Citi’s Buiter: Greece will be forced out of the euro regardless of who wins the Sunday elections

New Democracy. Syriza. Doesn’t matter. According to Citi’s senior political analyst Tina Fordham, chief economist Willem Buiter, and global economist Ebrahim Rahbari, “any new Greek government, regardless of its composition, will struggle with implementation challenges related to the imposition of further austerity measures demanded by the Troika in exchange for further assistance,” and as a result, they “consider it likely that a new troika deal would ultimately fall apart and lead to Grexit.”

Citi notes that there is growing sense among European leaders that “promotion of economic growth can no longer be subordinated completely, even in fiscally unsustainable euro area member states, to the requirements of fiscal austerity,” but no one has any idea what that means.

This seems to be the current thinking, according to Citi:

The only operational, practical consensus on growth is that austerity policies should not be unnecessarily pro-cyclical. If a deficit target is overshot because of bad luck (economic activity and government revenues are weaker than expected despite full adherence to all conditionality) rather than bad faith (there has been a failure to implement agreed measures or policies), the shortfall will not have to be made up immediately – in the original time frame. More time will be given to achieve the original objectives without the need for deeper and faster austerity than originally envisaged. Bad faith (non-compliance) will, for incentive-compatibility or moral hazard reasons, continue to be punished with demand for enhanced and faster austerity.

Warning. Also, reminder: “And of course, reduced austerity does not mean no austerity, let alone the reversal of austerity…fiscal policy will remain contractionary overall – just less contractionary.”

Citi’s doesn’t think Greece is able to handle any more austerity, and its rapidly deteriorating fiscal condition is hastening a day of reckoning. On how and when Greek membership in the euro ends:

A possible trigger would be the determination by the IMF following the first or second assessment, that it cannot disburse its next installment due under the current programme because the Greek programme is not fully funded for 12 months after the assessment. In that case some of the smaller core euro area member states that have made their contributions to the Greek EFSF programme conditional on the IMF disbursing would probably drop out too. The Greek sovereign would then be forced to default. Then the ECB would stop funding the Greek banks through the Eurosystem and through the Greek ELA. With neither the Greek sovereign nor the Greek banks having access to the lender of last resort, we believe Greece would probably leave the eurozone, as some liquidity through the issuance of New Drachma is better than no liquidity.

The Citi team says that “more generally, we are concerned at the prospect of formerly wealthy countries becoming ‘new, critical fragile states.'” This is where things get really messy. They don’t think the ECB, EU, et al. will even let Greece go financially when things get really bad as described above. More like this:

In order to prevent such a scenario, we believe that even if “Grexit” were to occur, Greece would stay in the European Union and receive some form of Troika or other external assistance, most likely through the Balance of Payments facility run by the European Commission and the IMF for non-euro area EU member states. Since 2008, Latvia, Hungary and Romania have been under such programmes. Support from the EIB, and from Structural and Cohesion funds would also be likely to be forthcoming. We would also expect the ECB to continue to support the Bank of Greece after a Grexit. After all, the Greek central bank would exit the Eurosystem with considerable euro-denominated debt to the Eurosystem (this could be its Target2 net debit balance – something around €100bn, or its share of the total losses suffered by the Eurosystem as a result of Greek exit, however this would be established, net of the capital it has paid into the ECB, which would, in principle, be refundable on exit).

And the darkness is spreading through Europe. The “seeds of dystopia” are being planted:

Throughout the euro area periphery, and indeed beyond it in the ‘soft core’ of the euro area, the potential for the so-called “seeds of dystopia” referred to in the WEF Global Risks report remains a key long-term risk to European political stability and competitiveness, as youth unemployment rises and the social contract between states and citizens erodes. The burdens of this adjustment fall disproportionately on young people, as evidenced in youth unemployment exceeding 50% in Greece and Spain and unacceptably high everywhere in the periphery and the euro area at large. We continue to take the view that political change in Europe will continue to take place in the ballot box, but note the rising risk of frequent changes in government, street violence and other upheaval in a more fraught environment undermining both political and social consensus when it is most needed. However, unlike in the Middle East and North Africa, European countries do not have an age pyramid, but rather an inverted one, making it less likely that inter-generational conflict will propel rapid change in political outcomes towards more growth and employment-friendly policies.


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Guest Post: Does America Face An Election Between Two Moderates?

Submitted by James Miller of the Ludwig von Mises Institute of Canada

Does America Face An Election Between Two Moderates?

This weekend the runoff election will be held in Egypt to decide who will be the next president.  The country’s first democratic election in decades comes one year after former President Hosni Mubarak was ousted during a massive civilian protest.  Despite decades of financial support from supposedly democracy-friendly U.S. and Western governments, it’s was widely acknowledged that Mubarak’s constant reelection was the product of ballot rigging.  He aggressively held power for years by censoring and controlling the media along with suppressing political dissent.  Mubarak was shielded from most opposition by the fact that he used his office as a tool of political corruption and was the quintessential Western puppet of a dictator.

At the beginning, most journalists in the West were celebrating the Egyptian revolution as a victory for democratic governance.  They saw the possibility of untainted elections as the best way for Egyptians to adopt their values.  With the first presidential runoff ballot since Mubarak just around the corner, the good feelings have begun to wear off.  Many prominent media publications are dismayed that this weekend’s contest is looking like a battle between two radical candidates.  The Globe and Mail reports:

If this is what democracy is like, maybe we’re better off without it, many Egyptians voting in their first-ever truly free presidential election must be thinking.

With a choice between a leader of the Muslim Brotherhood on the one hand and a former air-force commander and prime minister for Hosni Mubarak on the other, not only do these virgin voters have to choose between two political extremes, but the majority of Egyptians don’t want either of them to win.

New York Times columnist Thomas Friedman equates the runoff election with “having to choose between two diseases.”

From the mainstream, corporate media perspective, this isn’t how elections are supposed to play out.  In America, the Democrat vs. Republican paradigm forces both parties to appease centrists and independent voters.  The nominees must campaign not as extremists, but pragmatic moderates who embody the level headedness of the people.  The victor in November is thus given an electoral mandate from the voters to carry out their collective will.

This is also the election process taught in public schools and universities.

But while the American public has been duped into believing such a process gives rise to pragmatic and temperate leaders, quite the opposite is true.

With former Massachusetts Governor Mitt Romney now the presumptive Republican nominee, campaign season is now fully underway.  Romney is being portrayed as the free market loving, social conservative choice to Barack Obama’s cool, calm, and collected liberalism.  Instead of falling victim to the stereotype of being a fragile leftist, Obama’s ramping up of the War on Terror has been applauded by the right as a step toward the center.  Weekly Standard editor and all around warmonger Bill Kristol declared the President a “born again neo-con.”  And in spite of initially supporting a public option within his key legislative achievement of health care reform, Obama opted for the less extreme alternative of the individual mandate that the conservative Heritage Foundation once endorsed.

As for Romney, he was portrayed by his opponents as Obama-lite due to his pioneering the President’s health care scheme during his tenure as governor of Massachusetts.  Romney has gone on record stating “I’m not going to cut $1 trillion in the first year” as it would “cause our economy to shrink [and] would put a lot of people out of work.”  Of course his logic only works if you believe the money stolen and spent by the government actually creates wealth despite the expenditures never having to compete in the open market.  Statements like these are what leads to Romney being called a “closet Keynesian” by Paul Krugman and the “Massachusetts moderate” by Newt Gingrich.

Though the November election will be hyped as two opposites squaring off against each other, both candidates are considered rather moderate compared to who could have been the nominees.

The question is, are Barack Obama and Mitt Romney really that moderate?

Let’s account for the similarity in policy of both.

–Both are large supporters of the military industrial complex.  Romney has vowed to increase defense spending and wants the Navy, which is larger than the navies of the next 13 nations combined, to ramp up production of warships.  Numerous times the former governor has vowed to prevent Iran from acquiring a nuclear weapon even if it means offensive military action.  For Obama, as the New York Times recently revealed, the President spends every Tuesday morning playing God by picking out drone targets on what could be mistaken for baseball cards.  His unlawfully ordered death strikes are based on flimsy evidence and incredibly vague criteria for determining who the enemy is.  And then there are the hundreds of civilian casualties that have been a result of the unaccountable killing spree.  The drone war won’t end in a second Obama administration and military aggression will likely escalate under a Romney presidency.  This policy does absolutely nothing to keep the U.S. safe and everything to put the public in harm’s way.

–Both show no opposition to the Federal Reserve System and the banking cronyism it has institutionalized.  Both supported the Wall Street bailouts and the unprecedented bout of money printing that took place during the financial crisis.  While Goldman Sachs was Obama’s biggest private donor in the last election, the investment firm is currently Romney’s largest donor.  This election is shaping up to be more of the same as Wall Street is bankrolling both candidates.  Seeing as how the whole banking system operates under the veil of solvency due to fractional reserve lending, it is in the elite money lender’s interest to use their easy access to the printing press to keep the house of cards from collapsing.

–Neither candidate has made a peep out of ending the needlessly expensive and socially degenerating drug war.  In fact, the Obama administration has increased spending on drug enforcement and has cracked down on medical marijuana distributors more than any other president before him.  Romney hasn’t taken a position on the drug war but considering his socially conservative talking points, it’s extremely unlikely he will allow others the freedom of putting what they want in their own bodies.  In short, both candidates are supporters of the prohibition on dry plants and the seedy and dangerous black market it has created.

–And then there is the drug of which all of Washington is addicted to: spending and borrowing.  Neither Obama nor Romney have presented budgets that have actually brought expenditures in line with revenues.  The national debt would balloon under both their proposals.  Being that, as Lew Rockwell identified, pork barrel spending is the “entirety” of the federal government’s budget, denying the welfare dependents of their food stamps, the elderly of their Social Security checks, farmers of their subsidies, green energy companies of their taxpayer loans, Wall Street of its implied bailouts, dictators of their foreign aid, and military contractors of their lucrative deals has become electoral suicide.

Those opposed to the above polices are typically referred to as radicals.  This is especially so for the independent minded who see politics as a game played by well dressed mobsters and the state as an institution of pure thievery.  In modern American discourse, peace is now the policy of ignorance.  The right to do what you want with your self and property must come second to the will of the ruling class.  Being in favor of free markets and not the crooked capitalism which politicians love means wishing to see workers starving in the streets.  True liberty is only of value to the dimwitted and unpatriotic.

Texas Congressman Ron Paul was a steadfast supporter of sound money, nonintervention, the unfettered market, and significantly axing government spending before a now guaranteed financial collapse.  His reward was being treated like a senile uncle and his presidential campaign being subjected to an incredible amount of voter fraud.  He was deemed too much of a threat to the establishment.

In the end, Paul and others who are disgusted at the utter cronyism that is the state aren’t the extremists.  What’s extreme is a blind adoration of government power.  Paul isn’t a radical; he is practically the only politician in Washington who isn’t a closet socialist or fascist on an egotistical power trip.

With such radicalism deeply entrenched in the U.S. government, the best hope the country has is for this fall’s election turnout to be the lowest on record.  Like Egypt, the choice is between two radicals seeking to use the state’s apparatus of violence to help their political buddies and mold society to their liking.  Voting for the lesser of two evils is still evil and immoral.  The freedom to not vote is still available to Americans.  They would be best to exercise it before it’s too late.

ZH Evening Wrap Up 6/15/12


No news links tonight, it’s Friday & I’m too lazy.

In summary

– Gold is crashing up

– Obama has decided congress & the constitution are both completely irrelevant… and American workers for that matter

– Fed is monetizing & flattening the curve, completely blowing by the fact that the availability of credit does not create demand

– A guy is walking on a rope over niagara falls at 10pm eastern

Oh, and the market has the potential to blow up on Sunday evening


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