"If we want to date the moment when the Atlantic liberal order lost its authority – and when the European Project ceased to be a motivating historic force – this may well be it. In a sense, the Greek crisis is the financial equivalent of the Iraq War, totemic for the Left, and for Souverainistes on the Right, and replete with its own “sexed up” dossiers." (from Ambrose Evans-Pritchard at the Telegraph of 19 June 2015) 

It is easy to listen to the Troika's rhetoric of Greece the Failed State and to assume that more and deeper cuts and systemic changes are required. It is also easy to assume that Greece has not changed, and is the laggard in Europe. Yet looking at the numbers and we see a country that has implemented systemic changes that would destroy any ruling party in any Western country, from France or the UK, to the United States.

Could France, Germany, the UK or the USA cut its government payroll by 28%? Could any of them cut their average pension by 61%?

As Evans-Prichard goes on to say "We all know the argument. The EU is worried about political “moral hazard”, about what Podemos might achieve in Spain, or the eurosceptics in Italy, or the Front National in France, if Syriza is seen to buck the system and get away with it." All the while forgiving and forgetting the Moral Hazard that is incumbent in the IMF, ECB enforcement of the original loans and lending (investing) in Greece.

The price

With the loans being declared illegal, Syriza now goes into negotiations early next week looking to see what the Troika is willing to bring to the table. If the only things on offer are more years of hardship and continuing a program that "directly affected living conditions of the people and violated human rights, which Greece and its partners are obliged to respect, protect and promote under domestic, regional and international law" (Exec summary, Chapter 6) , then Syriza walks away, declares the loans void, and says "see you in court".

Greece would not even need to leave the Euro, as it will still be the legal currency of the country. There will be no need for a New Drachma with an instant 50% devaluation. Euros would continue to flow through the economy, and Greece's primary budget surplus would make it, theoretically, one of the better performing governments in the Eurozone, if not the world.

Suddenly, while Greece will be locked out of international capital markets, the immediate need to access those markets to service the debt will disappear. Not that simple of course, but a much stronger negotiating position.

Syriza's "get out of jail" card

For Syriza to stay in power, they will need an "out" to demonstrate to two constituencies that they represent the break from the past.  

They also need to deepen their roots throughout the Greek bureaucracy. After all, after 40 years of sharing power between PASOK and ND, all ministries, especially Finance, are stocked with bureaucrats who know how to please moderate socialists and moderate conservatives, but most of all know how to outlast whatever political party is in power. Just like almost every Western capital city.

Syriza needs to clear out the functionaires more closely aligned with the two (formerly) major political parties, and replace them with economists and functionaires aligned with a leftist socialist economic agenda. 


Syriza's "go directly to jail" card

What better way, then to frog-march to jail the ministry functionaires who wrote the papers that supported the politicians who negotiated the deals that the functionaires in Athens and Brussels (and Washington) then agreed. As long as those functionaires remain in place, more papers will be written demonstrating why the previous papers represented the only way forward. For syriza to make any progress, they must ensure those papers are never written. How better than to fire the functionaires (on the grounds of course, of #1 the functionaires committed illegal acts and #2 Greece still needs to streamline the bureaucracy and therefore must cut heads).

Of course, this is not exactly in the individual best interests of the functionaires - thus the importance of the “Debt Truth Committee”.

If the Committee states that the loans were illegal, as they have, then Syriza has all it needs to remove the functionaires pending trial. And to arrest and smear any sitting MP from PASOK or ND who was in any way involved in negotiating, speaking in favour of, or voting for the bailouts. 

So Syriza, the legitimately elected representatives of the Greece people, will negotiate for reductions in the debt burden, while at the same time shoring up their longer term position in Greece itself by surgically removing the functionaires who work to undermine them from within the ministries. They will try the politicians and former MPs who voted for the bailouts. As with Iceland, we will see what democracy really means, the democratically expressed will of a people translated into real pain for those who screwed the people.

Wolf! Wolf! Wolf, and Moral Hazard

Wolf

Having been wrong about the Grexit date of 9th May 2015, and having written again about why it is actually in the best interests of Greece based on other countries' experiences, it is time to call "Wolf!" again. Boring, I know, but "Wolf! Wolf! Wolf!".

Or, "Grexit! Grexit! Grexit, and Moral Hazard!"

There, I've said it. Now why do I keep saying it?

Syriza was elected, and they are a political party, and they will implement to the extent that they can, their agenda. From the Syrisa perspective, the ongoing Greece-Troika-EU dance that has become oh so tedious has two purposed; ensure that the Germans will reject or refuse to put any viable plan on the table, and ensure that EU's  (and Toika's) willingness to inflict massive and almost perpetual pain on the Greek people finally reduces the percentage of Greeks who say they want to stay in the Euro.

From the Troika perspective, it is clear that, like good loan-shark enforcers, the Troika will be happy to see every last penny extracted, every last asset liquidated, before in the end suggesting that there is one way-out left; suicide. According to the New York Times reported on 25 May 2015, "As for the hospitals, even though they are taking in twice as many patients now, their budgets have been cut to the bone. In the first four months of this year, health officials say that the 140 or so public hospitals in Greece received just €43 million from the state — down from €650 million during the same period last year."

The suicide that the Troika would like to see is the suicide of Syriza, those nasty, far-left socialist / communists who also happen to be Greek nationalists. So we are now in a battle of wills between the "End of History" with it's ultimate victory of liberal capitalist democracy and a miserable rearguard of that failed socialist philosophy that has no future.

The problem with this narrative, like all simplistic narratives, is that the situation is of course far more complex, and is one that strikes at the heart of the presumptive winner in the game of history. Capitalism is failing. Liberal democracy is failing. Sure, it remains the now-dominant political-economic narrative, and will remain so probably though the coming crisis (no, not the Greek one, the real one).

Moral Hazard

Greece is a reflection of the Moral Hazard that has engulfed the capitalist system, with Too Big To Fail (TBTF) banks, but Not Big Enough To Save countries. When the final choice must be make, the Troika and virtually all Central Banks will  impoverish and force a country to fail, rather than allow the poor lending decisions of the banks and IMF to reap the reward of poor investing decisions.

Moral Hazard is the concept that if an entity (or an individual for that matter) knows that they will be able to "get away with it", be it murder, theft, or simply poor lending and investment decisions, then there are not impediments to that unacceptable behaviour. In central banking and regulatory context it means the importance of demonstrating that no business is TBTF, because to admit that the business will not be allowed to fail will simply encourage "Moral Hazard" or behaviours that are ultimately counterproductive to the business (or the counter-party) to the point of damaging the business.

In the case of Greece, one side of the Moral Hazard has been the implicit expectation that no matter what happens, the money "loaned" to Greece will be repaid. The other side of Moral Hazard is that Greece sought and took loans when it knew that it was taking out loans that were well beyond the ability of the Greek economy to repay.

Until the IMF, ECB, national Central Banks and national governments print money, buy bonds, and run their countries at significant budget deficits, there will be Moral Hazard. With Greece, all can see the future, they just aren't willing to look.

This One Chart Proves the Grexit is desirable, and inevitable

Saturday 9th May, or as I've been calling it, G-Day (Grexit Day) has come and gone, without Churchill's desired invasion of Greece, with the idea of flanking Germany while also limiting the spread of Soviet control across eastern Europe.

No. Wait. I'm getting things mixed up here. Let me start over...

Now, I wouldn't want you to think that I'm actually comparing the Eurozone to the German occupation of Europe during the Second World War. There is no comparison. One brought pain and suffering across a continent, destroyed peoples, economies, culture, cities, indeed entire countries. And no, don't wait for the punch line - and then there was WWII. The fact is that the European Union with open borders and flow of people and capital has helped to lift millions out of poverty while also ensuring peace across (most of) the continent for over 50 years.

It is just a little humorous however to notice that the pre-D-Day map of Occupied Europe does bear a striking resemblance to a present day map of Euro Europe.

One of these is the EuroZone, the other is Axis occupied Europe in 1943 - Which is which?

So, starting over...

Saturday 9th May, or as I've been calling it, G-Day, has come and gone without the invasion of Europe by the New Drachma. Having predicted May 9 as the day, I now say "I was wrong ... about the date." Yet the conditions for a Greek Exit from the Euro are as strong today as they ever were, and getting stronger by the day. In my previous post predicting May 9 as G-Day, I listed six reasons why Grexit is inevitable. The passing of the 9th without a Grexit does not in any way invalidate any of those reasons.

Now I'll add another reason; it is the only way that Greece will rebuild the Greek economy and get the country back to work. And until the country gets back to work, there will be no future for Greece.

This chart, from the National Party (the ruling party) of New Zealand shows why Greece must leave the Euro, and why it will be a good thing. Look closely at this chart:

Now what does this tell us? Here are some quick observations:

1. New Zealand almost when broke in 1984, and in the space of 3 - 4 years, after restructuring its economy, went from being the 24th least open economy in the OECD to being the 1st, most open economy. And the economy grew nicely, after weathering the terrible pain of the restructuring.
2. Ireland has stuck with the Troika's demands and programme, and remains in trouble.
3. Iceland, after defaulting and being locked out of the international capital markets and the initial pain, has now enjoyed multiple years of solid economic growth, and is now #1 on this chart of levels of employment.
4. Meanwhile Greece is right there at the bottom. It knows that it can follow Ireland and spend another decade handing over assets to the loan sharks, sorry, the Troika and the loan sharks they represent, or it can take the Iceland approach and see renewed economic growth, quickly.

The road to growth is through a managed bankruptcy and fresh start. People can do this, and so can companies. As for lending to people, in the United Kingdom the FCA (Financial Conduct Authority) requires lenders to ensure that their clients are actually able to repay, and to ensure that the loan will not result in undue hardship. So why didn't those lending to Greece, or to be more accurate, buying Greek bonds and therefore making an affirmative investment, confirm that their investment would be able to be repaid without undue hardship.

A quick reminder of my original 6 reasons:

1. This is what the Greek people voted for.
2. The Greek people know that Europe is not going to bail them out, again (and again).
3. Greece (and the Troika) know the debt will never be repaid.
4. Syriza had six months or face political oblivion next election.
5. The Greeks needed to show "good faith" and negotiate, and they've done that.
6. The demand for reparations from Germany is designed to ensure negotiations fail.

Number 6 is almost the "General Belgrano" option. If it looks like negotiations will actually happen, thereby stranding your fleet in the middle of a South Atlantic winter, then do something to ensure the other side will not negotiate.

New prediction:

So, having missed the date, instead of fixing another date, I will only predict the following for anyone visiting Greece this summer:

• Buy your Euros before you leave, because if the Grexit happens while you are there, you'll not be using any ATMs, they'll be shut.
• You might even get the chance to buy your New Drachmas before you leave.
• The weather will be sunny.
• The Retsina will be tasty (and will go perfectly with the sunshine, olives and salads).
• The Greek people will be as wonderful and hospitable as ever.

Because let's be real about this, in or out of the Euro, Greece is a fantastic place, and the tourists will flow in, and the wine and olives and other produce will flow out. And with any luck, and Grexit will also begin the process of (re-)creating a vibrant economy that brings the Greek diaspora home.

Oh, and for a final treat - the official Talking P.I.G.S. music video!

Why the Grexit is inevitable - and some singing PIGS

In the past few days, we had the pleasure of a (very) extended lunch with a good friend from high school days in Thessaloniki, Greece. Of course we talked about mutual friends from those years - how So-n-so hadn't changed, how (yes, you know who you are) actually did become a (prominent) doctor much to all of our and our teachers', surprise. And what about, you know who, I heard he died. No, not true, he's alive an well and playing the electric guitar.

Of course there have been some deaths, and more than a few divorces, but many children who are now beginning to have children of their own. Some sing, including the snarlingly lovely Talking Pigs: We Won't Pay (As in Portugal, Italy, Greece and Spain).

One thing in common for almost all of my Pinewood International Schools (TiHi to some) class of '78 is that we left. Many still live in Greece and in Thessaloniki or have returned, and they are closest to the pain. The real pain of the past decade, that has destroyed wealth and hope. Unemployment is running at levels not see in Europe since after the war, and at levels that encouraged the socialist - fascist civil wars of the 1930s. Those did not end well.

But that does not explain why the Grexit is inevitable, and why it will happen very soon.

1. This is what the Greek people voted for. No, they did not vote to stay in the Euro, they voted for the party that said it would reduce the debt and meet pension obligations. The Greek people and voters are not stupid. They knew this could only happen by either the rest of Europe bailing out Greece again, or by leaving the Euro. 
2. The Greek people know perfectly well that Europe is not going to bail them out, because to do so will only set everyone up for the next bailout.
3. The Greek people, and the rest of Europe, know full well that the debt will never be repaid, and that the Troika are now acting as nothing better than the enforcers of loan sharks.
4. Syriza knows that it had six months before the voters would throw them out, and once out, Syriza would never come back. 
5. The Greeks needed to show "good faith" in actually attempting to negotiate a resolution with the Troika. This has now been done, and is failing.
6. The demand for reparations from Germany is designed not to actually extract the reparations, but to anger the Germans to the point that they will block any compromise that Syriza would have been required to accept.

The Greek government, elected by a battered and exploited Greek people, has been establishing the conditions that will give them the moral high ground (in the eyes of their voters) needed to actually leave the Euro.

Having set the conditions, when will it happen?

"Predicting the future is easy, getting the dates right is almost impossible." I would attribute that quote, but so many people have said that any attribution would be inadequate. But it certainly is true, and while I love to predict, getting the dates wrong is a specialty.

That being said, I'm still guessing May 9th.

Why?

Greece will leave the Euro, and they will do it sooner than later. They've made the April payment, but simply do not have the money for the May or June payments, and they cannot pass the legislation required by Europe and the Germans and stay in power. That gives us a late May or June date. So why earlier?

Capital flight.

Imposing currency controls will be a fundamental element of any Grexit. Accounts will be frozen, and any money in accounts will be re-denominated in New Drachmas. Once the bank accounts are unfrozen, the residual, former Euros will now be worth whatever the New Drachma has dropped to, and the drop will be significant, over--correcting to the downside.

Once it is accepted that the Grexit is coming and there will be no last minute deal, and with memories of Cyprus too fresh in every Greek's mind, the money will flow out of the country. Not just corporate money (most of which is probably off-share already) but any remaining personal money in bank accounts.

So Greece has to move before the coming Grexit is perceived as inevitable, and the money starts to flow out.

Weekend event.

When the Grexit happens, it will be on a weekend. The banks will be closed, parliament will be called into emergency session, and a packet of laws will be passed. As this needs to be on a Saturday to avoid wholesale capital flight the moment that parliament is called into session, were it a weekday.

This leaves only a few possible dates. And where there are few possible dates, I'm punting on the earlier date, so earlier in May. And looking at the calendar, that leaves us with May 2nd, 9th or 16th. My own guess is that the 2nd is too soon, and the 16th is too late.

That leaves me guessing May 9th.

Greece - a Grexit, Eurogeddon, or a big Yawn?

Get ready for Grexit. Or not.

1. A Greek exit may not happen.
2. Greek exit from the Eurozone will not destroy the Euro.
3. A Grexit will not be unprecedented.
4. The "playbook" for exiting a currency union already exists.
5. If, finally, it does happen, it will be controlled, and fast.

But, just in case, you should be considering carefully the potential impact on your business.

So here we are, again

On Sunday the 25th of January the Greeks went to the polls in a snap election that saw Syriza (a left wing part that barely registered in the voting five years ago) win 39% percent of the vote, and with that the right to form a government. This they have done in a remarkably short period of time.

Of course, with Syriza's win and forming of a government, a Grexit is neither a certainty, nor is will it happen immediately. Negotiations with Brussels and more importantly Berlin (even though the Greeks have said they will not negotiate with the Germans) will take weeks, with plenty of bluff and noise from all quarters. We can expect negotiations to break down two or three times, and eventually a very rapid dissolution, probably over the course of a weekend.

Is there a plan?

From late 2011 through the middle of 2012 when a Grexit seemed about to happen, central bankers, national finance ministries across Europe held "Non-meetings" with "Non-Papers" in unlisted conference rooms, thus ensuring that any participant could put hand on heart and say they had been to no meetings, and seen no papers, and that all was well and calm. We suspect that "Non-meeting" invitations have "not been sent" again, and "Non-Papers" are being dusted off and reviewed to confirm their continued relevance.

We would like to say that much has changed since 2011/2012, but realistically the only significant change has been a continually increasing total national debt burdens across of the Eurozone. The only other change has been the continued burden of austerity on the Greek people and economy, with little hope for any realistic prospects for improvement in the near term.

Greek unemployment in the younger cohort has since grown to as high as 60%, total employment continues to fall, incomes continue to fall, and the prospects are that this trend will continue. The Greek people have now lived through years of pain, and see only years of pain in front of them.

The Playbook already exist

Currency dissolutions are not new, and while they can be messy, though they can be handled quickly and effectively. Playbooks already exist, which call for a series of steps to take place very quickly, usually when the markets and banks are closed. So expect to see a breaking news flash on a Saturday afternoon saying that the Greek government has passed a number of new laws, including creation of the New Drachma pegged one for one to the Euro.

Also expect in those laws there to be:

1. Closure of the banking system for a week (at least)
2. Closure of the markets for a week (at least)
3. A requirement to have all Euro notes stamped (or hole-punched) at bank (that will be open for this purpose only) within a week
4. For contracts to be re-denominated in New Drachmas
5. For all national debt in the form of bond to be convertible at a rate of 1 New Drachma = 1 Euro

This is just a quick list. Search the internet and you will find a number of playbooks in much greater detail.

The next two years

Expect the New Drachma to devalue and a rocket pace. Of course this will be difficult to see in practice, as the only purchasers of New Drachmas will be those that are actually required to provide payments in New Drachmas in the immediate term. Virtually all others, including those with payments due, will defer payments by a week or two (at least) to get some idea of where the New Drachma will settle.

Imports to Greece will stop. 

Exporters will attempt to demand Euros for their exports, and will be in for protracted discussions / arguments with their customers over the terms of trade, and the currency in force.

Of course, there will be cheap - really cheap - holidays to Greece. Europe, and the US, will flood into Greece and the Greek Islands in a tourism boom never before seen. Exports will become very competitive. Greek olives and wine will be very affordable, and will bring "hard currency" into the country (along with the tourism sector).

Of course, that does not alone make an economy, but it will be a start, and a good start with a greatly deflated New Drachma. 

But no one should be deceived, it will come at a terrible cost in terms of Greek standards of living. These will continue to drop for another couple of years. No more BMWs for Greece, at least not for a number of years. And then, one day, there will be a positive GDP number, followed by more positive numbers, and finally, a growing and productive Greece.

Do you have a plan?

Of course, if it does happen, there will be some serious consequences for businesses across Europe and the UK. The implications could be considerable, including at a minimum the re-pricing of products and services in new currencies at a fixed conversion rate established at exit (with the potential for  a rapid devaluation of the new currency), potential liquidity issues, and sudden exposures to currency transactions between corporate entities that currently share the same currency. We would not be surprised, should any country exit the Euro, to find currency controls introduced in an attempt to limit the flow of capital out of the country. 

Cyprus taught people that cash is king, and we should expect to see runs on banks in Greece long before any actual Grexit.

This will not be TEOTWAWKI (The End Of The World As We Know It), nor will it be a ‘Big Yawn’?  Nobody knows right now, but we think it is worth running your business through a review to assess the impact you might face.

We recommend companies:

• Expect confusion and disruption for a period, but do not let this become all consuming, it shall pass
• Treat a potential Grexit as a Business Continuity event, and run a BCP exercise to confirm gaps and applicability of any plans
• Confirm that your CMT (Crisis Management Team) is appropraite for this type of crisis
• Shift where possible liquid assets out of jurisdictions with daily sweeps, ensuring that your specific capital control risk is minimised
• Identify the risk of write-downs in currency denominated assets, following devaluations
• Test processes for re-denomination or re-pricing of products and services
• Engage your legal counsel to ensure that contracts will survive an exit, or at least confirm te potential contractual impact of an exit, reviewing legal agreements to ensure continuity post any such change
• Speak with counter-parties to plan smooth transitions to any new currency
• Consider potential impacts of currency controls

Most importantly, consider your longer range options, including potentially shifting production of services capacity into Greece (or other exiting country) post the initial systemic shock. So, following a period of instability and currency fluctuation and probable significant devaluation, look to develop in a much cheaper labour market. Harvesting the upside is going to take time, planning and preparation.

And if nothing happens?

If there is no Grexit, you have lost nothing by dusting off your plans, running contingency exercises, reviewing contracts, and generally reconsidering your strategic risks. Greece will continue to deteriorate, and may actually become an attractive location for sourcing lower costs production or services.