Financial Lunacy Of The Week: Greece Joins The Subzero Club

You’d think that the stock market’s 650 point rise during the last three days on the back of Friday’s announcement that a “skinny” phase I trade deal—which has not yet been written—will be completed in three weeks time might qualify as the financial absurdity of the week.

After all, that’s exactly what the Donald and Chinese Vice Premier Liu He averred last April when a Phase I deal was promised within 4 weeks; and that particular Fake Deal came after many earlier alleged break-throughs including the ballyhooed Buenos Aires Summit handshake with Mr. Xi last December.

Indeed, even in the hastily rushed announcement just prior to the market close, the daylight between the two sides with respect to one prominent feature of the new, new Phase I—the promise of a currency stabilization agreement—was not hard to detect.

The Art of the Deal man spun it this way:

Trump added that a currency agreement is also going to be part of the deal, but that a critical agreement on enforcement is still being worked out. Negotiations for phase two will begin immediatelyafter ‘phase one’ is completed, Trump said.

Right. If that doesn’t give boot-strapping a new definition, we are not sure what would. That’s especially the case given what Vice-Premier Liu He had to say. As Zero Hedge noted,

For his part, Liu He said “hopefully we will make progress” which sounds…ominous.

Why, yes it does. That’s because there is not a snowball’s chance in the hot place that Beijing will ever agree to a currency enforcement mechanism that would amount to lashing themselves to a doomsday machine for the Red Ponzi. That is, they can’t possibly allow their $40 trillion debt bubble to implode, but if they don’t keep expanding domestic credit at aggressive rates, which drives down the Yuan exchange rate, that’s exactly what will happen.

Then again, another contender for the financial lunacy honor would be the Fed’s announcement that it will be buying T-bills on a $60 billion per month basis, and that the program is open-ended. And besides, they will also keep the two $35 billion 14-day repo programs and the $75 billion over-night repo window open until at least January, which is Fedspeak for indefinitely.

So when you do the math, they announced a potential $865 billion expansion of their balance sheet on an annualized basis. That is to say, they are announcing emergency room stuff even as the Donald claims credit for the Greatest Economy Ever and Wall Street buys 650 Dow points of “dip” for the umpteenth time.

Actually, however, we think that the doings in the Greek debt market yesterday win the prize for lunacy of the week. We are referring to the fact that you too can now pay good money for the privilege of loaning your capital to the profligate government in Athens, meaning that the poster boy for fiscal incontinence has now been admitted to the Subzero Club.

In commenting on this absurd development, at least one financial talking head didn’t mince any words. A London-based “rates strategist” named, Peter Chatwell, had nothing but praise for negative interest rates—-now that the once and current fiscal and economic basket case, Greece, has been admitted to the Club:

“Greece issuing negative-yielding bills is more evidence of the positive effect that negative interest rates and QE has on debt sustainability for governments,” said Peter Chatwell, head of European rates strategy at Mizuho International Plc in London. “Side effects are large for banks and investors, but for the governments there are very significant benefits.”

Of course, you can ask what kind of “strategist”—of rates or otherwise—can’t see the end is near when a quasi-bankrupt country is getting paid to borrow even more money?

Chatwell and his ilk are obviously of Citibank’s Chuck Prince school, who famously advised right before the 2008 meltdown that his people needed to keeping dancing until the music stops.

And for want of doubt, Greece is, was and will remain nearly bankrupt. In the several years in which it has been mostly out of the financial headlines, it has not pulled off a miracle of fiscal rebirth in the slightest.

In fact, it 2018 it’s government debt-to-GDP ratio of 181% posted still another record high.

Greek Government Debt To GDP, 2000-2018

Greece Government Debt to GDP

In modern times, no government can “grow” its way out of debt because debt burdens are way too high to begin with and growth prospects are feeble at best owing to the spending, tax, regulatory and monetary depredations of the state in nearly every jurisdiction on the planet.

But Greece is surely the poster boy for that truth. Its numbers are so impossible that the real issue is how soon will it default when the next recession hits the European economy. And said recession is surely just around the corner, given that Europe’s German engine is down for the count, and the dirigisme-riddled, lugubrious economy of France is also experiencing rapidly sinking industrial production.

Indeed, the relevant data with respect to Greece is the absolute collapse of its standard of living after the 2012 crisis. As conveyed by the chart below, the brutal 25% reduction in real per capita GDP between 2007 and 2013 has not been reversed or cured at all. At a mere $23,558 in 2018, it was actually just 1% higher than the level reached way back at the turn of the century.

What this means, of course, is that the aging and impoverished Greek population does not consist of happy campers. It’s politics are therefore utterly unpredictable, as the last decade has already demonstrated, but the probability of  Greece lurching toward some new demagogue calling for repudiation of debts in order to restore Welfare State benefits and reduce the current, crushing EU-imposed tax burdens is exceedingly high.

So there is no other way to explain Greece borrowing in the bills market at negative rates or even selling 10-year debt at 1.50%, which is below even the UST 10-year benchmark. What happened this week is simply this: The modern-day Chuck Prince’s who inhabit the rates world and bond pits elected to keep on dancing to the tune of an outright absurdity.

Nevertheless, you might wonder how long the Greek people will keep on dancing to the tune of meager economics and ultra high taxes. As to the former, it’s hard to imagine anything worse than the country’s index of retail trade. It’s still down 43% from the 2008 high, but, more importantly, has relapsed all the way back to levels first crossed 47 years ago in February 1972.



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