## Thursday, February 05, 2015

### ECB finally treats Greek junk as junk

For more than four decades, the Greeks disrespected all the basic principles of common sense and sane economic policies. For many years, it has been clear that they have ruined their nation and devoured their future and by helping them to sustain life resembling what they knew when their living standards peaked, one is only delaying the inevitable and does it for increasing costs while making the inevitably coming hard landing even harder.

Ten days ago, Greece has elected an über-Marxist bunch of loons. For a formerly capitalist nation, this injury is incompatible with life. Tsipras and his comrades have promised to spit on everything that Samaras established (and it was far from sufficient), on their debt, on the present creditors, and on the future creditors, too. Instead, they would propose totally unacceptable "solutions". They rejected everything that made sense and everything they promised was and is insane. And they started to behave arrogantly towards all of those who allowed Greece to live as a wealthy nation for so many years and those who are and will be essential to avoid a humanitarian catastrophe in Greece: especially on Germany but also on the "troika" of ECB, IMF, and the officials from Brussels.

Clearly, there is no genuine room for negotiations here. In the past, the rules have already been distorted too much and a new distortion is either unacceptable or so small that it makes no sense to spend time with it. Germany has apparently prepared a document for the weekend that demands that Syriza ditches every single promise it has made and it obeys all the agreed upon rules. One should emphasize that by adopting the communist policies, Greece isn't just crippling conditions for a future aid. It is also violating conditions for aid and bailouts that have already been decided and distributed in the past (especially in 2010 and 2012).

Last night, the European Central Bank (ECB) finally started to enforce some rules. According to the high-tier rules, it cannot accept junk as a collateral when it lends to commercial banks in the eurozone. And because Syriza openly declares that it didn't want to repay the debt, the bonds are obviously junk not just according to the ratings. One of the four anomalous veins through which cash continues to flow to Greece was cut.

There has been a crazy exception for a long time – the junkiest junk among all the junks, the Greek government bonds, could have been used as a collateral for the ECB loans to Greek commercial banks (which badly need it, due to the obvious run on banks). Finally, this exception was eliminated. The vote needed votes from the whole eurozone – showing that the opposition to the arrogant Greek behavior is rather universal. (Thankfully, Italy's PM Renzi who was ambiguous in recent days supported the move, too. To compare, insanely enough, an Adam Smith Institute fellow endorsed Varoufuckis' "creative" bond swap.) It was done almost silently, without much fanfare and without previous warnings. And it makes sense. It should have been obvious to everyone that the principles of sound banking, explicit laws, and common sense were being suppressed and a fix could have come at every moment.

It doesn't mean that the Greek commercial banks will immediately collapse. They may still be held above the water by the Greek central bank which may still get some cash from the ECB, using a different channel (Emergency lending program), but the interest rates are higher and the ECB is expected to supervise the transfer more closely than it did when the junk was used as a collateral. I think that in this way, the ECB is consolidating the debt – all the "junk things" will be concentrated at the Greek national level – which is a good way to get ready for the actual default event.

When the ECB removed the exceptions, the yields on 10-year debt returned from 9.5% above 10%. The Marxist Führers immediately flooded the banks with €10 billion of cash, saying that they will not be blackmailed. Indeed, they won't be blackmailed but let's hope that this economy will finally be killed without unnecessary words. Once again, Tsipras promised the eternal end to austerity ;-) – he will clearly keep his arrogance up to the very moment when voters will have to eat his flesh – while Varoufuckis didn't even agree whether they agreed to disagree with Schäuble.

Those who want to become chairs of ECB should train playing this game. Use cursor keys.

The ECB may do some additional steps and as far as I understand, by (finally) enforcing other rules, it may speed up the default event so that the event could occur before the first "obvious" possible moment which comes at the end of February.

Ukrainian currency drops 1.5 times in minutes

While John Kerry was arriving to FSU (Failed State of Ukraine) for a visit, the Ukrainian central bank has revealed that its regular intervention that kept the hryvnia near 16-18 hryvnias per dollar are no longer possible. The hryvnia instantly dropped to 24.5 per dollar (25 per dollar a few hours later), so it's finally slightly "weaker" than the Czech crown. ;-) Just to be sure, the overall normalization of currencies doesn't have any "real" implications. The rate hike from 14% to 19.5% didn't help.

Despite huge losses on both sides (including most tanks of the Novorussian Armed Forces), the cauldron (encirclement) trapping the 7,000+ Ukrainian troops in Delbatsevo seems to be complete. If that's the case, they have ammunition for 24 hours or so. Vuhlehirsk near Debaltsevo has already been taken by Novorussia. What is trapped is an important and skillful part of the Kiev army so if it has to be neutralized (which would be 5% of the German losses in the Battle of Stalingrad cauldron), it could be a problem for the very survival of the Kiev regime.

Hollande and Merkel want to visit Kiev today and Moscow tomorrow. If they don't offer something significant to Novorussia – and to Russia, for that matter – I guess that no mercy will be found. In that case, the question whether Kiev belongs to Ukraine or Novorussia could soon become questionable. Moreover, the U.S. haven't paid a penny to help the Ukrainian economy or stabilize its currency but it's thinking about sending lethal weapons to Kiev. Sorry but if you do so, it will make complete sense for Moscow to invade and reabsorb Ukraine. If you will misunderstood even that reaction, it may be time for nukes in D.C., too.

The demagogic word "austerity"

An extra comment. We are bombarded by texts (and the Greek voters were even more often bombarded by speeches) that use the word "austerity", usually in a negative sense. In most cases, this word has been used and is still being used in a totally demagogic way. We hear that "austerity increased the number of suicides". We are told that "the new government wants to end austerity". But all of these sentences are completely nonsensical.

What actually caused the slight increase in suicides wasn't austerity but "bankruptcy and poverty". And as you know, "poverty" can't be ended by a simple decision or a vote. When the word "austerity" is being used correctly, "austerity" refers to a living style that is materially modest and this modesty was either "artificially imposed from above" or it is "temporary" or both. "Austerity" is supposed to be a downward deviation from the normal. But none of these circumstances applies to the Greek situation.

Greeks are simply broke and their poverty is the normal. Samaras' years that were referred to as "austerity" were in no way a downward deviation. They were some of the richest years of Greece in the 21st century, as everyone will see. The "default situation" of all human beings is poverty. People are being born with bare buttocks. The mankind has created and accumulated wealth but a functioning trade and capitalism that had to be in place for a long enough time, along with some additional conditions, were needed for the poverty to change to wealthy life.

This map refers to the GDP in 2005 because the colors were clearer. A 2012 map is here.

Most people and most countries in the world live in relative poverty – mostly yellow/orange/red color – which this map defines as GDP below \$10,000 a year per capita. They're the "original nations" and "original members of the homo sapiens species". It's the richer, mostly blue nations that are upward fluctuations, something "unnatural" or something that was "artificially created".

Communist demagogues love to take wealth for granted. Adam and Eve have lived in a luxurious castle and it was some evil people – probably capitalists – who stole this infinite wealth from them or their descendants and who imposed austerity on their lives. But the truth is exactly the opposite. Adam and Eve didn't have anything nontrivial and it was mostly the capitalists who built the world where people may be wealthy.

The possibly looming full Greek default and related developments will mean nothing more than the change of Greece on the map above from "blue" to "yellow". It's not a big deal; most countries surrounding Greece on the map are yellow, after all. Most of the time, nations tend to get richer but that's also correlated with their increasing understanding of the importance of free trade, financial accountability, enforcement of laws and contracts, protection of owners and employers, and other important aspects of a functioning capitalist society. Greece has voluntarily chosen to walk in the opposite direction – increasing legal support for those who live out of work of others. It was done both at the national level and the international level: Greece as a whole became a company that lived out of work of others. And such mistakes do have consequences.

It would be better for the rest of Europe if Greece dropped not just to the yellow but to the orange or red category. The modest yellow color could still be enough for Syriza-like infections in other countries (like Podemos in Spain) to get way too many votes. This far left-wing pandemics has to be stopped, otherwise the centuries of prosperity of the modern type – and this prosperity was "invented" in Europe – will end on the European continent rather soon. Similar communist revolutions could turn out to be a much more urgent threat for the Old Continent than Islamization and other things.

A fun story – good heart is great but some compensation for that is good, too

On Thursday noon, I was returning from bureaucratic offices – annual tax returns (which I was obliged to file electronically) plus health insurance and pension insurance annual forms (on paper): it has never been so fast. When I was returning home, I found car keys – from a rather expensive but not too expensive car. They worked. ;-) So I decided the owner had to be living in the nearby family house – the keys were really in front of the door, kind of. The owner, between 60 and 70 years, I guess, agreed it was him, when I rang the bell. I waited for a few minutes.

When he came to see me, for a minute, I insisted that it was my duty and I deserved nothing for that. But at the end, I did accept the half a liter bottle of Fernet Stock as a compensation. :-) The probability could have been 30% that the keys would be stolen – even I had the temptation to give it to police – and perhaps 5% that the car would be stolen as a result. So the bottle is a very cheap way to get out of this trouble. You know, I am among the most likely people who would consistently do such things for free. But at the end, if the people who help others are never compensated in any way, they ultimately stop doing good things, too. I hope that you understand why this seemingly off-topic story with this message appears in the blog post about Greece.

1. Very interesting (for me to watch) experiment, this one!

Lubos, I feel that the thrust of this your post is that trust is an exhaustible resource.

However, our mental capacity and motivation to trust money is genetically built into people's brains; No less in Greek brains.

The Greek government now only needs to start printing their own currency to motivate some creative and constructive ambitions *within* Greece - ambitions (unfortunately also inside some of the more unscrupulous and greedy Greeks) that will be constrained by their relative inability to buy various high-tech means of making what they want and 'need' from abroad.

[Just commenting from the top of my head as usual.]

2. Strange times when abiding by basic, transparent, long-established and rational rules becomes the surprising exception that angers the powers to be. Still hoping for a backlash toward economic sanity and accountability.
Has Tsipras gambled too high? I sure hope so.

3. Overall unemployment 26%, youth unemployment 50%, reduction in GDP 25%. That's not austerity; that's a Great Depression. It is not surprising the Greeks voted for communists (there's always been a strong communist party there); it's surprising there wasn't an actual armed rebellion.

That said, the Greek economy cannot provide a Western standard of living, and the temporary boom time the Greeks enjoyed on entering the EU is permanently gone. Regardless of Merkel and the ECB, Greece will default on all its debt and leave the EU and euro. There is really no other choice. The Greek economy cannot repay the loans. Why that wasn't obivious years ago is a mystery.

The geopolitical question is whether Greece also leaves NATO. The resurgence of Orthodoxy in Russia gives Greece a natural ally outside NATO/EU.

4. Dear Lubos,

I think your accusations and arguments have a solid foundation and the moral of the story that Greek people hold the biggest part of the responsibility is indeed true (although I find offending characterizations unnecessary). I would like, as a side discussion, to mention that although certainly Greece has the biggest problem there are quite a few other countries that have very similar problems. Italy, Portugal and Spain on one hand and France on the other. Do you spot a problem there as well as you (and me) spot in Greece? And the fact that these countries face such a problem (i.e. southern) does it give some special "flavor" to the whole problem? Certainly you cannot accuse France and Italy (and even Spain) for not producing much more than Greece. And what about the fact that Podemos is likely to take power in Spain, while the French president and the Italian prime minister have come to agree with Tsipras (and not only) for a relaxation of the austerity? The local communities in Spain and Portugal face exactly the same problems as the ones in Greece, so maybe the problem is a European one indeed (and not only a problem of Greece)? Spain's unemployment was sky rocketing long before Greece's.

The answers to the above I am not sure about. I am trying to collect opinions so I would like yours as well. Sorry for the many points I am introducing and the messiness of my thoughts.

5. Dear Juan, the debt of Portugal, Ireland, Italy and Spain may be repaid.

Even though obviously "some of the same patterns of behavior as in Greece" exist in these countries as well – they exist in *all* Western countries (including my homeland) and not only Western countries – they're in no way in the same situation as Greece.

Of course that if e.g. Spain got many years of a Podemos government, it could easily get to a very similar situation as where Greece is today. But this is a speculation at this point. You can't assume that Podemos has already won because it's not clear. And even if Podemos won, they would probably "fail" to destroy their country within one election period.

The Southern leaders' kisses for comrade Tsipras are outrageous acts but countries are not being destroyed by kisses. As long as Hollande and others mean their "support" for Syriza and "dreams about relaxation of austerity" to be just an inconsequential ritual showing their being left-wing, it's not really a lethal problem. Leftists have lied 24/7 since they became leftists but that doesn't mean that countries with leftists were in the state of permanent default. One actually needs to "act" to destroy things.

6. Hmm, but independently of Greece, we have been seeing many voices and discussions about relaxation of austerity, especially from France. I mean, Hollande's logic is not quite the same as Berlin's. In the meanwhile the demonstrations in Spain and the youth especially are getting fiercer.

In the meanwhile unemployment in at the same level as in Greece (if not higher), productivity at a low. Portugal has a more viable than Greece's debt but it is in a huge mess as well. Corruption in these countries is massive. Politicians will have to promise stuff in order not to happen to them what happened to Samaras. So, let me ask you again, if I may, if you think there is a deeper problem here (I am not implying the capitalism by the way).

Also, is it only me seeing the radical pre-election Syriza inexistent? I mean, they are expressing opinions more and more towards the previous government. I think this is a sensible thing to do. Do you think that there is a slight chance that they come into logic as they seem to be coming and indeed implement some huge reforms (actual ones like tax evasion)? This is my impression. In the end of the day, as an EU tax payer I want that Greece pays its debt to me. I think it is only reasonable that they first make money to pay me (but pay me) and that country needs reforms to make money. The more money their citizens make the more money will flow to "me" if they obey the rules and agreements. So, in your opinion, what would be the best way that Greece "makes money", be more productive and be more like Germany or Austria? (and the same applies for Spain and Portugal)

7. Dear Lubos,
it is no secret that the situation makes no rational sense whatsoever (and the rhetoric out of new Greek government is a farce at best). But since you allude to history, I do have to remind us what the Western world owes the classic Greeks, the "original upwards fluctuation" if you allow the analogy. You may say that it was more cultural than economical, and that it was 2k years ago, and I agree. But this heritage is ultimately the reason that (deep in their heart) most continental Europeans would prefer keeping them in, if only they returned to some form of reason!

8. Dear Johannes, by DNA, Greeks are almost identical to the ancient Greeks. But from a civilization viewpoint, they have nothing to do with each other. The two of us are much closer to classic Greeks than the average modern Greek.

There's no outstanding debt to Greece that would arise from the ancient Greek upward fluctuation. The ancient Greeks were advanced in many ways and they got a happy prosperous cultural life for that. It gradually penetrated to Rome and beyond and it's good that those things aren't paid to the descendants. Patents or copyrights only apply for O(50) years and there are very good reasons why it is so - especially because the distant descendants don't really have much to do with the achiemevents of their ancestors. They haven't met them (100 year older), either.

Your justification to keep Greece in the EU could be used to Egypt and Mesopotamia/Iraq and China as well, couldn't it?

9. Dear Luboš,

"It should have been obvious to everyone that the principles of sound banking, explicit laws, and common sense were being suppressed..."

What you say there is true. But it was true WAY BEFORE Greece joined the euro.

Look, FUCK Greece! The problem here is the EURO. Greece is only a symptom — an INEVITABLE one.

But the euro TOO is only a symptom.

Because the ROOT of all problems here is the fucking EU itself.

Until THAT one is 'solved', you're going to keep on witnessing the consequences of the further INEVITABLE crimes that will be committed by the EU in setting up and taking advantage of these ANTICIPATED 'beneficial crises' and the growing misery in the years to come that will trail in their wake.

END the EU. There will be no peace until it is done. KILL IT NOW!

Otherwise you'll all end up ripping each other's throat out like a swarm of rats trapped in a tiny cage. Better now to gnaw your way out and kill the cage maker.

WACHT AUF, EUROSUCKERS!

10. I think it's nonsense, John. The essence of these problems has nothing to do with the European Union. It's a completely ordinary relationship between two groups of people - one that is much more likely to save and lend, the other that is much more likely to live in comfort and borrow.

Approximately speaking, between Greeks and Germans. The former have collectively borrowed too much money from the latter. What does it have to do with the EU? Do you think that the Greeks wouldn't be borrowing outside the EU? Do you think that their debt in the real terms would be lower today? Why do you think so?

The main thing that the EU has caused is a change of perspective. Without the EU, Greece would be recognized just as another poor country - one that happens to be on the European continent but is analogous to Argentina. With the EU, there is this nonsensical expectation that Greece and Germany are essentially the same thing, which they are not, of course.

But the EU hasn't really created the differences. If something, it worked hard to mask them. Of course that they can't be masked indefinitely because they are real and have lots of reasons that are hard to change. But admitting that the differences can't be masked is something else than the wrong claim that the differences were created by the EU.

At any rate, the forced "egalitarianism" between the nations is exactly perhaps the worst thing that's wrong about the EU, so every sensible Euroskeptic must want this redistribution and forced "equality" of nations to stop. That's why the exit of Greece from the eurozone is a step in the right direction. The EU was trying to impose German logic on Greece which wasn't easy. But now it threatens to accelerate the propagation of some delusional ideas - e.g. Syriza's program - from Greece to many other countries. This is a much bigger threat than many other things that the EU has brought us.

This has to be stopped and reverted which is why it's important to isolate the Greek problem.

11. I agree with you on this Lubos. EU and the world owes modern Greeks nothing more that it owes to Czechs or to Irish so to say. No, this argument is tiring me a lot and I am from Greece. If we want to stand up to our ancient name we should do it by our own.

I think, to a large extent, what has happened to Greece is the fault or ours, the Greeks. We neglected and ignored a lot of things. I would not say we were living so much above our ability as you say Lubos. Our private debt is not significant at all. But it is mainly our fault the way we managed our own county or to be more precise the way we did not manage.

In Greece we never thought of planning ahead. We never thought how to absorb our doctors, engineers, scientists. Rather we just left them alone and now they are employed by the same countries we blame to be the reason of our downfall. We never cared too much for technology, about R&D, about proper marketing of the simple products we produce. We never could, and I am afraid wiill, be able to cooperate in a big scale with our selves. If our DNA is pure (which I doubt because of common sense reasons) we indeed continue the legacy of the ancient Greeks who could not cooperate.

In any case, I think Lubos is being so strict to us because he is a reasonable person. I do not think Lubos has any problem with any Greek in particular, only from our collective behavior. I do not think anybody would benefit from our departure from the euro except for ourselves. We would be selfish to do it. For once we must be responsible and live up to our name. As the great Greek scientists do in Europe and the USA in a local and personal level it is the time we also do it as a group.

Lubos, trust me, there is too much conversation here in Greece. I promise there is no sensible Greek person who does not want to repay the debt, who does thinks he is above the rest and who is not extremely worried about the situation. One of the Syriza promises is that corruption will stop, science and research will be advanced and EU collaboration will flourish. Maybe media exaggerates abroad (and maybe they have the right to do so) but I would like to ask you to be slightly more patient. Greeks, unlike what you seem to support, are quite hard working and I strongly believe that they will not let their creditors and friends down. I think self-blame and self-critisization has already been done. Me too, I hope Syriza will come into logic (and it seems to drop its idiotic positions and come to sense) and indeed find a way to keep everybody happy.