Huge Win for Greece, Varoufakis Sacked, Troika Unlikely to be Placated

Greek Prime Minister Alexis Tsipras' first move following the landslide anti-austerity "Oxi" vote in yesterday's referendum was to toss his finance minister and chief troika critic, Yanis Varoufakis, on the pyre. Varoufakis announced his resignation today with the blog post, "Minister No More":

Soon after the announcement of the referendum results, I was made aware of a certain preference by some Eurogroup participants, and assorted ‘partners’, for my… ‘absence’ from its meetings; an idea that the Prime Minister judged to be potentially helpful to him in reaching an agreement. For this reason I am leaving the Ministry of Finance today. 

I consider it my duty to help Alexis Tsipras exploit, as he sees fit, the capital that the Greek people granted us through yesterday’s referendum. 

And I shall wear the creditors’ loathing with pride. 

We of the Left know how to act collectively with no care for the privileges of office. I shall support fully Prime Minister Tsipras, the new Minister of Finance, and our government. 

The superhuman effort to honour the brave people of Greece, and the famous OXI (NO) that they granted to democrats the world over, is just beginning.

There is no indication at this point that the eurozone power brokers are feeling any change of heart after a super-majority of Greeks rejected their last proposal. Jack Ewing reports from the European Central Bank headquarters in Frankfurt that there is a wait-and-see attitude on Greece's access to emergency liquidity assistance (ELA):

The no vote by Greeks on Sunday makes it even more difficult for the European Central Bank to continue propping up Greece’s commercial banks, whose solvency is closely linked to that of the country’s government. 

But the central bank has so far avoided taking action that could force Greece out of the eurozone, a possible outcome if the banks fail. Without a banking system serving as a conduit for euros and a platform for transactions, Greece might have little choice but to begin printing its own currency.

“Pressure has increased further for the E.C.B. to revoke Greek banks’ access to central bank liquidity,” said Mujtaba Rahman, the Europe director for the Eurasia Group, a political risk consulting firm. “Still, the E.C.B. is very likely to keep its liquidity lifeline open for the time being.”

While the central bank probably will not cut off credit to the Greek banks on Monday, it is also unlikely to increase the amount available to them from its current level of 89 billion euros, or about $99 billion. The 25 members of the Governing Council will not want to increase the central bank’s exposure to Greece until there is tangible progress toward an accord with eurozone creditors and with the International Monetary Fund.

Without an increase in credit, Greek banks are in imminent danger of running out of cash to dispense to depositors. They are unlikely to open tomorrow, despite promises to the contrary by Athens.

“The Greek no puts the European Central Bank in a most difficult position,” Holger Schmieding, chief economist at Berenberg, a German bank, said in a note to clients. “We look for the E.C.B. to tread very cautiously, though, perhaps even seeing to it that small amounts of euro cash could still be withdrawn from Greek cash machines for a while until the political outlook becomes clearer.”

In other words, the historic "Oxi" vote by the Greek people means nothing to ECB apparatchiks. This attitude is also prevalent in Brussels where James Kanter quotes European Commission VP Valdis Dombrovskis saying "Oxi" will make things worse for Greece:

“The commission is ready to continue its work with Greece,” Mr. Dombrovskis told a daily news conference in Brussels. “But to be clear, the commission cannot negotiate a new program without a mandate from the Eurogroup.” 

Mr. Dombrovskis was referring to the name of the group of finance ministers from countries that use the euro.

The hurdles to a formal resumption of talks, including any official decision by the Eurogroup to begin negotiations on Greece’s third international bailout in five years, were high, Mr. Dombrovskis warned.

“The ‘no’ result unfortunately widens the gap between Greece and other eurozone countries,” he said. 

“There is no easy way out of this crisis,” he added. “Too much time and too many opportunities have been lost.”

Once again, to the eurozone power elite the "Oxi" vote means nothing; in fact, worse than nothing. The democratic referendum, we are told, has raised the costs of the any new bailout deal by tens of billions of euros.

What the "Oxi" vote reveals is the weakness of the "big lie." Greek voters saw clearly what was happening: Banks were shut because the European Central Bank capped ELA when Tsipras called the referendum. The ECB did this in an attempt to shock Greeks and stampede them in the direction of a Yes vote. It failed stupendously. Now, as Krugman outlines in his column, "Ending Greece’s Bleeding," for the ECB to increase ELA would be to acknowledge that the cap on lending was a political intervention meant to topple Greece's Syriza-led government:

The most immediate question involves Greek banks. In advance of the referendum, the European Central Bank cut off their access to additional funds, helping to precipitate panic and force the government to impose a bank holiday and capital controls. The central bank now faces an awkward choice: if it resumes normal financing it will as much as admit that the previous freeze was political, but if it doesn’t it will effectively force Greece into introducing a new currency. 

Specifically, if the money doesn’t start flowing from Frankfurt (the headquarters of the central bank), Greece will have no choice but to start paying wages and pensions with i.o.u.s, which will de facto be a parallel currency — and which might soon turn into the new drachma.

But the big lie must be protected. That is all neoliberalism is at this point. Krugman is not sanguine about the possibility of a new debt deal emerging quickly; and without this, Krugman sees no better alternative for Greece than abandoning the euro:

In the failed negotiations that led up to Sunday’s referendum, the central sticking point was Greece’s demand for permanent debt relief, to remove the cloud hanging over its economy. The troika — the institutions representing creditor interests — refused, even though we now know that one member of the troika, the International Monetary Fund, had concluded independently that Greece’s debt cannot be paid. But will they reconsider now that the attempt to drive the governing leftist coalition from office has failed?

I have no idea — and in any case there is now a strong argument that Greek exit from the euro is the best of bad options.

Of course, Greece no longer has its own currency, and many analysts used to claim that adopting the euro was an irreversible move — after all, any hint of euro exit would set off devastating bank runs and a financial crisis. But at this point that financial crisis has already happened, so that the biggest costs of euro exit have been paid. Why, then, not go for the benefits? 

Would Greek exit from the euro work as well as Iceland’s highly successful devaluation in 2008-09, or Argentina’s abandonment of its one-peso-one-dollar policy in 2001-02? Maybe not — but consider the alternatives. Unless Greece receives really major debt relief, and possibly even then, leaving the euro offers the only plausible escape route from its endless economic nightmare.

And let’s be clear: if Greece ends up leaving the euro, it won’t mean that the Greeks are bad Europeans. Greece’s debt problem reflected irresponsible lending as well as irresponsible borrowing, and in any case the Greeks have paid for their government’s sins many times over. If they can’t make a go of Europe’s common currency, it’s because that common currency offers no respite for countries in trouble. The important thing now is to do whatever it takes to end the bleeding.

Basically we are back to where we were when negotiations first started between Greece and the troika. Absent significant debt write-offs there appears to be no rational alternative to a Grexit.

But a Grexit doesn't appear to be Tsipras' goal; axing Varoufakis is proof of that (though the finance minister didn't seem too broken up about it; at the end of the day, a scholar prefers the quiet of the cloister). Why the troika doesn't grab at the offer Tsipras made last Wednesday after Greece failed to make its repayment to the IMF and be done with the crisis can only be explained by a perception in Brussels, Berlin, and other European capitals (not to mention Washington D.C.) that protecting the big lie of neoliberalism -- at all costs -- is paramount, and this demands that a leftist party like Syriza must go.

Greek Zero Hour: Default or Lickspittlry

The flurry of activity yesterday and today surrounding Greek debt negotiations is succinctly framed by this two-sentence paragraph found in "European Leaders Assemble for Urgent Meeting on Greek Crisis," by Liz Alderman, Niki Kitsantonis and Jack Ewing:

Unless they strike an agreement soon, Greece may not be able to make a series of coming debt payments. On Friday, Greece must make a €300 million loan repayment to the International Monetary Fund, and it owes €1.2 billion later this month.

Yves Smith at Naked Capitalism, "Greece’s Creditors Meet to Prepare Offer (Updated – Creditors Agree on Terms)," seems confident that Greece can meet Friday's deadline and has enough wiggle room to survive the month:

The press is awash with reports of a high-level meeting convened yesterday by Angel Merkel and attended by Francois Hollande, Christine Lagarde and Mario Draghi. The upshot is that Greece’s creditors have agreed to sort out their differences and come up with a proposal to present to Greece in the next few days. Greece is generally believed to be able to make its €300 milllion payment due to the IMF on Friday; if not, it has the expedient of asking to bundle payments under an existing IMF rule, which would give it till the end of the month to remit the €1.5 billion it has coming due in June.

So why the splashy optics of a Monday-night emergency powwow of big shots? There are several "technical" issues in play. Two key ones are pension overhaul and the value-added tax. The euro honchos convened to finalize an agreement on which of Syriza's "red lines" Greek leader Alexis Tsipras must cross.

Smith says that Tsipras is giving ground on pensions, agreeing to raise the retirement age to 67. The endgame here is to cripple Syriza and beat back any challenge to a bankrupt neoliberal orthodoxy. If Tsipras is made to kneel, violating his own campaign promises to protect if not increase pensions, and schlep a pension-cut deal back to parliament for approval, the troika will have won. Syriza's parliamentary majority will splinter. Already the Left Platform bloc of Syriza is gaining momentum. Left Platform wants to default on debt payments and return Greece to the drachma. As Alderman, Kitsantonis and Ewing explain:

Far-left Syriza lawmakers have become increasingly agitated recently, accusing Mr. Tsipras of making too many compromises on the anti-austerity pledges that helped sweep the party to power in January’s elections.

A new political uproar broke when a group of Syriza lawmakers refused to back the government’s nominee for a new representative at the International Monetary Fund, Elena Panaritis, a former Greek parliamentarian who once worked at the World Bank. In a letter on Sunday, more than 40 Syriza members, mostly lawmakers, took issue with her support of Greece’s last international bailout agreement in 2012, which the party considered to have been unfair and overly harsh. Ms. Panaritis withdrew from consideration on Monday, citing the opposition.

Although symbolic, it was the latest in a series of uprisings within Syriza, which during the election campaign had promised to take a hard line with Greece’s creditors in debt negotiations and to resist austerity measures. A hard-left faction recently pressed for but lost an internal central committee party vote to have Athens stop paying its creditors altogether if they demanded further austerity.

Mr. Tsipras is facing an array of pressures as critics from both the left and right in the Greek government question whether he has a viable plan to restart the economy, which slid back into a recession in the first quarter. At the same time, Greece’s creditors, the I.M.F. in particular, have resisted unlocking any aid unless the government can show that it will put its finances on a sound footing and run enough of an operating surplus to make regular debt payments. 

The dispute over Ms. Panaritis on Monday “shows that there’s a lot of exasperation in Syriza ahead of a deal with creditors,” said Harry Papasotiriou, a professor of political science at the Panteion University in Athens and the head of the Institute of International Relations. 

Even if dissent within Syriza deepens, the government would probably band together to push through any legislation needed to secure the bailout funds. Few lawmakers want to precipitate a default or force Greece to exit the currency union. But the hard-liners of Mr. Tsipras’s party could eventually break away, analysts said, especially the Left Platform, a faction that has already pushed for Greece to stop paying its creditors if they continue with “blackmailing tactics.”

This is the outcome I believe Merkel, Largarde, Hollande, Draghi et al are after. They want to force Tsipras into "Obama mode." Talk "hope & change" and deliver more of the same. Syriza's governing majority collapses as a result, and the moral to the story becomes, "See, that is what happens when you try to change the order of things."

AP is reporting this morning (Elena Becatoros "Greece submits draft bailout plan, creditors say not enough") that Tsipras has delivered a proposal to the creditors, and he's talking tough:

"It is now clear that the decision for whether they want to adapt to realism and emerge from the crisis without the division of Europe ... belongs to the political leadership of Europe," Tsipras said.

In the end, this is all a Kabuki. There is no alternative to a default. Greece has been hemorrhaging capital and must soon implement controls. This is the last paragraph from the Alderman et al piece:

In the meantime, Greece’s finances continue to deteriorate as deepening political uncertainty accelerates a decline in tax receipts and withdrawals of deposits from the nation’s banks. Last week, Greece’s central bank reported that deposits fell in April to €133 billion, the lowest level in a decade, after savers withdrew nearly €5 billion from the banks during the month. More than €30 billion was withdrawn between the end of last November and the end of April, according to the Bank of Greece.

And yet the troika persists in maintaining the fiction of robust primary surplus targets. According to Smith:

Things are even worse than they appear. The target for this year was 3%, and 4.5% for 2016. Most observers thought both figures were insane. And remember, when Syriza assumed office, Greece has a small primary surplus. As of April, the IMF projected a deficit of 1.5%, and matters can’t have gotten any better. To just meet Greece’s ask of 1% now means a swing of a full 2.5% of GDP, almost the unreasonable level they were expected to hit for 2015. Even if the creditors make what they think is a generous offer of 2% for 2015, that is equivalent to an asphyxiating 3.5% consolidation from the new starting point of negative 1.5%. 

So the creditors may have read too much into Tsipras’ offer to negotiate on pensions. Or they may feel they have to go this step regardless of whether their gambit will work. Or they may be in denial as to how badly Tsipras has been boxed in by his Left Forum (although he can always cut a deal with To Potami). At a minimum, both sides appear to finally be about to get out of the Groundhog Day phase of these negotiations to an end game. 

Zero Hour is rapidly approaching (although this has been said many times before). The "Either/Or" here seems clearer than before. Either Greece defaults on its debt, or Tsipras brings back the creditors' crummy deal to parliament and manages to get it approved only to see Syriza splinter, and with it the momentum of a resurgent Left.

Greek Debt Negotiations to Muddle Along, But Things Actually Looking Up for Syriza

It is Monday morning which must mean that there is a meeting in Brussels between eurozone finance ministers and Yanis Varoufakis' Greek negotiating team. Tomorrow is the deadline for repayment of 750 million euros to the IMF. Last week Varoufakis said Greece would make the repayment. The ever-skeptical Yves Smith of Naked Capitalism is not so sure. As she argues in her post today, "Greece Finally Threatens Default as Deal with Creditors Remains Remote,"

The ruling Greek coalition appears to have finally woken up to the fact that it it cornered. As we indicated, the longer the creditors keep Greece in the sweatbox, the more its popularity is destined to decline. 

While the latest polls still show Syriza as the most popular party, its support is now at 36%, a round trip from a huge surge after the government took office to back to where it stood when it was voted into office. Approval ratings of the government’s strategy have dropped precipitously from the very high levels reached shortly after the new government took office. As e pointed out early on, the best strategy for the creditors was simply to remain non-negotiable. Either Syriza would capitulate to their demands, or the government would lose support, paving the way for the return of a more complaint coalition. Syriza appears to realize that following the inertial path of trying to extend its negotiating runway does not work in its favor. Even if Greece were to pull a rabbit out of the hat and make the €750 million IMF payment, it has a total of €1.5 billion coming due to the IMF in June, which it almost certainly can’t satisfy if it fails to unlock the bailout funds.

Yves Smith seems to think that Syriza can either make the IMF payment tomorrow and risk having to issue scrip to pensioners and government workers at the end of the month, or it can stiff the IMF, a course of action that would not immediately precipitate default and Grexit. As Smith explains:

The situation is more fluid than it appears. The odds are high that blame game political calculations will win over sound policy. We’re already seeing jockeying starting to take place. Notice Schauble’s “justifiable conditions” caveat. He’s made clear repeatedly that he’d just as soon see Greece leave the Eurozone, but no one, particularly Merkel, wants to be seen to have pushed Greece out. Thus if Greece plays its cards so it can be depicted to have brought the default (and if it comes to that, an exit), that works to the advantage of the hardliners who see Greece as disposable and believe a default/possible exit can be made painful enough for the Greek people so as to make any other country that might contemplate leaving the Eurozone to see that alternative as too costly.

Despite the continued impasse, and virtual certainty of a default on Tuesday [!], the creditors have quite a lot of choices and options. For instance, despite the IMF’s tough talk about not giving Greece any grace period on a default, an IMF default is not as fine a trigger event at a private sector bond default. As the Financial Times explains:

But that hard line masks a little wiggle room created by the IMF’s own procedures. Under the official timeline plan, it is not until a month after a missed payment that the managing director formally notifies the board and not until three months afterwards that a formal statement to the outside world is expected to be made.

In other words, even if Greece defaults on the loan repayment to the IMF, things can continue to muddle along as they have. The June repayments are larger than this month's. But if missed payments can play out over months before a default is officially declared, there is no reason why this can't repeat itself next month.

In the Business section of today's "newspaper of record" is a slightly more sanguine treatment of the Brussels negotiations. Peter Eavis, Jack Ewing and Landon Thomas, "I.M.F. and Central Bank Loom Large Over Greece’s Debt Talks," see a chink in the troika's armor, and it is not the wiggle room on IMF repayments; it is the risk aversion of the European Central Bank:

It would of course also be a high-stakes gamble for Greece to do anything that could undermine relations with the central bank, which is shoring up Greece’s banking system. It has lent Greek banks more than €110 billion, cash the lenders need to operate but would have trouble raising on international money markets. 

The support to the banks is not the debt that the officials in the Greek government would consider for default. Instead, the idea would be to not repay Greek government bonds held by the central bank. Greece is scheduled to repay nearly €7 billion on those this summer. 

If the Greek banks could not repay their central bank loans, the losses would be passed on to other eurozone countries. An outcry would come from Germany and other countries already fed up with what they regard as Greece’s misbehavior. The central bank’s credibility — probably a central bank’s most important asset — could be damaged. 

Still, the central bank’s deep caution about financial stability would most likely limit how hard it pressed Greece. As the guardian of the single currency, the central bank may not want to do anything that could set off a chain of catastrophic events in Greece’s banking sector that could lead the country to quit the euro. 

“The E.C.B. does not want to be responsible for precipitating a crisis,” said Mujtaba Rahman, practice head for the European Union at Eurasia Group, a political consultancy. “They are very, very concerned about having blood on their hands.”

I know at the end of April when last I wrote about this I said climax was near. Then it looked impossibile that Varoufakis could scrape together the 750 million euros due the IMF on May 12. At the time there was the brouhaha over Varoufakis' obstreperousness; things seemed to be at an unbridgeable impasse and something was going to fracture. But then Tsipras organized a deft cosmetic reshuffling of the bargaining team, with Varoufakis nominally sent to the sidelines, and that seemed to cool things down. Also, I had no idea just how wide the nonpayment wiggle room to the IMF is. Things can continue to go on as they have for months.

Syriza will get some rhetorical help from the Scottish National Party blasting away at austerity. And there is evidence that the U.S. is extremely jealous of Russian pipeline overtures to Greece. So all in all I am more hopeful of some sort of resolution that favors Greece than I have been in months.

ECB's QE: Too Little, Too Late

Proof that Mario Draghi has the votes he needs to launch a European Central Bank (ECB) version of the U.S Federal Reserve's quantitative easing (bond buying) program when bank governors next meet on January 22 is David Jolly's "Swiss National Bank Abandons Minimum Exchange Rate Against Euro":

The Swiss National Bank said in a statement that it was giving up the minimum exchange rate of 1.20 Swiss francs per euro, less than a month after it had reiterated a pledge to continue to support that floor by buying the euro in “unlimited quantities” if needed.

***

The euro, used by 19 nations, has been a one-way bet since last May, falling about 15 percent against the dollar to a nine-year low, partly because of expectations that the European Central Bank would announce its intention next week to combat economic weakness and deflationary pressures by buying eurozone government bonds on a large scale. 

In that policy, known as quantitative easing, the central bank would effectively be printing money, increasing the supply of euros relative to other currencies and driving down its market price. 

Phyllis Papadavid, foreign exchange strategist at BNP Paribas in London, said after the Swiss central bank action that monetary authorities were “still sensitive” to the overvaluation of the franc, but that they had adapted to changed conditions — particularly the dollar’s recent rise — by changing course.

With prices dropping 0.2 percent in December, deflation has come to Europe. This, along with a favorable appeals court opinion yesterday supporting the ECB's earlier 2012 announcement that it would purchase government bonds of eurozone member states on the open market, has strengthened Draghi against the German naysayers. For an excellent summary of the ECB's planned foray into quantitative easing (QE) see Jack Ewing's "Devil May Be in the Details on European Central Bank Bond-Buying":

A solid majority on the central bank’s 25-member Governing Council appears, based on recent public statements, to favor broad bond-buying. Their position was strengthened by the opinion submitted to the highest European appeals court on Wednesday in response to a lawsuit by German citizens seeking to block a previously planned bond-buying program that Mr. Draghi announced in 2012 but never deployed.

The ECB's QE is already being criticized as too little, too late. Analysts doubt that purchasing €1-trillion worth of government bonds will cure deflation which has to do with withered demand. Plus, the Governing Council will most likely not act until March; it will only make a commitment to a QE program at its January meeting, but details won't be available until it reconvenes in March.

From now until then the ECB will have to figure out a formula for which bonds to buy. There are no "eurozone" bonds, only bonds issued by member nations. As Ewing clearly summarizes:

Because of the large number of unanswered questions, the European Central Bank may not be ready to announce details of a bond-buying program next week.

“It’s almost impossible for the E.C.B. in this environment not to act,” said Mujtaba Rahman, an analyst at Eurasia Group. But, he said, “We think it’s a two-step move — announcement in January, further details in March.”

Some elements of such a program are a given. The central bank would buy bonds on the open market — not directly from governments, which would be a violation of its charter.

But the bank will have to figure out how to deal with the lack of Pan-European assets comparable to the United States Treasury bonds that the Fed purchased in its quantitative easing program.

The simplest and most likely option would be to buy bonds in proportion to each eurozone country’s share of the central bank’s capital, which is calculated according to each member state’s population and gross domestic product.

The drawback to this method is that it would mean buying large quantities of German government bonds, which are already in heavy demand — so much so that on Wednesday the yield on the 10-year German bond reached a new low. 

Germany accounts for 18 percent of the European Central Bank’s capital, more than any other country. (Malta, with 0.65 percent of the central bank’s capital, has the smallest share.) Market interest rates on some other German government bonds are already below zero. So it is not clear what purpose, if any, would be served by pushing the rates even lower, as would happen if the European Central Bank started buying.

A second option would be to buy only highly rated government bonds — those of France, Finland and Germany, say, while avoiding the bonds of governments with riskier finances, like Portugal or Greece. That approach would answer German concerns that taxpayers could be stuck with the bill if some eurozone governments were to default on their debt.

In theory, if the European Central Bank drove up the prices of highly rated bonds, private investors would turn to the bonds of weaker countries instead. But it is not certain that would happen. If not, the E.C.B. would not achieve its goal of providing relief in heavily indebted countries like Italy.

A third option would be to buy bonds in proportion to the outstanding debt of each eurozone country — the higher the debt level, the more bonds the central bank would buy. This alternative would favor countries that are the most deeply in debt and need the most help, like Italy. But conservative critics in Germany would probably complain that these countries were being rewarded for irresponsibly running up huge debts.

It is hard to imagine a situation where Germany would green-light option three, the only option that Ewing brutes that might have a meaningful impact. So Draghi's QE will not be enough to arrest eurozone deflation.

Draghi has made clear that he wants no part in any candidacy for the Italian presidency (Elisabetta Povoledo, "Resignation of President Will Test Italy’s Premier"). Hopefully this augurs ill for the fresh-faced neoliberal PM Matteo Renzi.

Neoliberalism has to be torn down. Syriza is maintaining its narrow lead going into Greece's January 25 parliamentary elections. If elections were held today in Spain, Podemos would gain a majority (see Vicente Navarro's excellent "What is Going On in Spain? The End of an Era and the Beginning of Podemos").

The mainstream parties of the big three -- Germany, France and the UK -- are under assault from the Right. That is not going to change. The left-hand of the mainstream political duopolies will rush to defend the right, which will have the effect of further disillusioning voters in each nation. Maybe out of this disillusionment real Leftist parties will arise in the big three.

If Hillary is nominated, a similar hopeful possibility will confront voters in the U.S.

The answer to European deflation is obvious. Why not a continent-wide building program similar to China's massive investment in infrastructure?

Grexit Sturm und Drang

Europe has problems. A barrel of Brent crude fell below $52, causing the euro to drop to a nine-year low, $1.19, against the dollar. A contentious meeting of the European Central Bank will be held on January 22, a few days prior to the election in Greece, to consider some form of quantitative easing in order to stave off deflation. As Jack Ewing explains in "Falling Euro Fans Fears of a Regional Slowdown":

The further declines in the euro and in oil did not change expectations that when the European Central Bank meets on Jan. 22 that it would unveil further stimulus, broad-based purchases of government bonds, so-called quantitative easing. 

When deciding policy, E.C.B. officials are probably focused on the inflation rate more than the value of the euro or the price of oil, and the German data indicated that inflation continues to fall to levels considered dangerously close to deflation — a downward price spiral that is poisonous for corporate profits. 

German inflation was just 0.1 percent in December, according to an estimate by the government statistics office. 

An official estimate of inflation in the eurozone as a whole is to be released on Wednesday. Analysts expect the rate to fall to close to zero or even below it, putting further pressure on the European Central Bank to act.

Germany, which is dealing with a burgeoning nativist movement that is eroding the base of support for mainstream conservative parties (Alison Smale, "Anti-Immigration Rallies in Germany Defy Calls to Desist"), will argue against quantitative easing. The Germans will reason that the oil-price drop will act as a form of stimulus:

There are still many economists and public officials, though, who maintain that in fact cheap oil and a cheap currency are overwhelmingly good for Europe. One of them is Jens Weidmann, president of the Bundesbank and an influential member of the Governing Council of the European Central Bank. 

“The cheaper oil price works like a stimulus program,” he said in an interview published Sunday by the Frankfurter Allgemeine newspaper. “Consumers and companies have to spend less and can consume and invest more.” 

The statement was a signal by Mr. Weidmann that he remains skeptical about whether more E.C.B. stimulus was needed. 

While a majority of the E.C.B. Governing Council appears to support embarking on a quantitative easing program, members may be reluctant to risk alienating Mr. Weidmann and the larger German public whose views he represents. Germany worries that it might get stuck paying a big part of the bill if the European Central Bank loses money on any eurozone government bonds it might buy as part of quantitative easing.

These German worries of being left holding a huge bag of worthless bond paper are compounded by Syriza's lead in the Greek polls. Alexis Tsipras, the leader of Syriza, has promised if elected to renegotiate and possibly repudiate loans with the troika (European Commission, European Central Bank, IMF). For the last week German government officials have been lecturing Greeks to stay in line and not monkey with austerity. Liz Alderman has a helpful summary today ("Euro Countries Take Tough Line Toward Greece") of this hectoring:

On Monday, Germany’s economics minister, Sigmar Gabriel, said Europe would not accept undermining the stability that has returned to the eurozone in the last couple of years.

“We aren’t vulnerable to blackmail,” he said in an interview with the German newspaper Hannoversche Allgemeine. “We expect from the Greek government — regardless of who will form it — that the agreements made with the E.U. will be respected.”

Last week, Wolfgang Schäuble, the German finance minister, cautioned Greece against moving away from its current economic reforms, saying: “If Greece takes another path, it will be difficult. Any new government will have to stick to the agreements made by its predecessor.”

In an acknowledgment of the delicacy of the situation, German officials on Monday quickly backed away from a weekend report by the magazine Der Spiegel that suggested that Chancellor Angela Merkel and Mr. Schäuble believed that the eurozone could cope if Greece quit the euro and returned to the drachma.

A government spokesman denied that contingency plans had been made for such a possibility, and insisted that Germany wanted Greece to remain in the eurozone.

Officials in Brussels, too, emphasized Monday that membership in the euro bloc was “irrevocable,” although they left open to what extent Greece could renegotiate the terms of its bailout after the election.

“The euro is here to stay,” said a European Commission spokeswoman, Annika Breidthardt.

Guy Verhofstadt, a former Belgian prime minister who leads the Liberal group in the European Parliament, called the idea of a Greek exit, or “Grexit,” from the eurozone “nonsense,” not only because most Greeks do not want to leave the euro, but also because European taxpayers would wind up losing billions of euros that Greece owes them.

If Greeks can hold on and weather the threats and fear mongering (incumbent prime minister Antonis Samaras is campaigning on a purely fear-based appeal asserting that a havoc-plagued Grexit will result if Syriza triumphs) and Syriza can form a government, Tsipras will have a solid bargaining position. Europe is engaged in a pestilential fiction that an austerity-ravaged Greece can actually pay back the loans she has been awarded.

Alderman concludes her story by quoting two Commerzbank economists, Jörg Krämer and Christoph Weil, who say that renegotiation is the most politically expedient option Germany has, despite all the threatening noises from Schäuble et al.:

Still, most observers expect a Greece run by Mr. Tsipras would stay within the eurozone, and that a new Greek government would reach an agreement with its European creditors following a period of turmoil. After all, if Greece were to return to the drachma, the country would likely face new economic upheaval that it could ill afford. 

Preventing a Greek exit is also still desirable for Germany and other countries, since billions of euros in European taxpayer money could be wiped out if Greece were to leave the euro, raising the risk of a political backlash against leaders in those countries, said Jörg Krämer and Christoph Weil, the Commerzbank economists. 

“It would be much easier politically to renegotiate a compromise with Greece, albeit a lame one, and thus maintain the fiction that Greece will pay back its loans at some point in time,” they said.

The fear mongering has just begun. Greeks will pummeled with every type of propaganda and every form of thought control over the next three weeks. Dire warnings of anarchy will be broadcast. The proud Scots were made to buckle recently. Can we expect the Greeks to act rationally and vote to reject the pestilential fiction of austerity?

Last week I was sanguine. Years of brutal benefit cuts and high unemployment would inure the Greek voter to fear mongering at the polls. Now I am not so sure. Deflation on the European continent is going to up the ante and turn the January 25 poll into total war. No effort will be spared to maintain the neoliberal credo of austerity. Alderman reports that Tsipras has only a three-point lead with 20 percent undecided. Not terrific numbers.

Oil-Price Drop Russian Currency Collapse: The Lunacy of the Washington-Riyadh Axis

A top story today is the collapse of Russia's currency. Yesterday, despite the central bank raising interest rates to 17%, the ruble reached the depths of 80 to the dollar before climbing back to 68. The ruble has lost half its value since the beginning of the year. 

What's the cause of this panic? The oil-price drop engineered by the Saudis. Saudi Arabia has refused to cut production despite demands from others in OPEC. Mike Whitney has a helpful primer on the issue, "The Oil Coup: US-Saudi Subterfuge Send Stocks and Credit Reeling," which appeared yesterday on the Counterpunch web site:

Here’s what’s happening: Washington has persuaded the Saudis to flood the market with oil to push down prices, decimate Russia’s economy, and reduce Moscow’s resistance to further NATO encirclement and the spreading of US military bases across Central Asia. The US-Saudi scheme has slashed oil prices by nearly a half since they hit their peak in June. The sharp decline in prices has burst the bubble in high-yield debt which has increased the turbulence in the credit markets while pushing global equities into a tailspin. Even so, the roiled markets and spreading contagion have not deterred Washington from pursuing its reckless plan, a plan which uses Riyadh’s stooge-regime to prosecute Washington’s global resource war. Here’s a brief summary from an article by F. William Engdahl titled “The Secret Stupid Saudi-US Deal on Syria”:

The details are emerging of a new secret and quite stupid Saudi-US deal on Syria and the so-called IS. It involves oil and gas control of the entire region and the weakening of Russia and Iran by Saudi Arabian flooding the world market with cheap oil. Details were concluded in the September meeting by US Secretary of State John Kerry and the Saudi King . . . 

. . . [T]he kingdom of Saudi Arabia, has been flooding the market with deep discounted oil, triggering a price war within OPEC… The Saudis are targeting sales to Asia for the discounts and in particular, its major Asian customer, China where it is reportedly offering its crude for a mere $50 to $60 a barrel rather than the earlier price of around $100. That Saudi financial discounting operation in turn is by all appearance being coordinated with a US Treasury financial warfare operation, via its Office of Terrorism and Financial Intelligence, in cooperation with a handful of inside players on Wall Street who control oil derivatives trading. The result is a market panic that is gaining momentum daily. China is quite happy to buy the cheap oil, but her close allies, Russia and Iran, are being hit severely . . . 

According to Rashid Abanmy, President of the Riyadh-based Saudi Arabia Oil Policies and Strategic Expectations Center, the dramatic price collapse is being deliberately caused by the Saudis, OPEC’s largest producer. The public reason claimed is to gain new markets in a global market of weakening oil demand. The real reason, according to Abanmy, is to put pressure on Iran on her nuclear program, and on Russia to end her support for Bashar al-Assad in Syria….More than 50% of Russian state revenue comes from its export sales of oil and gas. The US-Saudi oil price manipulation is aimed at destabilizing several strong opponents of US globalist policies. Targets include Iran and Syria, both allies of Russia in opposing a US sole Superpower. The principal target, however, is Putin’s Russia, the single greatest threat today to that Superpower hegemony.

The danger of the the Washington-Riyadh oil-price-drop strategy to bring Russia to heel is that the panic will spread globally. The Dow has already dropped close to 1,0000 points in a week, while yesterday European markets were roiled. As Jack Ewing reports in "Anxiety Over European Banks Amid Ruble Crisis," companies perceived to have exposure to Russia took a hit. Ewing makes clear this is panic selling. European banks are much less exposed to Russia than, say, for instance, tiny Greece. Part of the problem is lack of information. When the European Central Bank ran its stress tests earlier this year it failed to include Russian loans because the ruble was perceived to be stable. Now -- after a year that saw a U.S.-backed coup in Kiev, the EU herded into a sanctions campaign against Russia following Crimea joining the Russian Federation, a civil war in Ukraine, and the recent oil-price drop -- things look very different.

Adding to the nervousness on Tuesday was the lack of precise, up-to-date information about which European banks might have large holdings of, say, Russian government debt. When the European Central Bank began its examination of the resilience of eurozone lenders at the beginning of the year, a ruble decline seemed like a remote possibility. Hardly anyone anticipated the steep fall in energy prices that would undercut the Russian economy. 

As a result, the European Central Bank did not include a ruble crisis among the hypothetical scenarios it used to test banks’ ability to withstand stress. Data released by the central bank in October following the bank review provide detailed information on individual banks’ exposure to the government debt of countries like Malta or Slovenia, but not Russia. 

The European Central Bank declined to comment on Tuesday, but a person with knowledge of its bank supervisory arm said that officials were closely monitoring banks that are exposed to the Russian economy or Russian debt.

In the vacuum of public data, investors ganged up on banks and other companies known to have large Russian holdings. The targets included Raiffeisen Bank International in Vienna and the Danish brewer Carlsberg. 

Shares of Carlsberg, whose Baltika brand is the biggest selling beer in Russia, fell 7.5 percent. A Carlsberg spokesman declined to comment, except to refer to an earnings report published last month that described the Russian market as “difficult.” Shares of Raiffeisen Bank, which earned more than 70 percent of its pretax profit from its Russian subsidiary in the first nine months of this year, fell more than 8 percent on Tuesday. 

“All financials with exposure to Russia are currently suffering,” Ingrid Krenn-Ditz, a Raiffeisen spokeswoman, said in an email. “In Russia we continue to pursue a policy of selective underwriting” with a focus on customers, she added.

The flames of panic are being fanned, and on top of this the U.S. Congress has weighed in with a new sanctions bill which also includes $350 million in direct military aid to the Kiev junta. Peter Baker writes ("Obama Signals Support for New U.S. Sanctions to Pressure Russian Economy") that the legislation empowers Obama to go after Gazprom (I wonder if this means that U.S. citizens can no longer purchase Gazprom stock); it also provides for tens of millions in "democracy promotion" in the former Soviet Union:

The legislation also authorizes the president — but does not require him — to impose sanctions on international companies that invest in certain types of unconventional Russian crude-oil energy projects and to further restrict the export of equipment for use in Russia’s energy sector. And it authorizes the president to bar investment or credit to Gazprom, the Russian state energy giant. 

In addition, the legislation authorizes the provision of lethal arms to the Ukraine government, including antitank weapons, tactical surveillance drones and counter-artillery radar. Mr. Obama has resisted sending weaponry to Kiev on the theory that it would only escalate the fighting in eastern Ukraine, so it is not clear whether he will follow through on the authorization. 

The measure went beyond only penalties to authorize $10 million in each of the next three fiscal years to counter Russian propaganda in the former Soviet Union and prioritize Russian-language broadcasting in Ukraine, Moldova and Georgia. And it authorized $20 million in each of the next three years to promote democracy, independent news media, uncensored Internet access and anticorruption efforts in Russia.

But under pressure from the Obama administration, lawmakers removed elements that would have tied the president’s hands, including a provision that would have barred lifting sanctions until Russia was not only out of Ukraine but Moldova and Georgia, too, where lingering conflicts are not likely to be resolved soon. 

“President Putin bears responsibility for any outcomes that flow from his actions and breach of the international order,” said Senator Robert Menendez, Democrat of New Jersey, the chairman of the Foreign Relations Committee, who pushed for the sanctions along with the panel’s senior Republican, Senator Bob Corker of Tennessee. “The United States Congress stands with Ukraine in the face of Russian aggression,” Mr. Menendez said.

What we need are some of those millions of dollars to be spent here at home, starting with Menendez's New Jersey. If only we could have real democracy in New Jersey then the planet wouldn't be cursed with a blatantly corrupt, bought-and-paid-for neocon machine pol like Bob Menendez. The nation would also be spared the likes of dangerous Chris Christie.

And the reason I have hope is that we are on the cusp of a democratic awakening here in the United States. I am almost convinced that popular consciousness has been raised to a level sufficient to reject Hillary Clinton's presidential candidacy. What this portends -- merely a GOP victory, another false Dem messiah (Elizabeth Warren?), or an actually split in the Democratic Party with the possibility for a third-party alternative movement -- is yet to be determined. Something is definitely happening here. The power elite are out of touch to such extent that they think they can jigger and job their way out of the mess that they have created and maintain their death grip on the control switch. The status quo is so bent and corrupted the people in charge will blow up the planet to maintain the power they have amassed

The Austerity War

We're in the middle of a war. The war is between capital and labor. But what's strange about this war is that capital has lost faith in capitalism, at least the kind of modern capitalism of Keynesian economics as practiced in the twentieth century. How else to explain this lust for austerity, for steep cuts in government spending, while there is still high unemployment and low and slow growth? The only thing that makes sense is that the 1%, the plutocrats who control the Republican Party, no longer believe that capitalism can deliver high and persistent growth; so they're engaged in a smash and grab. The idea is to destroy the post-war Keynesian capitalist system as soon as possible and suck up all the resources; then hope that twenty-first-century technology can lock everything down in a way that was not possible for the robber barons of the nineteenth century.

Let's recall the last two years. First, we had the debt-ceiling crisis in the summer of 2011. Markets crashed, Standard and Poor's downgraded U.S. debt, and Obama signed off on huge government spending reductions while kicking the can of additional cuts down the road. Then in the fall of 2011 you had a big push back in the form of Occupy Wall Street which spread around the globe before sputtering out in the winter, giving way to the 2012 presidential campaign. Obama ran as a stalwart defender of post-war social democracy, and he won a historic election. He took that win into negotiations with the GOP on the fiscal cliff  and came away with a win; not a resounding victory, but a win. The 10% across-the-board reductions in federal spending that are a hold over from the summer 2011 debt-ceiling standoff got delayed until now. And that's where we are.

Binyamin Applebaum does a nice job in a frontpage story today of explaining how significant our current embrace of austerity is:

The federal government, the nation’s largest consumer and investor, is cutting back at a pace exceeded in the last half-century only by the military demobilizations after the Vietnam War and the cold war. 

And the turn toward austerity is set to accelerate on Friday if the mandatory federal spending cuts known as sequestration start to take effect as scheduled. Those cuts would join an earlier round of deficit reduction measures passed in 2011 and the wind-down of wars in Iraq and Afghanistan that already have reduced the federal government’s contribution to the nation’s gross domestic product by almost 7 percent in the last two years. 

The cuts may be felt more deeply because state and local governments — which expanded rapidly during earlier rounds of federal reductions in the 1970s and the 1990s, offsetting much of the impact — have also been cutting back. 

Federal, state and local governments now employ 500,000 fewer workers than they did on the eve of the recession in 2007, the longest and deepest decline in total government employment since the aftermath of World War II.

Yesterday in Senate hearings Bernanke had to defend the Federal Reserve's policy of quantitative easing against sniping from some Fed officials and Republicans. This from a story by Binyamin Applebaum that appears on the business page today:

Ian Shepherdson, chief economist at Pantheon Macroeconomic Advisors, wrote that the testimony amounted to a “robust defense” of the aggressive efforts by the Federal Open Market Committee that “gives no ground to those within and without the F.O.M.C. who think asset purchases will soon need to be curtailed.” 

The reception on Capitol Hill was frostier, as several Republican senators challenged Mr. Bernanke’s assertion that the purchases were producing clear economic benefits, and questioned the potential costs. Senator Bob Corker, a Tennessee Republican, drew Mr. Bernanke into an unusually sharp exchange. 

Mr. Corker, asserting that low interest rates were “throwing seniors under the bus,” by reducing returns on some kinds of investments, asked Mr. Bernanke, “Do you all ever talk about the longer-term degrading effect of these policies?” 

“One thing we talk about is unemployment,” Mr. Bernanke responded. He added that the best way to increase interest rates was to increase growth. 

Mr. Corker then accused Mr. Bernanke of insufficient concern about potential inflation, saying, “I don’t think there’s any question that you would be the biggest dove since World War II,” using the term “dove” to denote a Fed official who is more concerned about unemployment than higher inflation. 

Mr. Bernanke, clearly piqued, responded, “You call me a dove, but my inflation record is the best of any chairman in the postwar period.”

And for a flavor of the direction that we are headed in check out the postmortem on Italy's election by Liz Alderman and Jack Ewing:

Few experts anticipated the depth of anger displayed by Italian voters over the austerity that Mr. Monti, the technocrat beloved by other European leaders but resented at home for pushing tax increases and spending cuts, represented. The electorate chose two men convicted of crimes — Mr. Berlusconi and Mr. Grillo — over the one Italian leader in whom the rest of Europe had put great faith. 

Mr. Monti initially resisted Ms. Merkel’s harsh austerity prescription, warning that it would stifle growth. But he nonetheless pushed a number of measures that reflected the Merkelian view that prudent finances were the fastest way to reduce Italy’s staggering debt and restore its reputation with international investors. In the end, Ms. Merkel’s embrace played a big part in Mr. Monti’s undoing. 

“The fact that Merkel was so involved and interested in our elections — her support was very negative for Monti’s fate,” said Tito Boeri, an economist at Bocconi University. “There is no doubt that in the Italian campaigns and vote there was a clear message against Europe.” 

Since the euro zone crisis began in 2010, European voters have generally shown remarkable forbearance in the face of recession, soaring unemployment, tax increases and cutbacks in government services. Ireland, Spain, the Netherlands, Greece and, last week, Cyprus chose centrist governments that offered the best chance of staying in the euro zone. 

Italy may just be being Italy. But this latest vote may be a sign that Europeans are reaching the limit of their patience. Experts said the developments here served as a warning that a new round of economically driven political turmoil could confront the Spanish prime minister, Mariano Rajoy, and France’s president, François Hollande. Both have grudgingly adopted austerity to keep the euro crisis at bay, despite recessions and rising unemployment. 

Italy, for its part, is mired in a recession that so far has lasted a year and a half. The economy is expected to contract further before improving — largely, many Italians say, because of a host of tax increases and spending cuts that Mr. Monti put in place. 

And like other countries, Italy is finding that austerity is making it harder, rather than easier, to stoke the growth needed to reduce the mountain of debt that set off the euro zone’s crisis in the first place. Its gross debt is expected to peak above 128 percent of gross domestic product this year — the highest level in the euro zone after Greece, and up from 126 percent last year.

Either austerity goes or the euro zone starts to disintegrate. There is more electoral freedom in Europe's multi-party parliamentary system than we have here. Syriza is likely to win the next election in Greece. In the United States, Obama has to step up. If he does not, if he becomes Clintonian in his second term, we'll see a big push for a third party that will equal or surpass the Nader-LaDuke challenge of 2000.