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by Luis de Sousa Sun Jun 28th, 2015 at 12:41:56 PM EST

Greece was left between the sword and the wall and the Greeks opted for the former. Portugal is next in the line of fire, but an eerie serenity reigns in the country. The mercury is up and most folk are at the beach this weekend; the media speak of football and hockey.

In reality much has changed since yesterday, and Portugal, even if not yet aware, is today a much more fragile country. Events will go sour, and possibly much faster than most expect. Hereby a short list of the gravest developments that  are to take place from tomorrow onwards.

1. The Stock Exchange. Markets are fast reacting to cataclysms, Portuguese companies are largely uncovered at this moment and will not be spared; banks will be the hardest hit. Trading is likely to be suspended some hours after opening. The sensible attitude is to not open the Lisbon stock exchange tomorrow morning and wait at least a few hours to see how things go around Europe.

2. The Contagion. Yesterday there were already news of medicines and certain foodstuffs running out in Greece. Tomorrow panic can take over and diary food  quickly vanish from supermarket shelves. By Tuesday it will start to be hard finding petrol and diesel. Cuts to the electricity supply will then be a step away. The sovereign bankruptcy will soon be followed by a wave of bankruptcies in the private sector that will spread like fire. Portuguese banks will be even more threatened, some might not survive this summer, following the trails of Banco Espírito Santo.

3. The Debt. Interest rates on the Portuguese sovereign debt are set to explode, leaving Portugal once again barred from the bond market. In the short term Portugal has provisions set aside to face this set back. The minister of finances was much criticised for the awkward way she announced these provisions, but these will certainly be useful in the months to come. Problem is: they won't last forever.

4. The Interest Rate. The euro will tank, possibly closing this week already under parity to the US dollar. Inflation will soon return to the Euro-zone (likely already in July) and the ECB will be pressed to raise interest rates. When it does so, it will render a large swath of Portuguese families and companies insolvent. It follows that the Portuguese banking system (or whatever may be left of it) will go insolvent too.

The abrupt end to negotiations over Greece's debt leaves the precession of events now largely out of control. Few can make something to remediate the unravelling described above. The Eurogroup is at this stage in the drivers seat, from a practical perspective there is hardly anything it can do now. The Greek Government can try to impose capital controls and start rationing first need foodstuffs and energy. The ECB has more cards to play, it can, for instance, keep feeding liquidity to the Greek banking system justified with the need to avoid contagion - but such deeds shall require great political courage.

Portugal is up for an hot summer, days of uncertainty never lived in its 40 year old democracy.

This is a crosspost from AtTheEdgeOfTime.

Portugal is taking its lead from the EU which in turn is taking its lead from Rick Blaine in Casablanca: I never make plans that far ahead.
by rifek on Sun Jun 28th, 2015 at 01:21:00 PM EST
Your point number 4 will turn out to be totally wrong. Deflation will hit the euro zone even harder than it has now.

The fact that even people from the left do not get this point is not surprising but still dangerous.

by rz on Sun Jun 28th, 2015 at 04:32:47 PM EST
I would not set aside a period of deflation at some point, a liquidity run is always a possibility in times of uncertainty. However, recent data clearly points towards inflation in the short term.

by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Mon Jun 29th, 2015 at 02:53:09 AM EST
[ Parent ]
Link is broken.

But I do not think you can read a lot about inflation from M3 money supply.

by generic on Mon Jun 29th, 2015 at 05:02:49 AM EST
[ Parent ]
  1. is irrelevant: There is no demand for product, so there is no point in investing, so there is no point in IPOs, so the stock market is expendable.

  2. is outside the realm of plausibility. Even in Cyprus the doomsayers were proven wrong, and the Cypriot government was something out of amateur hour at the clown school. Syriza is not: It is clear from the masterful choreography on display in Greece that Athens has gamed out this scenario ahead of time and deliberately let the balloon go up on their own time table.

(Even if they had not, supermarket supply chains and distribution channels do not work that way.)

  1. has an obvious solution, that Syriza is currently demonstrating for the slow learners. Of course, that's gonna suck for the EPP-PES collaborators in the Portuguese cabinet who have been so busy throwing Syriza under the bus and will now have to eat crow. My heart bleeds for them.

  2. is another ridiculous exaggeration. There might be a small dip in the dollar/euro exchange rate, but even that should be mitigated by the skill with which Athens is managing its capital controls. And although raising interest rates in response to deterioration of the terms of the foreign trade is admittedly classic BuBa quackery, there are limits to even the ECBuBa's insanity. At the end of the day, they will not allow the spread to the Fed Funds rate to increase to several per cent. And the Fed fortunately has reasonably competent professionals like Yellen at the helm.

- Jake

Friends come and go. Enemies accumulate.
by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 28th, 2015 at 05:13:29 PM EST
I have to agree with Jake here.  Much as I believe this whole situation has been spectacularly mismanaged by the Troika and Eurogroup, I don't believe the markets will be all that surprised.  There will be increased volatility as the situation unfolds, certainly, and, as my own diary makes clear, I don't see there being a quick solution for the Eurozone.  However the surprising thing may well be how little a Greek default effects everything else.  Greece is only  a tiny % of the Eurozone economy and it was tanking anyway. The rest of the Eurozone is growing and in a cyclical upturn. Euro devaluation and QE will keep things ticking over.  So unless you are talking about factors and issues specific to Portugal of which I am unaware, I wouldn't be pressing the panic button just yet.  If anything the Eurogroup will be desperate to ensure it doesn't repeat the mistakes it made with Greece - and that could even increase Portugal's bargaining power - if it has a Government smart enough to realize that.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun Jun 28th, 2015 at 06:12:57 PM EST
[ Parent ]
I am not pressing the panic button, and I don't think the Greek people are, though the politicians (of all stripes may be), but I do worry for Portugal. Portugal needs to be protected because of its banking structure and the fact that its bank have lent so much to the periphery, and likewise, the periphery (esp. Spain) has lent so much to Portugal. Greece is an outlier because it did not have much private debt, and it was mainly an issue of public debt, and that debt came through France and Germany, which meant the big boys could wield enough violence to make the euro taxpayers fall in line, capitalize the German and French banks, almost without awareness of what was going on. With Portugal, they simply cannot sacrifice it, because the media in the big countries would quickly point out the relationship with Spanish banks. Portugal must be protected t all costs. If Greece was the scapegoat, then Portugal is the lynchpin. There is no eurozone without Portugal.
by Upstate NY on Sun Jun 28th, 2015 at 07:39:26 PM EST
[ Parent ]
That seems like an optimistic take.

It would require the key players to have learned a lesson from the Greek case, other than "Varoufakis and Tsipras are unreasonable, jumped up peasants who can't even dress themselves."

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 28th, 2015 at 11:32:23 PM EST
[ Parent ]
  1. A loss of capitalisation is certainly not irrelevant for the banking system.

  2. You seem pretty optimist on this; I very much doubt the IMF will get the tranche due tomorrow.

  3. I would not call bankruptcy a "solution".

  4. Exaggeration is part of the game. However, note that the euro already lost 2% of its value since I posted this up.

by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Mon Jun 29th, 2015 at 03:01:54 AM EST
[ Parent ]
Bank resolution Is the solution for failed banks. Lack of inflation has been THE problem as it has made debt burdens and imbalances even more unsustainable.  A 2% devaluation s a mere blip.  Yes if it becomes 5 or 10% on a sustained basis it will have an impact - Mostly by reviving the Euro economy  and helping the ECB to reach its inflation target quicker.  Increases in interest rates are still a long way off, and won't be a broblem so long as they remain the rate of inflation.  All in all, a struggling Portuguese economy should welcome a Euro devaluation- even if it drives oil prices higher -itself not a bad thing in the long run.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Jun 29th, 2015 at 03:40:44 AM EST
[ Parent ]
  1. Bank capitalization is not measured by market cap, and banks do not have any very large direct exposure to common stock unless they are doing things that should not be legal. So the stock market can burn.

  2. What the IMF gets or does not get does not matter very greatly for the ability to maintain supermarkets and pharmacies in stock. The IMF can be allowed to burn.

  3. That is a statement of ideological preference, not economic necessity.

  4. Two per cent is not sufficient to matter to any business model that matters to the real economy. Those who lose their shirt over two per cent, or even five per cent or ten per cent, eurodollar fluctuations should be allowed to burn.

- Jake

Friends come and go. Enemies accumulate.
by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Jun 29th, 2015 at 11:44:30 AM EST
[ Parent ]
  1. You should probably read a bit more on the collapse of Banco Espírito Santo.

  2. I believe you missed my point here. When Papandreu announced the referendum back in 2011, for a few weeks Greece was only able to acquire petroleum from Iran. It is a matter of credibility.

  3. No ideology here, nor economics.

  4. Again you are past the point on this, even if the euro has flat lined against the dollar. What matters is the action of ECB in face of devaluation. A devaluation would be good for most Portuguese business and the economy in general.

by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Wed Jul 1st, 2015 at 04:17:17 AM EST
[ Parent ]
  1. banks that hold large exposure to common stock are not primarily in the business of banking. Let them burn.

  2. Syriza has been planning this for some time. There should be supplies in the pipeline for a few weeks.

  3. "Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. - Keynes

  4. the Fed Funds rate is historically a reliable anchor for ECB interest rate policy. The ECB's intellectual vacuity works in our favor here.

- Jake

Friends come and go. Enemies accumulate.
by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Jul 1st, 2015 at 10:39:54 AM EST
[ Parent ]
Easy to be wise after the markets open, but it seems the doomsayers are at least premature.

The euro hasn't tanked, markets are down a bit but haven't crashed, and the creditors are busy preparing a new offer for today lunchtime...

They are all falling over themselves to assure everyone that they would already have been talking debt reduction over the weekend, if the Greeks hadn't slammed the door. Perfidious bastards.

So I'm aligned with Jake's thesis that this is a pre-planned and masterful ploy by the Greeks, rubbing the troika's nose in its own collective stupidity, which will garner major concessions on debt restructuring at very little cost.

So how does it play out?

  1. Creditors table a new offer today
  2. Tsipras says, very interesting, let's keep talking
  3. By about Thursday, a feasible proposal is on the table
  4. Tsipras says, we can now recommend a Yes vote in the referendum
  5. No doubt about the result
  6. Banks and stock market open normally next monday

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II
by eurogreen on Mon Jun 29th, 2015 at 04:55:49 AM EST
There is a game-theoretic bent to this referendum action. In the game of chicken, Syriza is throwing the wheel out at about the last moment. Now up to troika to choose its best option.

At worst, the referendum allows the Syriza government to survive a "de facto" default for a few days. A horse might speak then.

by das monde on Mon Jun 29th, 2015 at 05:36:35 AM EST
[ Parent ]
Normally, people playing chicken think that the important point is knowing when to turn, but there is an even more important, and fundamental, point: having an opponent who is aware there is a wheel to turn.  The Eurogroup isn't aware which direction the sun rises, and though the troika knows there is a wheel, it considers itself indestructible and sees no need to turn it.
by rifek on Mon Jun 29th, 2015 at 11:53:49 PM EST
[ Parent ]
I hope you are right, but when considering how the creditors will play this game, there is also the angle of getting approval in national parliaments, and the factor of stupidity.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Mon Jun 29th, 2015 at 05:40:43 AM EST
[ Parent ]
This is a key factor "anti-Syriza" people keep missing when they express horror at the referendum.

The Eurogroup has always reserved final agreement for certain national parliaments... because "democracy..."

by Metatone (metatone [a|t] gmail (dot) com) on Mon Jun 29th, 2015 at 06:03:03 AM EST
[ Parent ]
Except when there are bonds involved. Then it's "fuck democracy."
by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Jun 30th, 2015 at 10:02:43 AM EST
[ Parent ]
Can we really look at the euro as a measure of the underlying panic? Sees to me that in the event of the euro unravelling totally over the next few years, anyone who is levered with euros in German banks runs the "risk" of having their euros converted to DM, which wouldn't be such a bad thing. In other words, it's the weaker country bondholders who should be worried. In the core, there is probably no panic.
by Upstate NY on Mon Jun 29th, 2015 at 11:49:22 AM EST
[ Parent ]
It's looking to me like things are in fact getting worse and Greece will be in full financial meltdown by Thursday.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Carrie (migeru at eurotrib dot com) on Tue Jun 30th, 2015 at 12:27:16 AM EST
[ Parent ]
The terrible thing is that it may make them vote the wrong way. Wrong as in against their own good.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi
by Cyrille (cyrillev domain yahoo.fr) on Tue Jun 30th, 2015 at 04:23:28 AM EST
[ Parent ]
The bank holiday might prevent (delay?) this meltdown as I wrote in this post. But the forcing the "meltdown" is certainly part of the strategy of the Eurogroup. There is no alternative.

by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Wed Jul 1st, 2015 at 04:07:23 AM EST
[ Parent ]
Fear-mongering is the enemy of democracy - from Greece to Cameron's EU referendum | Suzanne Moore | Comment is free | The Guardian

With migrants arriving in Kos and hordes of the dispossessed massing in Libya, why would we want to alienate a nation just one country away from Isis? Greece spends a lot on defence, this is true. Can we not see why?

But the troika are the agents of Project Fear. Though Germany was allowed to grow its way out of recession in 1953, it will not let Greece do this, because it would set "a bad example". The aim of all these dealings becomes clearer. It is to remove the democratic challenge of Syriza to these huge, undemocratic institutions of the EU and IMF. Even many rightwing economists argue that the conditional loans given to Greece have only enriched the financial intuitions. The aim is not growth but punishment.

The struggle within Greece is over whether it can be considered a sovereign state. This matters. It matters because it makes Europe a hostile place for those who are concerned with sovereignty, and this will play into the hand of the ultra-rightwing sceptics. Within Greece, it will play into the hands of the fascist Golden Dawn.

It will be yet another victory for largely faceless financial institutions over an elected government. Those who are pro-Europe are going to have make arguments based on these anxieties. We will have seen that some parts of Europe are way more equal than others.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
by melo (melometa4(at)gmail.com) on Thu Jul 2nd, 2015 at 09:20:12 PM EST

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