Weekend Update – Greece Sinks Itself.

Baltic Dry Index. 874 +21    Brent Crude 58.73

LIR Gold Target in 2019: $30,000.  Revised due to QE programs.

Because he writes so well and analyses so thoroughly, we give the weekend floor to David Stockman on tragic, capitulating Greece.

Another Tumultuous Week To Nowhere In The Casino

by David Stockman • July 11, 2015

----On the Greek front, Tsipras has utterly capitulated and completely squandered whatever mandate he received last Sunday. Whether Frau Merkel accepts his white flag or not over the weekend doesn’t really matter. This week’s events prove beyond a shadow of doubt—if any further proof was needed—–that the Eurozone is a doomsday machine that will end sooner or latter in a massive financial conflagration.

The “new” Greek plan submitted late Thursday evening (which is really the Troika’s plan all along) cannot possibly be successful, meaning that the Greek debt crisis will become a recurring, serial condition; and one which sooner or later will shatter the tenuous, unanimous-consent federation on which the Eurozone decision-making is based.

So if the third Greek bailout doesn’t bust the Eurozone—-then it will be accomplished by the next bailout of Portugal or Spain’s virtually certain demands for a better deal or Italy’s paralytic drift toward the fiscal wall.

But take the case a hand. Alexis Tsipras is semi-brave politically, but he is utterly naïve and stupid economically. He has now solemnly promised years of fiscal frugality that no Greek government can possibly deliver after the 61% referendum vote against austerity and the integral rejection of heavy-handed, continuous fiscal governance from Brussels and Berlin.

Setting aside all the tax, pension and other budget details, the opening paragraphs of the Greek proposal commits it to a primary surplus of 1% of GDP in 2015, followed by 2%, 3% and 3.5% during 2016-2018. That’s flat out ridiculous because this year’s commitment is already impossible; the next three years are far-fetched; and even if achieved would do exactly nothing to reduce Greece’s crushing 180% of GDP public debt.

Consider these facts. During the January-May year-to-date period, Greece has collected 18.6 billion euro and spent 20.0 billion euro. That’s a fair amount of new deficit for a 175 euro economy with a public debt of 322 billion euro, but it’s not the half of it. Like any other bankrupt enterprise, Greece is desperately fighting off the flood of red ink by shoving its bills in the drawer!

Indeed, the arrearages to vendors, pension funds, employees, municipalities, hospitals and many more agencies that are embedded in the 20 billion euro of recorded cash outgo are huge. Even if Greece were actually hitting its highly optimistic budget spending targets for 2015, year-to-date spending would be 2.6 billion euro higher—-meaning that its true deficit on an accrual basis for the first five months was in the order of 4 billion euro or 5.5% of GDP.

----But here’s the skunk in the woodpile. Due to the drastically concessional terms of the 250 billion of Greek loans now accounted for by bilateral Eurozone country  loans, EFSF advances, the IMF loans and the SMP and ANFA bonds held by the ECB,  Greece’s weighted average interest bill has already been cut to the bone. Specifically, in 2011 its weighted average interest rate on the public debt was about 6% compared to only 2.2% today.

Accordingly, Greece’s interest bill is currently about 7 billion euro annually or 4.0% of GDP.  The math of the thing, therefore, is that its primary deficit during 2015 on an honest accounting basis will be in the order of 2-3% of GDP, not the 1% of GDP surplus the Syriza government has foolishly promised.

Needless to say, the German bean counters will figure out something like this within hours, but even if Merkel decides to blink, the can will not get kicked very far down the road. The reason is that even if Greece implausibly manages to hit its new out-year fiscal targets to the cent, it would still have 35 billion euro of additional debt by the end of 2018. In short, it is already swamped in unpayable debt, but anything like its own rescue proposal will bury it once and for all.

Just assume that it grows its nominal GDP at an average 3% rate through 2018 (including a later catch-up from the certainty of a negative result in 2015) and that it hits it primary surplus targets. If this minor miracle happened, it would still add 10 billion euro to its debt after paying even today’s concessional interest obligations.

Next assume that to “save” the Euro yet another time, Greece’s paymasters grant it something in the order of its 50 billion euro request for three-year financing support. About half of that will be recycled to pay-off maturing debts through 2018, while the balance would presumably be incremental debt incurred to fund “investment projects”. Its hard to say who would more effectively waste these new public funds——a fractured, quarreling Greek government in the years ahead or its overseer apparatchiks from Brussels and Berlin.

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At the Comex silver depositories Friday final figures were: Registered 58.96 Moz, Eligible 121.23 Moz, Total 180.19 Moz. 

The monthly Coppock Indicators finished June

DJIA: +98 Down. NASDAQ: +192 Down. SP500: +127 Down.