The Mood On The Ground In Greece: "Some Have Raised The Prospect Of Civil War"

http://www.zerohedge.com/news/2015-06-29/mood-ground-greece-some-have-raised-prospect-civil-war

Beggar Thy Neighbor? Greece's Battered Banks Beget Balkan Jitters

Back in April, we noted that central banks in Bulgaria, Cyprus, Albania, Romania, Serbia, Turkey and the Former Yugoslav Republic of Macedonia had all effectively moved to quarantine Greece, as it became increasingly apparent that negotiations between Athens and the troika were set to deteriorate ahead of a €750 million payment due to the IMF on May 12. 

As Kathimerini reported at the time, subsidiaries of Greek banks in Eastern Europe were told to cut exposure to “Greek bonds, T-bills, deposits in Greek banks and/or interbank funding,” in an effort to assuage concerns that any contagion from a collapse of the Greek banking sector could imperil local lenders. 

A little over two months later, Greek banks are paralyzed, having lost access to emergency central bank liquidity on the heels of PM Alexis Tsipras’ decision to put euro membership to a popular vote.

Now, bond yields indicate investors are getting nervous about the possibility that the drama in Greece could spill over into the banking sectors of Bulgaria, Romania, and Serbia where Greek banks control a substantial percentage of total banking assets:

Despite what certainly appears to be souring investor sentiment, depositors seem to be safe -- for now. Reuters has more:

Petar Bakhchevanov withdrew some cash from an ATM in Bulgaria's capital on Monday as a test to make sure the deepening debt crisis in neighboring Greece had not spread to the Greek-owned bank where he keeps his savings.

Millions of people in ex-Communist Bulgaria, Macedonia, Albania, Serbia and Romania have deposits in banks owned by Greek lenders, putting this corner of south-eastern Europe in the frontline if there is contagion from the Greek crisis.

Central banks in Macedonia and Serbia introduced extra restrictions on the movement of capital between local subsidiaries and their Greek parents, saying the were taking precautions against any spillover from Athens.

"After watching the news on TV, I just wanted to check if everything is okay and I can withdraw money from my account," said Bakhchevanov, outside a branch of Piraeus Bank Bulgaria, a subsidiary of Greece's Piraeus bank (BOPr.AT).

Bakchevanov was able to get at his money. He took out 100 Bulgarian levs, or around $50, from the ATM, and went inside the branch where he said bank staff had reassured him he did not need to worry about his deposit.

However, as Reuters goes on to note, there are reasons to be concerned, because with "Greek banks owning 20 percent of the banking sector in some countries the exposure is real, and the region's economies have historically been fragile, so it would not take a lot to push them into crisis too."

Here's what Morgan Stanley had to say last month about possible contagion:

The risk is that depositors who have their money in Greek subsidiaries in Bulgaria, Romania and Serbia could suffer a confidence crisis and seek to withdraw their deposits. Although well capitalised and liquid (as highlighted for Romania by the NBR’s Financial Stability Report (2013)), Greek subsidiaries in the SEE region may see difficulties providing enough cash if withdrawals are intense and become problematic. In case of a liquidity shortage, Greek subsidiaries in Bulgaria, Romania and Serbia would probably create the need for local authorities to step in. Local central banks and governments would most probably provide additional liquidity, but if panic behaviour develops it would mean that certain banks would either have to find a buyer or be nationalised. In this case, the national deposit guarantee schemes will have to repay guaranteed deposits and, in case of insufficient funds, the government will have to provide them. 

Deposits in Greek subsidiaries which would be at risk of being withdrawn in Bulgaria, Romania and Serbia amount to 14.8%, 4.1% and 6.8% of GDP, respectively. Even if we take into account that not all of them are covered by the local guarantee schemes as the individual amounts could exceed the legal limit of €100,000, the deposits at risk remain significant. Thus, a potential bank run on Greek banks in the region would have a significant negative impact on local governments’ fiscal deficit and their debt. Moreover, potential losses incurred from depositors would have a negative impact on consumption and growth in the region.

Deposit run: Most immediate of the bear case risks for Greek bank subsidiaries in the SEE region is the potential for sizeable deposit outflows, and we can look to Greece’s own precedent, where c.€35 billion deposits are reported to have left the system (c.21% of the total). In Bulgaria, Romania and Serbia, this risk is particularly relevant, given that the existing funding gap is already high. On average, loan/deposit ratios at Greek banks are 107% in Bulgaria, 154% in Romania and 121% in Serbia. Should deposit outflows materialise in these countries, ultimately we are looking at a combined €15 billion of funding that could be withdrawn. Yet, a potential mitigation of risk is that a large proportion of deposits are protected by guarantee funds, and we can look to the example of Bulgaria, where 72% of deposits are insured.

And while it seems, based on what Mr. Petar Bakhchevanov told Reuters (see above), that all is currently quiet on the Eastern front (at least as it relates to Grexit-induced bank runs), nobody is out of the woods yet, as it is still far from clear what happens next, especially now that the ECB is set to review "all legal aspects" of ELA following the Greek default which will occur at midnight on Tuesday. And with that, we'll close with the following quote from Peter Andronov, the chairman of the Association of Bulgarian Banks:

 “If everything is messed up in Greece, you never know what madness this could create."

*  *  *

Here's a summary from Reuters regarding each country's proported exposure/contagion risk:

BULGARIA

* Greek-owned banks make up a fifth of the Bulgarian banking system. These include Bulgaria's fourth largest lender United Bulgarian Bank, owned by National Bank of Greece, and Postbank, Bulgaria's fifth largest lender, controlled by Greek Eurobank. Number 9 bank Piraeus Bank Bulgaria is controlled by Piraeus Bank of Greece and Alpha Bank is a direct bank unit of Greece's Alpha Bank.

* Bulgaria's central bank, in a statement issued on Monday, said it had measures in place to insulate Greek-owned banks from contagion. It said they are financially independent from their parents, they hold no Greek government securities, and have a capital adequacy and liquidity level higher than the average for banks in Bulgaria. "Any action by the Greek government and the central bank to impose measures in the Greek financial system have no legal force in Bulgaria and can in no way affect the smooth functioning and stability of the Bulgarian banking system," the central bank said.

* A spokeswoman for United Bulgarian Bank said on Monday: "We are doing business as usual ... We reconfirm and fully agree with the central bank statement from this morning."

* In a statement, Piraeus Bank Bulgaria said the capital controls in Greece are not affecting its operations, outlining that such restrictions do not have legal force in Bulgaria and pointing out that the bank has no exposure to the Greek banking system or Greek treasuries and bonds. "For us, this Monday is a normal working day," the bank said in the statement. "Piraeus Bank Bulgaria continues with its usual work on extending loans, raising deposits.and other banking activities as it has done since it stepped on the local market," the statement said.

ROMANIA

* There are four banks with Greek majority capital operating in Romania: Alpha Bank Romania, Piraeus Bank, Bancpost, controlled by Eurobank Ergasias, and Banca Romaneasca, controlled by National Bank of Greece. Together they account for 12 percent of total banking assets in Romania.

* The central bank has said the Greek subsidiaries in Romania are well capitalised and latest data showed their average capital ratio is slightly above 17 percent - in excess of the 10 percent capital ratio requirement set by the regulator. They also have amassed robust portfolios of state securities which entitles them to resort to funding from the central bank if needed.

* Piraeus Bank Romania said in a statement on Monday: "Piraeus Bank Romania is a local subsidiary, a Romanian bank with Greek capital. All operations are localized and integrated into the Romanian banking market policies, regulated by the Romanian central bank...There are no capital control policies enforced, banks are not closed, nor are operations limited."

ALBANIA

* There are three Greek-owned banks in Albania: subsidiaries of National Bank of Greece, Piraeus Tirana Bank, and Alpha Bank. Their share of the total assets of the banking sector in Albania is 15.9 percent, down from 20 percent in 2010, Klodi Shehu, director of the financial stability department at the Albanian central bank, told Reuters.

* Shehu said the central bank imposed minimum capital adequacy ratios for Greek-owned banks of 14 percent, above the 12 percent required for other banks. The three Greek-owned banks have a capital adequacy ratio of more than 17 percent.

* "These banks are well-capitalized, liquid and capable of timely payments irrespective of what happens in Greece," Shehu told Reuters.

MACEDONIA

* Macedonia has two Greek-owned banks which together hold more than 20 percent of total banking sector assets. They are Alpha Bank AD Skopje, a subsidiary of Alpha Bank, and Stopanska Banka AD Skopje, owned by National Bank of Greece.

* On Sunday, the Macedonian central bank ordered its lenders to pull their deposits from Greek banks and it imposed temporary preventive measures to stop an outflow of capital from Macedonian subsidiaries to parent banks in Greece. It said the capital limits apply to future transactions, not to arrangements already in place.

* Under Macedonian law, the Greek parents have no way to withdraw their founding capital beyond 10 percent, unless they sell their holding to another investor.

* An official at the Macedonian central bank, who declined to be named, told Reuters that several months ago the bank instructed Greek-owned banks to provide daily reports on transactions with their parent banks as a precaution.

* In an analysis of the possible worst-case scenario, with Greek-owned banks collapsing under the weight of deposit withdrawals, Standard Bank estimated that the Macedonian government would have to come up with 250 million euros, or around three percent of gross domestic product, to fully recapitalize the banks, "something that the sovereign can live with."

SERBIA

* In Serbia, four Greek-owned banks hold around $4 billion worth of assets, or 14 percent of total banking assets. They are Alpha Bank, EUROBANK EFG, Piraeus Bank and Vojvodjanska Banka, part of the National Bank of Greece group.

* In a written answer to Reuters questions, Serbia's central bank said it had in place "an elevated level of monitoring of businesses of four Greek-owned banks, especially their liquidity, their relations with parents groups and events in international markets related to Greek banks and their subsidiaries."

* The bank said that "daily reports" provided by the Greek-owned banks showed no increased outflow of funds to mother banks nor a significant outflow of savings. The bank said Greek subsidiaries are not branch offices but separate legal entities, and that there were strict limits on shareholders repatriating capital assets of the subsidiaries.

* "The central bank will continue to monitor banks in Greek ownership and if necessary will undertake other measures under its mandate to prevent a potential negative influence on Serbia's banking sector," the bank said.

* "We have to wait and see what will happen in the next seven days. One thing is sure, banks in Greece will be in some kind of hibernation in the next 10 days given that Greece introduced capital controls. Most Greek banks that operate in Serbia are self-funded and well capitalised, so I don't expect to see any problems in the short run," said Branko Srdanovic of the Belgrade-based consultancy Associates Treasury Solutions.

http://www.zerohedge.com/news/2015-06-29/beggar-they-neighbor-greeces-battered-banks-beget-balkan-jitters

French Economy In "Dire Straits", "Worse Than Anyone Can Imagine", Leaked NSA Cable Reveals

Earlier today Wikileaks released a new batch of NSA intercepts among which one in particular stands out: an intercepted communication which reveals that then French Finance Minister Pierre Moscovici believes the French economic situation was far worse, as of mid-2012, than perceived.

Specifically, Moscovici who served as French finance minister until 2014 and then became European commissioner for Economic and Financial Affairs, Taxation and Customs, used some very colorful language, i.e., the French economic situation was "worse than anyone [could] imagine and drastic measures [would] have to be taken in the next two years”. 

Needless to say, no drastic measures were taken. In fact, no measures at all were taken because thanks to the ECB's "whatever it takes" 2012 intervention and subsequent QE, pushed French yields to record low levels making the need for any reform moot (a la Greece, until the whole circus exploded).

He remarks about that the situation with the automotive industry was more critical than a pre-retirement unemployment supplement known as AER, which he also thought wouldn't have had a severe impact on elections (while senator Bourquin thought would have driven voters to right-wing National Front).

Moscovici's conclusion was that "the situation is dire" although the finance minister ignored warnings that without a "pre-retirement unemployment supplement known as the AER... the ruling Socialist Party will have a rough time in the industrial basin of the country, with voters turning to the rightwing National Front."

Moscovici disagreed. Fast forward 3 years, and not only did French unemployment just hit an all time highconfirming that the economic situation has indeed never been more dire...

... but the frontrunner for the next French president is none other than National Front's Marine Le Pen, who will no doubt seize this memo as further proof of the terrible economic state of the country and leverage it even more to her benefit, and add even more fuel to the Frexit fire. As a reminder, Le Pen now prefers to be called Madame Frexit because as she warned last week, when she becomes president, unless the Eurozone yields to her demands, France will be the next country out of the monetary project effectively ending the Eurozone. For more read "Forget Grexit, "Madame Frexit" Says France Is Next: French Presidential Frontrunner Wants Out Of "Failed" Euro."

Here is the intercept (link):

French Finance Minister Says Economy in Dire Straits, Predicts Two Atrocious Years Ahead (TS//SI//NF) (TS//SI//NF) The French economic situation is worse than anyone can imagine and drastic measures will have to be taken in the next 2 years, according to Finance, Economy, and Trade Minister Pierre Moscovici.

On 19 July, Moscovici, under pressure to reestablish a preretirement unemployment supplement known as the AER, warned that the situation is dire. Upon learning that there are no funds available for the AER, French Senator Martial Bourquin warned Moscovici that without the AER program the ruling Socialist Party will have a rough time in the industrial basin of the country, with voters turning to the rightwing National Front. Moscovici disagreed, asserting that the inability to reinstitute the AER will have no impact in electoral terms, besides, the situation with faltering automaker PSA Peugeot Citroen is more important than the AER.

(COMMENT: PSA has announced plans to close assembly plants  and lay off some 8,000 workers.)

Moscovici warned that the 2013 budget is not going to be a "good news budget," with the government needing to find at least an additional 33 billion euros ($39.9 billion). Nor will 2014 be a good year. Bourquin persisted, warning that the Socialist Party will find itself in a situation similar to that of Socialist former Spanish President Zapatero, who was widely criticized for his handling of his country's debt situation. Moscovici countered that it was not Zapatero whose behavior the French government would emulate, but rather Social Democrat former German Chancellor Gerhard Schroeder.

(COMMENT: Schroeder, chancellor from 1998 to 2005, was widely credited with helping to restore German competitiveness. He favored shifting from pure austerity measures to measures that encourage economic growth and advocated a common EU financial policy.)

Unconventional

French diplomatic

And the pdf

http://www.zerohedge.com/news/2015-06-29/french-economy-dire-straits-worse-anyone-can-imagine-leaked-nsa-cable-reveals

Puerto Rico Announces Bond Payment "Moratorium"

Having concluded last night that Puerto Rico debt is "unpayable," and that his government could not continue to borrow money to address budget deficits while asking its residents, already struggling with high rates of poverty and crime, to shoulder most of the burden through tax increases and pension cuts, Padilla confirmed tonight that (from Bloomberg):

• *PUERTO RICO TO SEEK "NEGOTIATED MORATORIUM", 'YEARS' OF POSTPONEMENT IN DEBT PAYMENTS

Likening his state's situation to that of Detroit and New York City (though not Greece), Padilla concluded, the economic situation is "extremely difficult," which is odd because just a few years ago when they issued that bond - everything was awesome?

When will PR overtake Greece again?

Puerto Rico's Governor is speaking on national TV:

• *PUERTO RICO DEBT IS UNPAYABLE, GOVERNOR SAYS
• *PUERTO RICO DEBT LOAD WON'T LET ISLAND OVERCOME RECESSION: GOV.
• *PUERTO RICO GOV. SAYS HE DOESN'T AGREE W/ ALL OF KRUEGER REPORT
• *PUERTO RICO GOVERNOR SEEKS CREATION OF FISCAL BOARD
• *PUERTO RICO NEEDS COMPLETE RESTRUCTURING PLAN: GOVERNOR
• *PUERTO RICO TO SEEK `NEGOTIATED MORATORIUM' W/ BOND HOLDERS
• *PUERTO RICO MUST HAVE BETTER TERMS TO PAY DEBT: GOVERNOR
• *PUERTO RICO SEEKS ACCORD ON FISCAL REFORMS BY AUG. 30

And the punchline:

• *BONDHOLDERS SHARE RESPONSIBILITY FOR PUERTO RICO'S DEBT: GOV.
• *PUERTO RICO TO SEEK `NEGOTIATED MORATORIUM' W/ BOND HOLDERS
• *PUERTO RICO BONDHOLDERS MUST MAKE SACRIFICES TOO: GOVERNOR
• *PUERTO RICO TO SEEK `YEARS' OF POSTPONEMENT IN DEBT PAYMENTS

We suspect the 70 handle will quickly become a 50 handle or less...

As AP reports,

Puerto Rico's governor says he will create a financial team that will meet with bondholders and seek a moratorium on debt payments.

Gov. Alejandro Garcia Padilla made the announcement Monday night after saying that the U.S. territory's $72 billion public debt is unpayable. He said he would seek a moratorium of several years but did not provide specifics.

Garcia's comments come just hours after international economists released a gloomy report on Puerto Rico's economy.

Legislators are still debating a $9.8 billion budget that calls for $674 million in cuts and sets aside $1.5 billion to help pay off the debt. The budget has to be approved by Tuesday.

As we explained previously,

What happens next is unclear: "Puerto Rico, as a commonwealth, does not have the option of bankruptcy. A default on its debts would most likely leave the island, its creditors and its residents in a legal and financial limbo that, like the debt crisis in Greece, could take years to sort out."

So without the "luxury" of default, what is PR to do? Why petition to be allowed to file Chapter 9 naturally: after all everyone is doing it.

In Washington, the García Padilla administration has been pushing for a bill that would allow the island’s public corporations, like its electrical power authority and water agency, to declare bankruptcy. Of Puerto Rico’s $72 billion in bonds, roughly $25 billion were issued by the public corporations.

Some officials and advisers say Congress needs to go further and permit Puerto Rico’s central government to file for bankruptcy — or risk chaos.

“There are way too many creditors and way too many kinds of debt,” Mr. Rhodes said in an interview. “They need Chapter 9 for the whole commonwealth.”

García Padilla said that his government could not continue to borrow money to address budget deficits while asking its residents, already struggling with high rates of poverty and crime, to shoulder most of the burden through tax increases and pension cuts. Where have we heard that before...

He said creditors must now “share the sacrifices” that he has imposed on the island’s residents.

“If they don’t come to the table, it will be bad for them,” said Mr. García Padilla, who plans to speak about the fiscal crisis in a televised address to Puerto Rico residents on Monday evening. “What will happen is that our economy will get into a worse situation and we’ll have less money to pay them. They will be shooting themselves in the foot.”

And the punchline:

“My administration is doing everything not to default,” Mr. García Padilla said. “But we have to make the economy grow,” he added. “If not, we will be in a death spiral.”

And this one: any deal with hedge funds, who are desperate to inject more capital in PR so they can avoid writing down their bond exposure in case of a default, "would only postpone Puerto Rico’s inevitable reckoning. “It will kick the can,” Mr. García Padilla said. “I am not kicking the can.”

We wonder how long before Tsipras, who earlier was quoting FDR, steals this line too.

And speaking of Prexit, how long before Puerto Rico exits the Dollarzone... and will there be a Preferendum first or will the governor, in his can kick-less stampede, just make a unilateral decision to join Greece, Ukraine, Venezuela and countless other soon to be broke countries in the twilight zone of Keynesian sovereign failures?

*  *  *

But Puerto Rico is not Detroit... well actually it is... worse:

• *PUERTO RICO FACES SIMILIAR SITUATION AS DETROIT, NYC: GOVERNOR

Puerto Rico's debt is nearly half that of California for a population one-tenth the size... (via WSJ)

http://www.zerohedge.com/news/2015-06-29/puerto-rico-announces-bond-payment-moratorium

Greece Threatens 'Unprecedented' Injunction Against EU To Block Grexit

Having told the citizens of Greece that the European leaders will not kick them out of Europe because "the cost of throwing them out is too high, enormous," it appears Greek PM Tspiras has another plan to ensure - no matter what the outcome of the forthcoming referendum - that there is no actual Grexit. As The Telegraph reports, Greece has threatened to seek a court injunction against the EU institutions, saying "we are taking advice and will certainly consider an injunction at the European Court of Justice. The EU treaties make no provision for euro exit and we refuse to accept it. Our membership is not negotiable."

Speaking earlier Tsipras stated:

• *TSIPRAS: REFERENDUM PROVIDES STRONGER NEGOTIATING POSITION
• *TSIPRAS: CREDITORS’ PLAN IS NOT TO THROW COUNTRY OUT OF EURO
• *TSIPRAS: COST OF THROWING COUNTRY OUT OF EURO AREA IS ENORMOUS
• *TSIPRAS: GREECE WILL NOT BE THROWN OUT OF EURO, COST TOO GREAT

And now, as The Telegraph reports, Plan B is in place...

Greece has threatened to seek a court injunction against the EU institutions, both to block the country's expulsion from the euro and to halt asphyxiation of the banking system.

“The Greek government will make use of all our legal rights,” said the finance minister, Yanis Varoufakis.

“We are taking advice and will certainly consider an injunction at the European Court of Justice. The EU treaties make no provision for euro exit and we refuse to accept it. Our membership is not negotiable,“ he told the Telegraph.

The defiant stand came as Europe’s major powers warned in the bluntest terms that Greece will be forced out of monetary union if voters reject austerity demands in a shock referendum on Sunday.

Any request for an injunction against EU bodies at the European Court would be an unprecedented development, further complicating the crisis.

*  *  *

With JC Juncker lies and propaganda this morning, Tsipras main goal now is to keep anarchy from breaking out before the potential vote on Sunday.

http://www.zerohedge.com/news/2015-06-29/greece-threatens-unprecedented-injunction-against-eu-block-grexit

ECB Says "Grexit Can No Longer Be Excluded", Hints At More QE

It seems Goldman Sachs' conspiracy theory was right all along...

• ECB'S COEURE SAYS ECB IS EVEN READY TO USE NEW INSTRUMENTS, WITHIN ITS MANDATE
• GREECE COULD EXIT EURO, COEURE SAYS IN LES ECHOS INTERVIEW

This is exactly what The ECB wanted all along (and their leaders overlords) - all they needed was an 'excuse'.

*  *  *

As we noted previously, from Goldman:

As tensions around Greece have mounted, it is something of a puzzle that EUR/$ has shown little reaction. Our explanation, laid out in our last FX Views, is that much of this price action stems from the Bundesbank, which has reduced the maturity of its QE buying, enabling the Bund sell-off and moving longer-dated rate differentials in favor of the Euro. EUR/$ thus hasn’t traded Greece, but instead growing question marks over ECB QE.

Here is Goldman's full take:

From an economic perspective, Greece shows that “internal devaluation” – whereby structural reforms are meant to restore competitiveness and growth –is difficult politically and a poor substitute for outright devaluation. Emerging markets that devalue during crises quickly return to growth, powered by exports, while Greek GDP continues to languish. We emphasize this because – even if a compromise involving a debt haircut is found – this will not do much to return Greece to growth. Only a managed devaluation, with the help of the creditors, can do that. With respect to EUR/$, we think the Bund sell-off increases EUR/$ downside if tensions over Greece escalate further. This is because the ECB, including via the Bundesbank, would almost surely step up QE to prevent contagion. We estimate that the immediate aftermath of a default could see EUR/$ fall three big figures. The ensuing acceleration in QE would then take EUR/$ down another seven big figures in subsequent weeks. We thus see Greece as a catalyst for EUR/$ to go near parity, via stepped up QE that moves rate differentials against the single currency.

Incidentally, "internal devaluation" is a very polite way of saying plunging wages, labor costs, and generally benefits, including pensions.

But if this is correct, Goldman essentially says that it is in the ECB's, and Europe's, best interest to have a Greek default - and with limited contagion at that - one which finally does impact the EUR lower, and resumes the "benign" glideslope of the EURUSD exchange rate toward parity, a rate which recall reached as low as 1.05 several months ago before rebounding to its current level of 1.14.  Needless to say, that is a "conspiracy theory" that could make even the biggest "tin foil" blogs blush.

A different way of saying what Goldman just hinted at: "Greece must be destroyed, so it (and the Eurozone) can be saved (with even more QE)."

Or, in the parlance of Rahm Emanuel's times, "Let no Greek default crisis go to QE wastel."

Goldman continues:

Greece, like many emerging markets before it, is suffering a balance of payments crisis, whereby a “sudden stop” in foreign capital inflows caused GDP to fall sharply. In emerging markets, this comes with a large upfront currency devaluation – on average around 30 percent across nine key episodes (Exhibit 1) – that lasts for over four years. This devaluation boosts exports, so that – as unpleasant as this phase of the crisis is – activity rebounds quickly and GDP is significantly above pre-crisis levels five years on (Exhibit 2). In Greece, although unit labor costs have fallen significantly, price competitiveness has improved much less, with the real effective exchange rate down only ten percent (with much of that drop only coming recently). This shows that the process of “internal devaluation” is difficult and, unfortunately, a poor substitute for outright devaluation. The reason we emphasize this is because, even if a compromise is found that includes a debt write-down (as the Greek government is pushing for), this will do little to return Greece to growth. Only a managed devaluation can do that, one where the creditors continue to lend and help manage the transition.

Here, Goldman does something shocking - it tells the truth! "As such, the current stand-off is about something much deeper than the next disbursement. It signals that the concept of “internal devaluation” is deeply troubled."

Bingo - because what Goldman just said in a very polite way, is that a monetary union in which one of the nations is as far behind as Greece is, and recall just how far behind Greece is relative to IMF GDP estimates imposed during the prior two bailouts...

... simply does not work, and for the union to be viable, a stressor needs to emerge so that broad currency devaluation benefits not only the peak performers, i.e., the northern European states, but the weakest links such as Greece.

Incidentally, all of this was previewed long ago in, in December 2012 when we wrote "Next Up For A "Recovering" Europe: A 30-50% Collapse In Wages In Spain, Italy And... France." To Greece's great chagrin, all of this internal devaluation has mostly impacted the impoverished country, which continues to be a shock absorber to broader internal devaluation across the entire Eurozone.

Which brings us back to Goldman's assessment of the current Greek state, and the suggestion that all the smoke and mirrors flooding the headline-scanning algos is nothing but noise, and that in reality the forces are alligned to "push the EUR near parity in fairly short order."

Paradoxically, Goldman keeps pushing for a worst-case outcome, and one where the market finally reprices all the risk it has ignored for months:

Even if Greece ultimately stays in the Euro (our base case), the immediate aftermath of such a non-payment will be to push bond yields up across the periphery. This rise in the fiscal risk premium (Exhibit 3) will of course be limited, because the ECB will likely accelerate QE, including via the Bundesbank. That will push rate differentials, especially longer-dated ones (Exhibit 4), against EUR/$. We estimate that the initial fiscal risk premium effect could be three big figures, while the subsequent QE effect could be worth around seven big figures.

The conclusion:

In short, we see mounting tensions over Greece as a catalyst for EUR/$ to move near parity in fairly short order, with much of that move driven by rate differentials. If, instead, a compromise solution is found (including possible debt haircuts), we see the upside to EUR/$ as very limited, i.e. on the order of one big figure at most. The reason for this is that the market is broadly expecting an agreement to be found, even with the possibility of a default in the near term on debt repayments coming due.

And of course, going back to the start of the note, a "favorable" outcome pushing EUR higher will be one that "will do little to return Greece to growth" and as a result will force the insolvent nation back to the negotiating table until such time as the Eurozone finally realizes that it desperately needs EUR much lower, not higher, and will do everything it can to achieve that, even if it means "siloing" Greece in a state of suspended default indefinitely if only to eliminate the "risk on" euphoria in the currency pair.

Indeed, as we said last year, the entire escalation over the Ukraine conflict was merely to push Europe to the verge of a triple-dip recession, which in turn was the catalyst that finally greenlighted the ECB's first episode of QE with Buba's blessing (after all Germany's economy was finally on the brink as well and it had little to lose). Well, the next such "catalyst" will come from none other than Greece as per Goldman's punchline:

We encounter many who argue that mounting tensions over Greece could be Euro positive. The short term angle is that risk reduction will lead to a squeeze of Euro shorts, so that EUR/$ could squeeze higher. The reason we don’t believe this is because we think stepped up ECB QE will dominate any risk-off response. Or, to put this in another way, the ECB will not allow the fiscal risk premium to go all that much higher. The medium-term angle is that the Euro zone might be more cohesive without Greece. That rationale assumes that Greece is a case apart, when of course it isn’t. After all, the Spanish unemployment rate is not far behind that of Greece and populist political pressure is also building.The underlying commonality, in our minds, is that “internal devaluation” is very difficult.As a result, we think mounting tensions around Greece could just as well focus market attention on the sustainability of the adjustment program on the Euro periphery.

Whoever would have thought that none other than Goldman would serve as the source of what may be the biggest "conspiracy theory" gambit of 2015...

One final thought: what Goldman wants, its former employee at the ECB tends to deliver.

http://www.zerohedge.com/news/2015-06-29/ecb-says-grexit-can-no-longer-be-excluded-hints-more-qe

Greek Supermarkets Begin To Resemble Those Of Venezuela

For years we have mocked Venezuela's economy (if not its long-suffering population): it got so bad, we even did a visual summary of selected Venezuela headline posts we wrote over the years.

Most of these were expected, and in line with the transformation of any normal nation to a socialist utopia. None were more poignant than the images of supermarkets and grocery stores that have been ransacked empty as a result of the collapsing currency, devastated supply chains and soaring inflation (supermarkets which have since imposed fingerprint scanners in what is no longer capital but food controls).

We are sad to announce that what was once a Venezuela trademark has now transitioned to a country that until recently was among the most developed nations in the west: Greece.

As we noted yesterday, in clear rejection of Tsipras' plea for calm, the Greek population stormed (now empty) ATMs, grocery stores and gas stations as they scrambled to obtain, or convert, paper currency into tangible products.

This morning, the NYT picked up on the realization that for Greece ATM runs were last week's story. Now, it's all about the "Supermarket Sweep"... and hoarding. To wit:

Beside the lines at A.T.M.s, people were also lining up at gas stations and in grocery stories. In the small town of Spata, outside Athens, residents had stripped grocery shelves bare by Saturday night. The local Shell station had run out of regular unleaded and had only premium gasoline to sell. “Doom,” the gas attendant responded, when asked to describe the mood.

The frenzy at gas stations across the country prompted Greece’s largest refiner to issue a statement assuring that there would be enough supply...

And this is how Athens is slowly starting to look like Caracas.

http://www.zerohedge.com/news/2015-06-29/greek-supermarkets-begin-resemble-those-venezuela