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Our Heretic (And Not-So-Simple) Views On The Greek Referendum

Conventional wisdom has it as follows: Tsipras is a hardline communist, who overplayed his hand with the troika (or "the three institutions", as he calls them). The referendum was a last-ditch play to retain power by stoking a nationalistic response to the standoff with creditors.

We believe the current stand-off with Greece's creditors is just part of the ongoing tug-of-war between Germany and the IMF on a possible haircut on Greek debt. The background of this conflict is as follows: the US (which exerts substantial influence on the IMF) is "pro Keynesian" while Germany is "pro austerity". The two different viewpoints are summarized in two articles in the New York Times: one by Wolfgang Schäuble, and a riposte to it by Paul Krugman.

The slowdown in the European economy is obviously affecting the US economy as well; hence the US interest is clearly justified. The USA has been nudging Europe to engage in some good-old Keynesian deficit-spending. Obviously, the deficit spending does not need to happen in Germany, whose economy is doing very well, thank you. It needs to happen in places like Greece, but then the question arises, how could this deficit be financed? Well, the markets are certainly not willing to finance Greece, so that leaves few people in the room able to do this. Rich Germany obviously comes to mind, but then this is a major no-no for German voters and politicians. (OTC:WEST) Germany engaged in the mother of all expansionary policies (and fiscal transfers) at the time of reunification with East Germany, when it set a 1:1 conversion rate of the East German mark into the DEM, while the exchange rate applicable for East German exports had been at 1 to 4.3. Rightly or wrongly, it is widely accepted in Germany that the dismal performance of Germany during the rest of nineties is due to those very policies- justifiable perhaps at the time by a duty of solidarity. Quite understandably, the German public doesn't feel such a strong duty of solidarity vis-à-vis Greece. Any German politician suggesting a large-scale fiscal transfer to Greece would be skewered. Any haircut on Greek official-sector debt would be seen as (and be) just that: a fiscal transfer to Greece.

One last background note: the German public seems convinced that Germany has already paid its dues when it comes to Greece. This is only partially true: the restructuring of Greek debt was at its heart an effort to convert private unsustainable debt into official unsustainable debt -saving major European banks in the process (including Deutsche Bank, which managed to stay afloat by engineering achieving a risk-weight asset density of 14% in 2008).

Now on to a few somewhat overlooked facts relating the Greek crisis, which should raise an eyebrow-or a few million:

i. What's being put to the Yes or No vote on Sunday is two documents: the first one is entitled "Reforms For The Completion Of The Current Program And Beyond" and essentially contains the "sacrifices" which are requested of the Greek side. The second one is called "Preliminary Debt Sustainability Analysis". But hold on a second: this is just math, projections on the servicing of Greece's debt based on certain assumptions relating to economic and fiscal performance. Why on earth would one put a spreadsheet on a referendum?

The plot thickens if one actually bothers to read the document. It is not even conclusive: under the first two scenarios ("full implementation of program reforms" and "partial reform compliance") Greek debt is deemed to be sustainable. As to the third scenario, which "reflects the IMF's baseline" "significant reprofiling of the stock of debt and concessional lending terms would improve sustainability. Reprofiling of payment flows does not imply nominal haircut or budgetary costs for creditors. This would also entail further NPV gains for Greece, and strengthen the sustainability of the Greek public debt in the long-run".

Things get even more bizarre, as the document states that "[f]urther work is under way to reconcile the scenarios". This work was obviously never completed, as the IMF came out a few days later with its own version of the debt sustainability analysis, which carries a date of 26 June (just a day later from the date of the draft Greeks are asked to vote on) but was only published on 2 July. In no uncertain terms, it labels Greek debt unsustainable, and considers it can become sustainable if the grace period on existing EU loans is extended to 20 years and the amortization period to 40 years-assuming of course Greece runs primary surpluses of 3.5% of GDP, has real GDP growth of 1½% in steady state, and achieves privatization proceeds of about €½ billion annually. However "[a] lower medium-term primary surplus of 2½% of GDP and lower real GDP growth of 1% per year would [also] require […] a significant haircut of debt, for instance, full write-off of the stock outstanding in the GLF facility (€53.1 billion)". Let's translate that: the GLF facility consists of the bilateral loans to Greece. Under this not-too-unlikely turn-of-events, Germany would need to kiss its entire direct exposure to Greece goodbye-the dreaded "fiscal transfer" we spoke about earlier.

Now back to the referendum: Greeks are asked to accept-or-reject an analysis which is inconclusive, work-in-progress, while the IMF flatly rejects as well. Funny, no?

ii. Now let's go back to the first document-the one containing the creditors' demands. But hasn't Tsipras conceded on most of these demands already, by sending the letter to the troika which was immediately leaked to the FT? Hasn't Juncker claimed that "[w]e were so close, in fact, we were so close that it was just €60 million that we were arguing over?" Hasn't Varoufakis said that "the only remaining difference between us and our creditors is debt sustainability"? Let's get this right then: Greeks are going to the polls over sixty million and a document which is inconclusive and which needs "[f]urther work [currently] under way to reconcile the scenarios". What on earth? Couldn't they have done this work before asking people to vote on it? Quite irresponsible, isn't it? Surely the bank closure must have cost more than sixty million?

iii. Which brings us to the bank closures. If one looks at the ELA procedures, as published by the ECB, ELA is extended to "solvent financial institution, or group of solvent financial institutions, that is facing temporary liquidity problems, without such operation being part of the single monetary policy. Responsibility for the provision of ELA lies with the National Central Banks concerned" which can happily go on extending ELA unless "the Governing Council of the ECB [with a majority of two-thirds of the votes cast] considers that these operations interfere with the objectives and tasks of the Eurosystem".

But didn't Draghi say as recently as 15 April that "[w]e approved ELA and we'll continue to do so, extend the liquidity to the Greek banks while they are solvent and they have adequate collateral". Didn't he say on 5 March that "the ECB is a rules-based institution […] and […] the decision about determining an ELA, are all the outcome of rules, not our political decisions. ELA is a decision of the National Central Bank of Greece, to which the Governing Council may decide to object with a very special and demanding majority requirement, if certain conditions are not in place. One condition is that ELA can be given to solvent banks with adequate collateral. The Greek banks at the present time are solvent. Their capital levels are well above the minimum requirements, and that's positive news. [T]oday, the Greek banking system is solvent". Let's look at his response on 3 June, when asked "Mr. President, maybe you could elaborate again on your decision not to tighten the haircut rules for collateral used by Greek banks. The situation, the financial situation in Greece has deteriorated considerably since December when you took a lighter stance on this issue. So the whole thing looks like you're -- you said you are a rules-based institution and it looks like you're making political considerations; not willing to interfere in the ongoing political process. How would you comment on that?"

What Draghi said was: "I would comment that it's not true. Simply said, we are not either interfering or in any way taking a stance with respect to the current negotiations. We are a rules-based institution. But you have to understand that there are two different sets of rules: one is for collateral posted against monetary policy instruments, and the other one is the collateral posted against ELA".

Granted, Draghi also said "We do assess how the developments in the markets affect the quality of our collateral, namely the quality of the Greek government bonds that have been posted as collateral. So were the conditions to change, we would certainly go through a series of things. Yes, we would have to revisit our previous decisions".

Reality is, there are no rules for ELA collateral policy, as a report requested by the European Parliament's Committee on Economic and Monetary Affairs flatly states-and the ECB has played fast-and-loose with this non-existent rulebook in the past. There is a difference now, however: as of November 2014, the ECB (through the SSM) is also the regulator of most major European banks.

Let's get real now-Greek banks had total assets of €391bn as at May 2015. One would think these assets should be enough to support €89bn+€6bn=€95bn of ELA. If these €391bn are not worth even €96bn, then Greek banks, with liabilities of around €322bn, should probably be just a tiny bit insolvent, no?

Are Greek banks insolvent then? The institution which determines this is the Single Supervisory Mechanism (SSM) and the SSM is part of the ECB. Let's then look at the response of the head of the SSM, Danièle Nouy, when asked as recently as 7 June whether "she may perhaps have slight doubts about [her] earlier statement that Greek banks were absolutely solvent and liquid":

"No, I don't: these banks continue to be solvent and liquid. The Greek supervisors have done good work over the past years in order to recapitalise and restructure the financial sector. That was also visible in the outcome of our stress test. The Greek institutions have experienced difficult phases in the past. But they have never before been so well prepared for them". If her views had changed in less than three weeks, wouldn't she have said something about this-if only to the banks themselves, which would then have to disclose it? Wouldn't she have asked Greek banks for a capital increase perhaps? After all, the exposure of Greek banks to the Greek sovereign stands at under 6% of total assets-and this exposure also includes T-bills and loans.

Could it be then, that the €89bn of Greek ELA already extended did not "interfere with the objectives and tasks of the Eurosystem", but the extra €6bn requested on Sunday would?

Didn't Draghi say four times in his press-conference of 5 March that the ECB is a "rules-based institution"? Didn't he repeat that twice in his 3 June press conference? Wouldn't they feel the need to spell out to us which rule forced them to send millions of Greeks to queue in front of ATMs?

And if Draghi is a stooge of Angela Merkel (admittedly, not highly likely, but humour me for a second) who decided to do "whatever it takes" to make sure those Greeks take heed, what was the response of the Greek side? Did Greece ask for (and publicize) the rationale of the ECB Governing Council decision? Did we find out what the vote tally was? All that Greece needed to get the extra ELA was eight votes, including the Greek and the Cypriot ones. How many votes did Greece get? Wouldn't that be of interest, so that we can see who our allies are, in this hour of need? And why hasn't Varoufakis followed through on what he said on 29 June: "The Greek government will make use of all our legal rights. We are taking advice and will certainly consider an injunction at the European Court of Justice". Oh well, probably not on the top of his list; he may have been busy giving an interview to his friend Phillip Adams on (Australian) ABC News.

iv. In the midst of all this, Tsipras requested a third bailout for Greece from the ESM-a granting of which would exclude the IMF from the financing of Greece. Slightly odd timing, as Peter Spiegel notes: "Eurozone finance ministers have already rejected a request for an extension, and Donald Tusk, the European Council president, [the day before] rejected it a second time. It is highly unlikely finance ministers, who are to hold a conference call again Tuesday night, will agree to this now". Why on earth would one send out this letter-ahead of a referendum and in full knowledge of the fact that it has zero chances of being entertained?

v. The last curious fact is that Greek TV broadcasters have so far not ordered any public opinion polls on the referendum. This is quite astounding, as on general elections we have at least a couple of polls published a day.

All these somewhat bizarre events may be due to the incompetence of Messrs. Tsipras, Varoufakis and Co. They may just be savages, or may simply be hostage to Syriza's leftist factions (none of which, by the way, threated to unseat the government in April, when it awarded a $500m contract to Lockheed for the upgrade of five P-3B Orion planes from the 1960s-at a time when, according to Syriza at least, Greece was going through a humanitarian crisis). Under this scenario, Tsipras & Co. will have fooled such ivory-tower academics, like Nobel laureates Paul Krugman and Joseph Stiglitz, but not the likes of Adonis Georgiadis or Kyriacos Mitsotakis (you won't get this unless you're Greek).

Or something else may be going on…

Let's just look at the most likely-turn-of-events from this point on, and see if we can make sense of the curiosities just enumerated.

Greek voters, fearing that banks may not reopen in the event of a No vote (and not knowing whether the Yes vote leads by a safe margin) are highly likely to turn out in droves for Yes.

Varoufakis has already said that "[i]f [the people] say Yes, we will do whatever it takes to make sure that this agreement is signed exactly as the troika […] is demanding of us". The head of the Greek negotiating team , Euclid Tsakalotos, has said: "We see the referendum as part of the negotiation process, not in lieu of it". Monday, therefore, Tsipras is likely to pay a visit to Ms. Merkel, with the results of the referendum at hand. He will tell Ms. Merkel, all your requests have been granted, now show us the money-save Greece. Now, Ms. Merkel will have no option but to oblige-how on earth can one say no to a nation which has overwhelmingly accepted everything requested of it?

However, Ms. Merkel has repeatedly insisted that there is no deal without the IMF. She always wanted this, as she is afraid that a political decision at EU-level may force Germany to provide financing on concessionary terms to Greece and other potential laggards. But, horror-of-horrors, the IMF in so many words asks for the dreaded haircut. Can you kick out of the Eurozone (assuming, for a moment, this can happen) a country which has just yielded to all your demands? Can you accept a haircut, thus setting a precedent that, whenever a Eurozone country can't service its debt, Germany will pay up? Ms. Merkel would be cornered, no?

Under this scenario, Tsipras would be likely to get his debt relief. He would be a hero in Greece, as he would have confronted Germany and won. Other laggards, such as the Italians, wouldn't be too displeased, either: a precedent will have been set, whereby if a Eurozone member screws up, the Germans pay up (would you believe? Mario Draghi happens to be an Italian!).

Let us also give short shrift to the unlikely outcome of a No vote, assuming for a moment that Tsipras were in cahoots with the IMF (and the US) to box in Germany. All that Greece would need is a €1.5bn loan from a friend (the US perhaps?) to make good on the IMF. The IMF could provide the entire €52bn that Greece needs over the medium term. Add that to the €32bn already lent by the IMF (and a bit more to support the banks, if needed) and now the IMF's exposure to Greece becomes eminently serviceable-or "sustainable", as they say. Why? Because the IMF has super-senior status, which means it gets repaid before anyone else-including the European bilateral loans of around €53bn, the €142bn lent by the EFSF, the €27bn in bonds held by the ECB and the €39bn in private debt. In other words, Germany would risk seeing its entire exposure to Greece subordinated to that of the IMF, with little leverage in case Greece does not pay up. Talking about being caught between a rock and a hard place…

In other words, Varoufakis may not be widely off the mark, when saying that there is "100% chance of success"-whether Greeks vote yes or no. Tsipras, when saying that Merkel and Gabriel are "uneasy and confused", may have a point, too.

If anyone cares about what I am voting for: I am going to drive my kids to my mother in northern Greece, so no time for that. I wouldn't bother to vote even if the referendum was on whether to exit the euro or not.

Neither Greece's ailment, nor its cure, is its currency, be it the euro or the drachma, or its pensions-whether too low or too high. Greece's cancer is the purely domestic cleptocracy which has been sucking the country dry for at least thirty-five years (that's as far back as I can remember, older people may argue this may have been going on for much longer).

You think I'm exaggerating? Let's look at a couple of interesting statistics, then. According to the UN comtrade database, supplies of bunker fuel to ships in Greece went from $25m in 2008 to $1.72bn in 2014. Exports of fuel to Turkey went from $204m in 2007 to $3.2bn in 2014. Exports of fuel to FYR of Macedonia in the same timeframe went from $72m to $614m (for comparison purposes, Greece's GDP in 2014 was $238bn). Either Greek refineries got very efficient during the crisis, or other refineries in the region got very inefficient. Or it could be that the cleptocrats, hit by the crisis in their other half-way legit businesses, had to supplement their income with other, far more lucrative ventures.

Well, according to the New York Times "Organized crime […]dominates the black market for oil in Greece; perhaps three billion euros (about $3.8 billion) a year of contraband fuel courses through the country. Shipping is Greece's premier industry, and the price of shipping fuel is set by law at one-third the price of fuel for cars and homes. So traffickers turn shipping fuel into more expensive home and automobile fuel. It is estimated that 20 percent of the gasoline sold in Greece is from the black market. The trafficking not only results in higher prices but also deprives the government of desperately needed revenue".

According to the FT "George Papandreou, the former socialist premier who resigned in 2011, also claimed he was brought down by oligarchs after a finance ministry campaign to tackle widespread fuel smuggling revealed a Balkanwide scam that cost Greece €3bn a year in lost taxes".

Its' not as if these smugglers are thousands. They're a handful of people, whom practically every Greek knows by name. Unlike Escobar, they are not in hiding. They're feted by the press as "successful businessmen" and are being sat next to prime ministers.

There are similar tales to be told in natural gas, energy and practically every sector that has to do with the state.

If that's not fixed, irrespective of whether the currency of Greece is the euro, the drachma or the rupiah, there can be no end to Greece's plight. Is Tsipras likely to fix that? I'll give you a hint: most Greek oligarchs voiced their support for Tsipras ahead of the general election in January. Before him, they of course supported his predecessor.

What I think, is that Greeks should be united in their fight for the rule of law and against the cleptocracy, and not divided over a referendum on an absurd question. That division, however, serves the cleptocrats well-they can go about their usual ways unnoticed. Whoever said "divide and rule" knew what they were talking about.