Greece Martyred to the Debt Gods

Henry Ford was believed to have said that if the American people understood the monetary and banking system, there’d be a revolution the next morning. We could say something similar about the Greeks today.

Here’s why.

Greece sealed further bailout funding this week. It’s enough to keep the Greek government going over the summer. Here’s the catch.

Part of the reason the Greek government gets the money is that it agreed to sell off further State assets. One is a prime bit of coastal real estate as part of the ‘privatisation agenda’ its creditors are setting.

The site is a former airport, where refugees currently live. They will be shifted so it can now become a luxury real estate project. But the deals won’t stop there. The portfolio of Greek assets for sale includes former government buildings, beaches, and hotels, according to the New York Times.

This isn’t the first sale. In December last year, the Greek government agreed to transfer control of 14 regional airports to a German operator for €1.2 billion.

In April the Greek government sold a 67% controlling stake in the country largest port to a Chinese state owned shipping group.

This is after the Syriza party ran on a platform opposing privatisations in order to win power.

Now you might be inclined to think that a country in debt like Greece should sell off its assets to pay back its bills. OK. But you’ll have to explain why there seems to be one rule for Greece and another for the rest of the Eurozone.

Take, for example, the other big deal this week. The European Central Bank is now officially buying corporate bonds as part of its Quantitative Easing program. It has already purchased 1 trillion euros worth of bonds, mostly sovereign (government) ones since 2014.

Previously to June, the ECB was purchasing €60 billion in bonds a month. That figure now rises to €80 billion, until at least next March.

In the space of a few days, the ECB has bought corporate debt from Europe’s biggest companies, including Siemens, Renault, Telefonica and Anheuser-Busch, according to Bloomberg.

Now when the central bank purchases all those bonds, it is doing it with money creating out of nothing. Yep – €80 billion a month. Free money!

Except for Greece.

Greek government bonds aren’t eligible for the ECB’s ‘asset purchase’ program. That’s because the credit rating agencies rate the bonds as junk.

But the ECB could, if it wanted to, reinstate a waiver on the condition that the ECB officially doesn’t buy ‘junk’ assets. That waiver was previously in place, before being suspended in February 2015. The ECB withdrew the waiver to make the Greek government toe the line on accepting bailout conditions.

If the waiver was reinstated, it would allow the ECB to buy Greek government bonds again. This would lower the Greek government’s borrowing costs.

It would also be a major help to the Greek banks. Currently they’re not able to pledge the Greek government bonds they hold to the ECB in exchange for cheap loans.

One reason Greece is mired in depression is that its banking system is barely functioning.  The ECB could solve this tomorrow if it chose too. But it chooses not to.

In late May this year the ECB indicated to Greece that it would reinstate the waiver. However, in June the Financial Times reported that the ECB decided to wait another three weeks before this would happen.

The FT reports: ‘Instead Mario Draghi, the ECB president, said while the council discussed the waiver, no decision would be made until Athens had completed all elements of its 86 billion bailout.’

The cynic in me says the ECB is keeping Greece cut off until the juicy Greek assets have been put up for sale or some sort of deal agreed on. Originally, the value of Greek State assets destined for privatisation was €50 billion.

Now you might be inclined to object that Greek government bonds are junk. But notice what Bloomberg further reported about the ECB’s first purchases of corporate bonds on Wednesday…

The European Central Bank didn’t shy away from the region’s riskier securities when it began buying corporate bonds on Wednesday.

Purchases included notes from Telecom Italia SpA, according to people familiar with the matter, even though Italy’s biggest phone company is rated as sub-investment grade by two ratings firms.

The company’s bonds are in Bank of America Merrill Lynch’s Euro High Yield Index and credit-default swaps insuring the notes against losses are part of the Markit iTraxx Crossover Index linked to companies with mostly junk ratings.’

A bit strange don’t you think? The ECB will buy junk corporate debt, but not junk Greek government debt.

Maybe the ECB’s motive isn’t targeting inflation and price stability, like they like to say it is. You’ll have to decide for yourself. Just remember, it’s not every year a country goes on sale.

Cycles Trends and Forecasts editor Phil Anderson put all of this into very neat perspective earlier this year. That’s when he spoke to a select group of people and showed — categorically — how easy it is to get rid of banks.

And government too. Fortunately, we taped the session.

Go here and find out how you’ll be able to hear all about it.

Best wishes,
Callum Newman

From the Port Phillip Publishing Library

Special Report: Wealth Eruption’: Forget the market downturn…the oil crash…and the debt…There are FOUR unstoppable events that could generate huge wealth for Aussie investors. Starting with one play that could make you a potential 1,068% return in the next 24 months…(more)


Callum is a feature editor for Money Morning. He covers areas of interest arising from world markets and the global economy that could mean new investment opportunities for Aussie investors. If you're already a subscriber to these publications, or want to follow Callum's financial world view more closely, then we recommend you join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Money Morning essays.


Leave a Reply

Your email address will not be published. Required fields are marked *

Money Morning Australia