John Vachon Slop Sink June 1941 Erie County, Pennsylvania. "Each group of ten trailers in the FSA camp at Erie has a trailer service unit, water faucet, slop sink, and garbage pail"

There have been many forms of “debt slavery” throughout history, and almost everyone is chained to the oppressive financial, corporatist system now in one way or another. Although, this fact has not even remotely sunk in for millions of people who, unfortunately, have absolutely no clue how bad it can get. The real issue here, however, is not necessarily what people will have to do to survive the upcoming storms. Rather, it is what they will be forced to do to remain a functioning part of the system under threat of excessive monetary punishment, physical confinement or violence to them and/or those close to them. So, one must be financially/coercively attached to the system to be a “debt slave”.

If you are allowed to voluntarily downsize your living standards and retain some freedom of movement/action, then you are not really a slave. And that's not meant to demean the existential struggle of the chronically unemployed and/or homeless people living on the streets or in the subway, whose numbers are bound to increase and many of whom will die of sickness, cold and hunger, but it's hard to say that they are “attached” to our economic system of complicity and coerced participation. The most obvious way this slavish attachment forms is through personal debts/obligations.

That’s why it’s very important to pay off your mortgage(s), car loans, student loans, outstanding balances on past bills, etc., throw away your credit cards and generally avoid taking on debt at all costs. However, that is not a panacea for avoiding debt slavery by any means. One reason is that, as mentioned in Part I, creditors and third party debt collectors may literally conjure up debts for people who never agreed to take on those debts, by failing to account for payments, illegally jacking up interest rates, retro-actively inserting penalty clauses and other similar tactics. Or, they may simply doctor up brand new “contracts” that never existed.

The U.S. financial industry and government “regulators”, at both the federal and state level, have already taken the first steps towards such practices through the illegal transfer of mortgage titles in the MERS system and the “robosigning” of fraudulent loan documents by law firms employed by the major banks, which sought to “prove” ownership of such titles and therefore the right to foreclose. Once these illegal foreclosures came to the mainstream public’s attention, the federal government launched a sham investigation and effectively forced state attorney generals and prosecutors to go along with a tiny and symbolic settlement, which will primarily be funded by taxpayer money.

Jose Suarez explores this issue for the Huffington Post and brings up some key points:

Banks Take It Easy, While Miami Struggles Against Foreclosures

 

However, the settlement will only help a small percentage of the millions of Americans who still are deeply underwater on their mortgages. Victims of fraudulent foreclosure robo-signings look to receive only about $2,000 in compensation.

 

That amount is paltry compared to the amount of pain, desperation, and despair of millions of Americans, and so many Floridians, dangling precariously at the unlikely mercy of banks and their improper, illegal foreclosure processes. $2,000 wouldn't even come close to covering moving expenses or the "first, last and security deposits" for folks forced to downsize from their own homes to rentals.

 

Another highly troubling aspect of the settlement is the potential spike in new foreclosures predicted by various real estate and financial industry analysts. The banks were delaying foreclosing on great numbers of homes until details of the settlement were finalized. They may not power up the illegal "robo-signing" machines again, but they are now clear to fire out the foreclose notices.

 

This is the buzz I hear from real estate professionals in South Florida these days. While it certainly has a big impact on their day-to-day business, a bigger question is: How will these trends affect the momentum of the overall economy? The tentative recovery has yet to reach a large portion of the individuals hit first and hardest by the recession; these residents, in particular, are still struggling mightily -- and yet another downturn could be exponentially catastrophic for many of these families.

 

The settlement frees the banks from any potential civil charges from the 49 states, though individuals can try to sue (in the chance you had the time and resources), and federal and state officials may wish to pursue criminal charges against the banks. But don't bet on the latter, unless you're interested in "wrist slaps." Snug relationships between so many politicians and big businesses, especially the banks, are telling.

This settlement essentially gives the banks free license to go on a rampage of financial harassment and foreclosure without any interference from state governments. That’s why it was noted in Part II that traditional protections found in contract law have been rendered completely worthless for the vast majority of people on this planet, including all but the wealthiest individuals in the West. These protections were rooted in decades of British common law that developed through judicial precedents during the so-called “Enlightenment” era. They offered the average white male citizen a way to protect himself from having to make payments or perform under a contract if it was generally secured in one of the following ways:

1) Duress (economic or physical) – i.e. You are put in a position, physically or monetarily, in which you have no other choice but to agree to the terms of a contract.

 

2) Fraud/misrepresentation – i.e. You agree to the terms of a contract based on a material misrepresentation or omission of facts.

 

3) Unconscionability – i.e. You are a disadvantaged party (very asymmetrical knowledge of the business) to a contract which contains extremely unfair terms on its face.

If a court established one of these situations to exist in any given case, then the complaining party had a right to void the contract. The problem for victimized debtors now is that the legal system only performs this protective function well when the economy is growing and wealthy private interests can claim an increasingly large share of the pie despite these common law hurdles-turned-artifacts. In an era of widespread economic contraction and deleveraging by consumers and businesses, the large private interests will instead seek to extract value through the seizing of assets (“foreclosure” implies a legitimate process) and the subjugation of distressed debtors.

Human labor, after all, is simply a form of energy that can be applied to various inputs and productive processes, including the harvesting of other energy sources and the development of infrastructure necessary for large-scale societies. Most middle to upper-middle class Americans have forgotten all about the labor expended and the lives lost by their not-so-distant ancestors in the course of such work. Yet, they may very well be forced into laying railway tracks and mining coal or constructing/repairing roads, highways, bridges and canals in the near future. College and graduate students steeped in debt who are expecting cushy office jobs that no longer exist will find out they have effectively been sold into slavery by their system of “education”.

At a time when the net energy returns afforded by the extraction of fossil fuels is quickly disappearing, the industrial corporate elites will once again rely on what can only be called “slave labor” to perpetuate a system of large-scale exploitation and wealth extraction. This time these pools of labor will not only be confined to minority groups or third world countries, and we will all find out just how little control we have over our own lives and our own bodies. When faced with the threat of arbitrary imprisonment and/or being stripped of all your earthly possessions, it will be very difficult to resist making a deal of debt servitude with the Devil.

Where can any of these people turn to for relief or protection? Can they seek help from their local police departments or court systems? Traditionally, those have been potential avenues for at least a modicum of justice. Soon, however, even these institutions will be well into the process of being privatized in the name of “fiscal responsibility” and “market efficiency”, which is really code for corporate control over all facets of the modern state. Wealthy corporate conglomerates will not only have seized the “power of the purse”, but also the state’s dispute resolution mechanisms and its monopoly to use coercion and violence in pursuit of vaguely-defined goals.

When a sizeable portion of the police force in any major city is trained, armed and managed by private security firms such as Erik Prince’s Blackwater (now known as… Academi), we may find it rather difficult to defend our homes, assets, friends and families from the wrath of our financial oppressors. They will be our creditors and debt collectors, as well as our judges, juries and executioners. One does not only become a debt slave by being underwater on private debts, though.

As we are clearly seeing in the Eurozone periphery, external public debts that are in the process of being redeemed through austerity and “structural reform” can be a force equally capable of enslavement. If you are any worker, taxpayer and/or retiree living in the shadows of the wealthiest members of society, then you are rapidly losing your freedom as I write these words. Your savings and disposable incomes are being run down to pay the salaries and bonuses of corporate executives and directors, while your democratic elections have taken an indefinite leave of absence and your government will be confronting your resistance with steel cages and the barrel of a gun.

At the same time, the Eurozone crisis perhaps offers us some signs of hope, albeit ones that are few and far between. First and foremost is the fact that the process of systemic credit collapse in our highly inter-connected environment can occur at a pace that is not necessarily capable of being out-paced by those who seek to take full advantage of it, or in ways that are completely unexpected by them. We see this revealed in the repeated inability of the IMF, EU and ECB (and their corporate masters) to come up with policies that will keep Greece in the monetary union and prevent contagion from spreading to other peripheral markets.

It is also true that extensive systems of slavery can only sustain themselves with a certain amount of complicity and passive acceptance within the population. When it is a clear majority of people in a given location, rather than a minority, who are being pushed into slavery, there will most certainly be forceful pockets of resistance and the slave masters will require the slaves’ help to squash these movements. Indeed, that is exactly what we saw in European countries occupied by Nazi Germany, and even then many of the resistance movements made significant headway towards unlocking their peoples’ chains.

The slave masters will especially require the unwavering support of civil servants tasked with carrying out orders of oppression from above. In Greece, we recently witnessed the country’s largest police union issue a statement of its intention to refuse to continue aiding the elites in the enslavement of the Greek people, and even threatened to issue symbolic arrest warrants for Troika officials stationed in the country. It is not hard to imagine similar occurrences in Portugal, Spain, Italy and even Ireland, as their policemen and women are squeezed of pensions and salaries, and forced to face the reality of their role as slaves to the system.

Closer to the “core”, there were also acts of defiance in Brussels, Belgium by firefighters who sprayed foam from their hoses onto central streets and government buildings. In a separate display, these protesting firefighters also hosed down the Prime Minister’s office and the police units protecting it. Perhaps we can expect these pockets of official resistance to grow larger over time and act as a barrier between the corporatist slave masters and the populations they seek to enslave. Which then begs the question - what will the military forces of Westerns countries do? Will they remain a cohesive, unified force that carries out orders as they have been for many years now, or will pockets of resistance materialize within their ranks as well?

It is a mistake to assume that the men and women in the U.S. military, for example, are guaranteed to bring slavery and death to their own people when they are commanded to. As USA Today reported, people who actively work for the military donate more to Ron Paul’s campaign more than any other candidate, and he is certainly not someone known for advocating imperialism and oppressive government authority. That reflects an attitude that is anything but closed-minded and uncritical of current policy trends. So, while the global population’s future of debt slavery is a very real and ongoing threat, there are also reasons to believe it may not sustain itself for very long.

Then again, the number of slaves is growing by the day and the time may come when many of us are forced to either fight for our freedom or learn to live with our chains. These are obviously very serious issues and very serious possibilities. It is no longer acceptable for anyone to pretend that the concept of systemic slavery in the developed, “civilized” world has been relegated to the history books. It took the upheaval of the Great Depression and the Second World War to truly rid the U.S. of its enslavement of African Americans only 60-70 years ago. What will it take for the indebted masses now? And is anyone really willing to find out?

John Vachon Duet September 1940 St. Mary's County, Maryland. "John and Louise Dyson, aged Farm Security Administration borrowers. Mr. Dyson was born into slavery over eighty years ago. Mrs. Dyson is the mother of fifteen children"

 

"Debt" has been used as a means of slavery throughout human history, in ancient societies dating as far back as thousands of years ago, such as those in Mesopotamia, Egypt, North/South America, etc. Debtors in these societies would be forced to relinquish their crops, land, freedom and even their wives and children to satisfy unpaid debts. Such extravagant periods of debt creation often culminated in the necessity for systemic debt forgiveness (or "Jubilee") by the decree of chiefs, emperors and kings to simply maintain some sense of social order [see Debt: The First 5000 years].

However, the decree of the all-powerful ruler no longer exists in these traditional forms, in which the rulers and landed aristocracy could easily maintain their power through force even after all lower classes’ debts were wiped out. Instead, our modern network of nation-states requires a continuous level of economic and financial coercion to exert discipline and maintain the status quo relationships of wealth, power and dominance [see The Debt-Dollar Discipline].

As explained in Our Depraved Future of Debt Slavery (Part I), our global society is facing conditions of systemic dependency, greed and malice very similar to those which existed in the American South of the late 19th century, which created a system of slavery for blacks just as ruthless as that which existed before the Civil War. The modern industrial and financial elites cannot tolerate any policies of systemic debt forgiveness, since almost all of their wealth is invested in instruments tied to those debts (including the underlying currencies).

At the same time, they cannot continue extracting surplus value when large segments of the developed world’s population remain saturated with debt, which acts to suppress aggregate demand for goods, services and capital investment. In order to continue making profits, then, they must have extensive access to very cheap labor and fixed capital inputs. They must transform the consuming classes of the first world into indentured servants and slaves through already established channels of financial and political oppression, and also pick up productive assets for "pennies on the dollar".

Last time, we looked at one obvious way in which the modern slave state has been forming – the rise of the privatized prison-industrial complex which has become a venue for detaining ever-larger numbers of people in the poorest and most socially manipulated classes of our society, such as low-level drug users and dealers. These prisoners provide a constant stream of enslaved labor to wealthy corporate interests, just like the convict leasing system of the late 19th and early 20th centuries used primarily for African-Americans.

Vast amounts of money and resources are devoted by state and federal government agencies towards maintaining a perpetual "war on drugs" that merely reinforces the very profitable industry of drug addiction, use, trafficking, punishment and imprisonment in a vicious cycle. More recently, though, we have managed to manufacture another perpetual threat/response paradigm which provides the justification for modern enslavement – the "war on terror".

Everyone should now be aware of the argument that the National Defense Authorization Act (NDAA) allows the U.S. federal government, in coordination with the U.S. military, state governments and a sprawling intelligence network, to indefinitely detain any person in any place, including U.S. citizens, suspected of participating in or aiding “terrorist activities” without any due process of law (such as formal charges and trials).

Without getting into disputes over legal interpretations of the Act or its constitutionality, it is still undisputed that this type of legislation, which is in the company of such notables as the Patriot Act, represents a clear trend towards suppressing domestic dissent and expediting the mechanisms of incarceration. When peoples of a society are burdened with vast amounts of unpayable debts, it is predictable that they will eventually protest against those debts in whatever ways they can, ranging from intentional defaults to physical resistance.

 

 

Just look at Greece, where the people are being forced to take on more external debts (with interest) through their government as these debts become increasingly difficult to pay back, and while the benefits all run to a small group of elites. They are made to suffer through brutal austerity so that they can stay in debt, just like the recidivist drug addict stays in the prison system. Inevitably, such a state of affairs leads to violent riots and protests by the masses, which, in turn, lead to violent reactions by the state, which then feed back into more violence by the people.

It is a symptom of debt slavery that has plagued societies for centuries and has even led some of them to outlaw the issuance of interest-bearing debt altogether. As stated before, though, such a path does not compute for the powerful creditors and their beneficiaries today, which is why the last thing the Eurocrats will discuss at their now weekly Summits is a policy of systemic debt forgiveness (the PSI deal does not even come close to counting). Even the Troika itself has admitted that Greece’s debt/GDP could very well remain at 160% for the next decade despite bailouts, austerity and “voluntary” debt swaps.

If you woke up tomorrow and were told that many of the Greek protestors/rioters, along with lower class tax evaders/debtors, were now being indiscriminately and indefinitely detained without judicial process and that uniformed soldiers and tanks were being deployed to the streets of Athens, would you be very surprised? I’d hazard a guess that most people who follow the news wouldn’t be, but they would still call you a fanatical nutcase if you suggested anything similar could happen in America, the "land of the free".

 

 

That is despite the fact that our private and public debt (per capita) situation is worse than that of Greece, and our level of unchecked executive authority is much, much worse. In the post-Reconstruction south, state laws were re-written and federal laws were ignored when it came to increasing the levels of incarceration and debt servitude (peonage) among blacks. Today, federal laws have all but usurped the police powers reserved to the states under the 10th amendment and become the primary mechanisms of enslavement.

Michael Barnholden’s book, Reading the Riot Act: A Brief History of Rioting in Vancouver, explains how the original “Riot Act” passed by the British Parliament in 1714 has been put into effect since that time, and how it is still active law in Canada. The act gave enormous amounts of discretion to the executive arm of government in identifying and detaining “rioters”. In his review of the book, Max Sartin points to the socioeconomic premise underlying the Riot Act that was insightfully indentified by Barnholden.

The Rain Review of Books

 

"All of the riots, from those characterized by racism to those attributed to drunkenness at sporting events, are said by Barnholden to have a connecting thread in the exploitation inherent to the capitalist economy and the need of the ruling class to garner the consent of its subjects when possible or their submission by force when necessary. The legal definition of a riot and its presentation by the media are functional to the interests of the ruling elite, at the expense of the working class, including the unemployed and prisoners.

 

Barnholden frames the question in terms of human rights versus property rights, damage to property taking precedence over harm to human beings. The author’s concept of human rights isn’t defined in the book, leaving open the question of whether such rights, or the very idea of rights itself may be just another legal technicality, like the definition of a riot, subject to the whims of those in power.

 

Barnholden himself points out that "a job is the only guarantee within capitalist society of the basic human rights of food and shelter, and there is no right to that". But he also describes a paycheque as an element of coercion. Employment under a manager is exploitive and oppressive, but it’s the only way to achieve certain basic necessities of life, which as human beings we supposedly have a right to access. But we have no right to employment (which is also "wage slavery") and so our most basic rights become meaningless."

Barnholden gets to the root of why economic coercion under a capitalist system can easily turn into outright slavery, enforced by the corporatist state. There is absolutely no reason why the Riot Act in its most subjective form cannot once again be adopted by the U.S. and other Western nations as an additional means to threaten an increasingly distrustful population with incarceration, and to carry out that threat when necessary. In fact, current trends suggest this is exactly what will happen.

The protections afforded U.S citizens in their Constitution against arbitrary oppression by the federal government have been undermined in just about every way possible since 9/11. That is indeed a scary reversal from the post-Civil War era, because it means that state and local governments are helpless to protect their own citizens from federal encroachment. This is especially true at a time when state governments are also wading deep in pools of stale debt, and must sell out their citizens to get temporary financial aid, which first makes its way into political pockets and then straight to the major banks.

The indefinite detentions of the West in modern times began under the Authorization of the Use of Military Force (AUMF), enacted before the invasion of Afghanistan, but now the NDAA has put Congress’ official stamp of approval on the very broad interpretation that was afforded the AUMF by the Bush Administration. The federal courts (including the Supreme Court) have been extremely reluctant to challenge any of these unconstitutional executive powers, and indeed have sanctioned them in many cases.

With that legal framework for the federal and state executive branches in mind, it’s not hard to see how people could eventually be forced into peonage contracts by their private creditors or third party debt collectors. The truth is that both traditional contract law concepts such as "fraud/misrepresentation", "economic/physical duress", "unconscionability", etc., which sought to protect disadvantaged parties from exploitation, and Constitutional protections against the ex-post revision of private contracts have been thrown into the trash bin of history.

In the final part of this series, we will see how legally enforced contracts of debt servitude could become a defining feature of developed world populations in the near future. Indeed, the concept has already been deeply planted across the Western world in very important ways. This will be a means of maintaining a system of debt slavery without literally imprisoning all debtors. However, none of these outcomes are guaranteed to be sustained over time, and so we will also explore why these populations may ultimately be able to shape their own futures, free from the burden of perpetual indebtedness.

Lewis Wickes Hine Breaker Boys January 1911 South Pittston, Pa. "Breaker boys working in Ewen Breaker of Pennsylvania Coal Co."

The President of the European Central Bank, Mario Draghi, looks more and more like the bad guy from the B-rated horror movie series Saw with every passing day. Jigsaw was his name. Or maybe I should say "is" his name, because that series apparently never ends just like the tortured European sovereign debt and banking crises. For those unfamiliar, the premise behind the movie was that Jigsaw would create extremely uncomfortable situations for people, both psychologically and physically, and then watch how they react.

It started off with people who had to saw off their arms, gouge out their eyeballs or murder another person to escape from some sort of death trap. The second movie made the scenarios more complex and had people shoving other people into pits full of dirty needles to reach a key that unlocks a door in a house that leads to yet another booby-trapped room. There were another five or six movies after that one which I didn’t feel inclined to watch, but I imagine the premise didn’t change much.

It was all originally supposed to be about an old cancer patient (Jigsaw) who teaches others about the true value of life in clever ways, but was really just about another pathetic, sadistic man who manufactures impossible situations and gets off on watching other people suffer. Sounds a lot like what’s going on in Europe, huh? By now, everyone and their pet dogs are familiar with the pan-European motto – AUSTERITY OR DIE!

We cut off the limbs to save the core and throw our fellow man under the bus, because they tell us that those are our only collective choices. Mario "Jigsaw" Draghi, especially, has been cast in the role of the wise old man who serves as the “neutral” arbiter of the European Monetary Union. However, when we look beneath the surface, it is clear that he is anything but neutral, and is simply running a rigged game for the benefit of the major European banks (with the willing aid of technocratic politicians such as Lucas Papademos and Mario "Three Card" Monti).

Draghi constantly repeats the message that fiscal/structural adjustment (austerity) is both the only and the best way to preserve the finances of peripheral EU nations, and miraculously make them competitive in the global economy. That is a false choice, plain and simple. The goal should not be to preserve the Eurozone in its current form, because that only benefits a very small and elite group of corporate executives. Requiring painful austerity in the name of that goal is nothing more than a torturous and sadistic exercise involving millions of people, under the guise of acting under some sort of eternal economic wisdom.

While the Eurocrats like Mario preach on about the virtues of responsible finance, they will simultaneously bail out large financial institutions who have clearly been the most reckless lenders AND borrowers of them all. What else do you call it when the ECB gradually cuts its interest rate for bank loans to zero, subsidizes unlimited euro for dollar liquidity swaps with these banks, purchases their toxic assets on the secondary market, accepts all manner of distressed collateral from them and makes up its own rules as the game progresses?

Most recently, the ECB has decided that it will simply swap the Greek bonds on its balance sheet for entirely new ones that are immune to collective actions clauses, which means the ECB will not be forced to take any losses on its Greek bonds while investors in the private sector will. Some analysts have already pointed out that this move makes a mockery out of existing contract law and will further crowd out private investment in peripheral sovereign debt. That is certainly true and the reason is outlined below by Joseph Coterrill for FT Alphaville.

ECB seniority and dirty hands

 

There’s been an enormous, justified fuss over the ECB swapping its Greek bonds held in the Securities Markets Programme. Ultimately though it is – in practical terms – about getting away with the least egregious level of seniority for the ECB now, not avoiding ECB seniority altogether.

 

The exchange is to stop the bonds getting retroactive collection action clauses (thus, exposing the SMP to forced losses) in a Greek parliamentary vote likely to be held next week, as part of the “stick” in the PSI offer to bondholders.

 

The ECB’s swapped bonds will be just like the old ones, sharing the same payment features etc, except (effectively) the bonds’ serial numbers are getting filed off. It’s probable that the legislative act will list the Greek law bonds to be CAC-ed by their series or ISIN, which would have swept up the ECB’s holdings. No other holder gets to ghost out like this.

 

It’s perhaps not so much that losses would be forced on the SMP – but that they would be heavy or in line with the PSI’s 75 per cent haircut to net present value. Thus below the SMP’s purchase price. The central bank treats that kind of loss as monetary financing (see Draghi’s points in February’s press conference.) Friday’s swap has reportedly switched the ECB’s bonds at par, thus generating a paper profit for the SMP.

Draghi has made this an issue of adhering to treaty restrictions against direct financing of Eurozone governments, but the real story here is yet another one of preserving the status quo financial system. The ECB has purchased about €56 billion worth of Greek bonds under its SMP program in 2010 at 20% discounts to par value, and analysts generally conclude that its participation in the PSI at 75% would lead to a loss of about €10-15 billion, which is a decent amount. However, the real threat would be the precedent set for its much larger combined holdings of Portuguese, Spanish and Italian bonds, which total about €160 billion.

It is… very difficult to see what the alternative was.

 

What could you do instead?

 

a) Let Greece write its law specifically excluding the ECB by name, rather than allowing its holdings to silently drop out via the ISINs

 

b) The direct route: Let Greece go ahead and insert retro-CACs into the ECB’s holdings

 

c) Abandon the retro-CAC law altogether

 

We think a) would have made the ECB’s seniority much more egregious. For b), certainly the momentum of PSI is maintained… at the expense of throwing the central bank into legal risk and probably, serious infighting as a full EU Treaty violation hoves into prospect. How long would the entire SMP portfolio last in that scenario. It’s c) that seems a total non-starter; a negotiated write-down is already hanging by a thread given the attitude of northern eurozone governments.

The original purpose behind the Greek PSI program was to keep Greece from defaulting on its debts in a "disorderly" manner, exiting the Eurozone and triggering financial contagion throughout European bond markets. If the ECB is forced to take a haircut on its bond holdings as a part of this process, then that drastically increases the cost of maintaining the Eurozone ponzi to core countries such as Germany. It would render the secondary markets purchases of peripheral bonds by the ECB an act of on-boarding credit risk and transferring it to the core without really making any new long-term credit available to distressed sovereigns.

Once the solvency of the ECB is called into question, the game is up and the major European financial institutions lose their explicit and implicit backstop of last resort (the central banks of the Eurosystem and the German Treasury), which then leads to a banking crises many times worse than that of 2008. So this latest maneuver by the ECB is really nothing more than a means of extending and pretending for as long as humanly possible. It is true that no official sector haircuts also increases the direct cost of bailing out Greece, but, then again, the decision may have already been made to let Greece exit the EMU after its debts are restructured.

Dimitrios Giannopoulos of Athens News has also discovered that the ECB bond swap may simply add another €60 billion of fresh debt to service onto the Greek government's balance sheet and, therefore, the Greek people (via ZeroHedge).

The Great ECB-OSI Bond-Swap Scam

 

But the confidential GLK document notes that the parallel ECB bond swap at par value must also be financed by the EFSF and added to Greek debt.

 

"The old ECB bonds will be transferred to a treasury account of the Greek state for the duration of the PSI bond swaps, and will therefore be charged on the level of Greek debt by the additional amount of 56.3bn euros," says the GLK document.

 

This means that the funding of the 56.3bn euro ECB "bond swap" must be "financed" by the EFSF together with other components of PSI funding under the second EU-IMF bailout plan for Greece whose exact size remains to be decided by the Eurogroup in today's meeting of the 17 finance ministers in Brussels.

It's very unlikely that any EU/IMF bailout plan will actually account for this additional debt burden of Greece, and this is perhaps yet another way of making sure that Greece is forced out of the Eurozone when it inevitably fails to reach "sustainable" debt/GDP levels. The bailout money, which is now proposed to be held in escrow until Greek somehow meets the impossible terms of its deal, will never make it to a single living soul in Greece. It will, however, make it directly to the banks, since the escrow condition will not restrict payments for interest on debt, which has now grown even larger courtesy of the ECB.

While the Troika, Greek politicians and its private creditors continue to perform their kabuki theater, Mario Draghi is doing everything he can to make sure that the ECB will be able to preserve the Eurosystem’s banks no matter what temporary deal is or is not reached, with or without Greece. That is obviously what a central bank does, and Draghi realizes there are many more players out there who will submit to his game even after Greece defaults (see Portugal, Ireland Spain and Italy). The only thing that stands in his way now is the sheer complexity and speed of the situation in credit markets, as well as the public squares.

"I WANT TO PLAY A GAME."

That’s what Jigsaw would tell his victims in an unsettling tone before he set them loose in a torturous maze with only a few very painful options available to choose from. Only one person survived these games and she became Jigsaw’s protégé and assistant, but probably ended up dying later in some ill-conceived plot line (I have no idea). The fact is that this is real life, and while the Euro crisis and GFC in general may be almost as constricting and needlessly torturous as the frames of a B-rated horror series, the victims do have at least some chance to tell the bankers, bureaucrats and politicians - "TOO BAD". We don’t want to play your game anymore, and we won’t.

Detroit Publishing Co. Congress 1908 "South corridor, Library of Congress, Washington, D.C."

It’s hard to miss the irony in the fact that perhaps the biggest stumbling block to the status quo financial elites in the Western world, who are attempting to kick the can a bit farther down the road, aside from the sheer impossibility of the underlying math, is democratic elections. 2012 may very well be the year where decades of political theater for the benefit of large corporations and financial consumers from sea to shining sea come back with a vengeance to bite the status quo politicians in the ass.

And let’s be clear, it is the run-up to elections and the accompanying theatrical drama that will prove to be the most difficult for the status quo, rather than the actual outcomes of these elections. There is little doubt that almost all of the politicians will end up singing the exact same tune once they are actually in office. The real problem for the perennial can-kickers is that they simply do not have enough time to wait around for the elections to finish and the winners to take office.

First and foremost, we have the elections in Greece to replace the unelected, technocratic government that was force-fed to its people late last year. Due to the increasingly large and vehement public opposition to bailouts for the banks and austerity for the poor, politicians in the "opposition" parties must be very careful not to align themselves too much with the Troika and it’s puppet PASOK party (of which former Prime Minister Georgios Papandreou was a member).

That’s why we see the leader of the New Democracy party, Antonin Samaras, who has his eyes fixated on the position of Prime Minister (I’m not really sure why anyone wants to be the leader of Greece anymore), continuously flounder and backtrack on what exactly he will agree to in the latest austerity package that all of the bailout money has been conditioned on. Last year, Samaras refused to sign any written commitment to the terms of the austerity package, which has since expanded, before finally giving in.

That was all just a prelude to the main show which is taking place now. Samaras has once again "pledged" in writing to implement the Troika’s austerity program, but is simultaneously saying that the program may have to be adjusted once he is in office, since it does not do enough to promote growth (no kidding!). Helena Smith reports on what she was told by a top adviser to Samaras for The Guardian:

Guardian Live Blog

 

"The letter has just gone. We have no problem expressing committment to a stabilisation progam. We are all for eliminating the deficit, controlling the debt and going on with the privatisation program things that right from the beginning we proposed.

 

It [the letter] makes very clear that we have full respect for the long-term objectives, targets and key policies of the programme.

 

We also said we should modify the plan to allow for prompt [economic] recovery. We don't want to make recovery a top priority but we insist that it becomes an additional priority, that it be be applied in tandem with other policies to allow the economy to breath. Is this such an irrational, stubborn view when the [rescue] plan to date clearly hasn't worked?"

 

It's not because the objectives are wrong. From the beginning we agreed with them. But there is a missing ingredient.

 

Even if it was perfectly implemented the numbers didn't add up. We are not saying that we are against austerity but we have to change the mix and allow for recovery.

 

We are feeling a little embarassed that again and again they want us to show our committment to the plan. When we say prioritize recovery we mean we want to discuss it with them, not do anything unilaterally. Even if they allowed us to do whatever we wanted to do we would still stick to the programme."

How about those statements for floundering and backtracking?? Now that Germany, Finland and the Netherlands are kicking around the idea of delaying Greece’s bailout money until after the elections, Samaras will have to put on an even bigger show about how he will protect the interests of Greek workers and pensioners against the abrasive Eurocrats, and perhaps even promise not to sign off on the current plan. Otherwise, everyone will just assume he is going to do exactly what the Troika requires of him once he gets in office, like the PASOK party he is running against, which is quite a safe assumption.

Secondly, there are elections in France and incumbent President Nicolas Sarkozy has been steadily dropping in the polls against Francois Hollande of the Socialist Party. As of early February 2012, Hollande is almost running at his all-time high of 60% against Sarkozy. If you thought Samaras was being a thorn in the side of the pan-European austerity hawks, then take a look at what Hollande has been saying. Steven Erlanger for the New York Times reports:

French Candidate Assails Plan for Greece

 

"The front-runner for the French presidency, the Socialist candidate François Hollande, criticized European policy on Greece on Monday, saying that mandatory austerity measures were too severe and would never produce the desired results because "everyone knows" that "there is no rebound in growth in Europe and in Greece."

 

Mr. Hollande’s remarks, one day after the Greek Parliament adopted austerity measures demanded by the European Union and the International Monetary Fund, while violent protests left many buildings in Athens in flames, offered a critical assessment of European and Greek leaders’ handling of the crisis. The Greek government, he said, would "have a short life," while the austerity plan forced on Greece amounted to a "purge."

 

The French presidential race is heating up with President Nicolas Sarkozy expected to make his candidacy for re-election official this week. Mr. Sarkozy is still running behind Mr. Hollande in the opinion polls for both the first round of voting on April 22 and in a runoff on May 6. In a luncheon interview with a group of foreign journalists here, Mr. Hollande was pleasant and expansive, but remained vague on the details of his programs."

Right, Politics 101 - keep all your plans and policies for office vague and uncertain, but stay sharply critical of the current administration. Yet, that’s exactly what the markets can’t continue to handle right now – vagueness and uncertainty about the future of fiscal and monetary policy. The French sovereign bond market has so far remained relatively quiet throughout the whole crisis, except for a brief spike upwards in the 10-year yield late last year. If all of Sarkozy’s repeated promises of implementing domestic austerity come into question, though, France's credit situation could change very fast, especially since it has already been downgraded from AAA by S&P and put on “negative outlook” by Moody’s.

We also have a Spanish regional election in Andalucía on March 25, which is a bit more trivial than those above, but it still has the potential to create some major disruption in the Spanish bond market over the next month. Spain has been one of the worst hit economies during the financial crisis, with its unemployment rate reaching 23% at the end of 2011, and it has so far failed to offer the Troika any "credible" austerity plan for reducing its budget deficit. Angela Benoit reports for Bloomberg:

Spain Risks Deficit Spiral as Election Postpones Budget Cuts: Euro Credit

 

"Spain’s month-old government may postpone deeper budget cuts until after a regional election in March, adding to the risk the nation misses its deficit goal for the second year.

 

The ruling People’s Party, led by Prime Minister Mariano Rajoy, will contest an election in the southern region of Andalusia to end 30 years of Socialist rule. Spain’s 10-year bond yields have risen 10 basis points to 5.5 percent since the PP government took over on Dec. 21, increasing the rate to 359 basis points more than German bunds of similar maturity.

 

"Rajoy doesn’t want to get burnt before the Andalusian election," Antonio Barroso, an analyst at Eurasia and a former Spanish government pollster, said in a telephone interview. "They’re so crucial for the PP that it won’t take any kind of measure that would undermine its ratings in the region."

 

Rajoy needs to slice the equivalent of 3.6 percent of gross domestic product off the budget deficit this year to meet a European Union target, just as the economy may be entering its second recession in two years. Postponing steps until after the March 25 election risks undermining confidence in Spain’s ability to meet its goal, which Fitch Ratings already has "doubts" the country will reach.

 

"Rajoy has yet to explain how he will reduce the deficit when the economy is shrinking," said Georg Grodzki, global head of credit research at London-based Legal & General Investment Management, which oversees about $515 billion. "I don’t think Spain can afford to wait for more than two months at the most."

There's obviously nothing Rajoy can do to achieve a "sustainable" budget deficit in Spain while the economy contracts, and implemented austerity will only make the latter worse, but he also can’t afford to not offer up any bogus policy promises. The regional election is now getting in the way of him doing so, though, because the Spanish people are simply against any Greek-style "structural reforms" (they are not senseless and can see what has happened over there). Rajoy realizes such opposition exists, and will therefore hold off on submitting a budget until after the election. It’s entirely unclear whether the credit markets will hold off on pounding Spanish bonds into the ground, though.

Last, but certainly not least, we have the 2012 Congressional and Presidential elections in the U.S. I have suggested before that the Obama Administration, in its consistent attempts to present a rosy economic story before November 2, may have effectively killed the capacity of the Fed to "print money" through QE3 asset purchases [Who Killed the Money Printer?]. That in and of itself would be a HUGE blow to the status quo elites who are banking on the Fed to step in with at least a trillion dollars or so in easing to keep the markets happy.

But the electioneering syndrome certainly doesn’t stop there. We also have the Republican Presidential front-runners and those up for re-election in the Senate who will harshly criticize and block any and all attempts of Obama to launch any significant stimulus measures or help bail out Europe through additional contributions to the IMF. Since the Republicans control the House of Representatives, these full frontal blocks will not be hard to carry out. For example, The Hill reports on the opposition to Obama’s latest mortgage refinancing plan.

White House to push housing plan despite Republican opposition

 

"The White House has recently promised major steps to boost the housing market and help struggling homeowners, but bruising fights with Congress loom over major pieces of the plan.

 

The housing market is widely seen in Washington as still struggling in the wake of the subprime mortgage crisis, and weighing down what would be a more robust economic recovery.

 

In recent days, the White House has made a concerted effort to address the housing sector, rolling out new plans to help homeowners avoid foreclosure and boost the housing sector.

 

But while the administration can nibble around the edges and implement changes, it needs Congress and regulators to get on board with any major initiatives, and this presents significant challenges."

There are, of course, many other elections occurring around the world, but these are the "democratic" ones that could be the most disruptive to maintaining the status quo, hopium-filled market environment over upcoming months. And, as mentioned earlier, the political theater of these elections is by no means the only thing that could throw a spanner into the works. Here’s another obvious one – all of the non-existent capital that was promised to backstop the Euro periphery through the IMF, EFSF, private bondholder "haircuts", etc., doesn’t materialize! All in all, 2012 should be a very disturbing year for the extenders and the pretenders alike.

Unknown Aftermath April 1865 "Richmond, Virginia. Destroyed Richmond & Petersburg locomotive." Aftermath of the Confederate evacuation in which Richmond's business district, accidentally torched by its own citizens, burned to the ground, the flames extinguished only with the aid of the occupying Federal Army

In response to the latest suicidal austerity demands of the Troika hit squad, protestors in Greece burned a German flag while the Greek daily paper Dimokratia adorned its front page with the headline, “Memorandum Macht Frei” [memorandum makes you free]. These elements of the populace are unsurprisingly reacting to the fact that bureaucrats in Washington, Berlin and Brussels are signing away the living standards of the Greek people while telling them that it’s all being done for their own good and is absolutely necessary for peace and prosperity in Europe.

Ambrose Evans-Prichard pointed out in a recent blog post that the Troika’s plans for Greece are far worse than what was demanded of [or offered to] Germany after the second World War, and much more similar to what was demanded of it after the first one (we all know how well that worked out). In 1953, the Western powers granted Germany 50% relief on its external debts with very few conditions attached, and now Greece is struggling to get that same amount with absolutely impossible conditions attached.

The main reasons for this difference in treatment are a) Greece is not nearly as strategically important to these Western capitalist powers as Germany was back then and b) the financial elites simply cannot afford to create a precedent of debt forgiveness in the current environment of unprecedented public and private debts. What is perfectly clear, though, is that the continuously shape-shifting complex of bailout, haircut and austerity measures advocated for Greece have been destined to fail since they were first conceived.

Germany's Carthaginian terms for Greece 

The EU deal will in theory cap Greece’s public debt at 120pc of GDP in 2020 - at the outer limit if viability - after eight years of belt-tightening and depression, if all goes perfectly.

 

Since nothing has gone to plan since Europe’s austerity police began to administer shock therapy eighteen months ago, even this grim promise seems too hopeful.

 

The Greek economy was expected to contract by 3pc in 2011 under the original EU-IMF Troika plan. In fact it shrank by 6pc, and is now entering what the IMF fears could become “a downward spiral of fiscal austerity, falling disposable incomes, and depressed sentiment.”

 

Manufacturing output fell 15.5pc in December. The M3 money supply crashed at a 15.9pc rate. Unemployment jumped to 20.9pc in November, up from 18.2pc the month before, and is already above the worse-case peak pencilled in by the Troika.

 

Some 60,000 small firms and family businesses have gone bankrupt since the summer, the chief reason why VAT revenues dropped 18.7pc in January. The violence of the slump is overwhelming the effects of fiscal retrenchment. So much Sisyphean effort for so little gain.

 

You can argue that Greece has dragged its feet on EU-IMF demands - though the IMF is careful not make such a crude claim, offering mixed praise in its last report.

 

But as Professor Vanis Varoufakis from Athens University says: “If we had better implemented the measures, the worse it would be: the economy would be comatose, and the debt-to-GDP ratio would be even more explosive.”

 

So yes, like Germany accepting the terms of the Carthaginian Peace with a gun to its head in 1919, Greece signed “an insincere acceptance of impossible conditions” - to borrow from Keynes - hoping that sense would prevail with time.

But now that politicians from nearly all parties in the Greek Parliament have once again passed a ruinous fiscal austerity package (most likely without bothering to read it), as both the technocratic leader Papdemos and the “opposition” leader Samaras warned that all hell would break loose if they voted against it, the people of Greece and of the world should rid themselves of any misplaced anger and remember where all the wealth is really going - supranational bankers and corporate elites.

Bureaucrats and politicians in Athens are just as complicit as those in Berlin and in Washington, and they are all serving a higher master. It’s not the German people who are benefitting, and, in fact, they are also paying a very hefty price to keep an impossible currency union in one piece. Through the IMF and EU bailout mechanisms, Germany has already sunk tens of billions of euros into Greece for no benefit whatsoever, except buying some time for “firewall” protections from financial contagion (i.e. the ECB’s LTRO).

Even that temporal benefit is very close to running out, as German politicians have reached the point where they may be upping the ante so high that the current bailout and austerity plans will be stopped dead in their tracks and Greece is forced to leave the Eurozone (of their own volition, of course). The tone of Merkel’s administration has noticeably shifted towards strong implications that nothing Greece does will be good enough anymore. German Finance Minister Wolfgang Schauble said on Friday that “we can’t keep sinking money into a bottomless pit”.

The policy cannot command democratic consent over time. The once dominant Pasok party has collapsed to 8pc in the polls. Support is splintering to the far Left and far Right, just like Weimar Germany under the Bruning deflation.

 

The next Greek parliament will be packed with “anti-Memorandum” fire-breathers, and any attempt by Greek elites to prevent elections taking place must push street protests towards revolution.

 

In a sign of things to come, the Hellenic Police Federation has called for the arrest of Troika officials on Greek soil for attacks on “democracy and national sovereignty".

 

It is clear that Germany’s finance minister Wolfgang Schäuble wishes to expel Greece from the euro, calculating that Euroland is now strong enough to withstand contagion, and that the European Central Bank’s `Draghi bazooka’ for lenders has eliminated the risk of a financial collapse.

Schauble’s mindset and motive are much less than pure, but he is right - Greece cannot survive in the Eurozone without any bailouts or austerity, and it can’t survive with them either. Even the most measly sums of bailout money that have already been authorized to be used for the Greek people are not being delivered to them, because the Greek government is having trouble “absorbing” the funds. English Katherimini reports:

Delays in Absorption of EU Funds

 

The European Commission is closely monitoring 181 projects in Greece, for which some 11.5 billion euros will be dispersed. While much of this money is going toward infrastructure schemes, 4.3 billion euros is being allocated through the European Social Fund for projects to help with employment.

 

However, Kathimerini understands that of these 4.3 billion euros, more than 1.1 billion has not yet been absorbed despite the unemployment rate surpassing 20 percent in November. The schemes are meant to be overseen by the Education and Labor ministries but they are finding it difficult to get the projects off the ground.

 

The Labor Ministry says that the schemes it is responsible for were to be run by the OAED employment organization, but sources said that it is too weighed down at the moment dealing with the rapidly increasing number of unemployed Greeks. The total figure of Greeks without jobs passed the million mark in November.

 

As for the Education Ministry, sources said that staff shortages are making it difficult for officials to plan the programs that will absorb the EU structural funds which Brussels has made available.

The Germans must look at that and correctly assume that there is absolutely no reason for them to continue backstopping these funds for Greece, which is implicitly a bill for the rest of the EU periphery as well. They may have greatly benefitted from the all-consuming debt slaves of Southern Europe in the past, but not any longer. The only clear and efficiently carried out purpose of the bailout measures is keeping the major banks solvent as they scatter toxic assets across the smoldering remains of European and American taxpayers, and as their executives and directors continue to receive outrageous levels of compensation for nothing but negligence and fraud.

All of the major western banks are given access to virtually unlimited cheap credit at their respective central banks through ZIRP, discount loans, LTRO, etc., while the average citizens and small businesses have seen access to affordable credit plummet for years now. Thousands of these businesses, which actually have the capacity to hire workers, go bankrupt every month, while the major banks are kept out of bankruptcy proceedings at all costs. In the meantime, they can fraudulently foreclose on your home and settle any and all litigation surrounding the issue out of court in one fell swoop.

On top of that, many European banks have been at least partially nationalized and therefore have explicit guarantees from their respective governments, while those other wholly-private fat cats have to make do with only implicit guarantees. Why should the banks even care about taking a 50-70% haircut on the value of Greek bonds when the bailout funds will be directly transferred to them, their governments will be on the hook for any capital shortfalls and they can post all manner of toxic waste to the ECB as collateral for unlimited 3-year funds? These are the true perpetrators of mass injustice and exploitation in our system; our urban and suburban consumer complexes are their concentration camps.

They are the only ones who stand to gain from the systematic gutting of social safety nets and the imposition of slave wages across Europe and North America. Everyone else, including the Greeks, the Germans, the French, the British, the Americans, etc. stand to lose and lose big. The Greek people, especially, are now at a very important crossroads that will be difficult to navigate. They must stand up against the degrading farce that took place tonight in Athens behind closed doors, but they must also refrain from being swept up into anti-German, reactionary fervor. At the end of every painstaking day, only recognizing the true nature of collective oppression can make you free.

 

Arthur Rothstein Blatz on Tap Summer 1939. Butte, Montana "Men lounging in front of the Arcade"

Friday's NFP number brought us some altogether unprecedented BS from the BLS. Much has already been said about the filthy stench emanating from these "data points", so I will just review the most important points here. First thing to note is that squeezing a record 1.2 million people out of the "labor force"(people who don't waste time looking for jobs that don't exist) is apparently a sure fire way to get the headline unemployment rate down to only 8.3%

ZeroHedge, as usual, does an excellent job deconstructing the self-contradictory nonsense that is known as the NFP jobs report.

Record 1.2 Million People Fall Out Of Labor Force In One Month, Labor Force Participation Rate Tumbles To Fresh 30 Year Low

"A month ago, we joked when we said that for Obama to get the unemployment rate to negative by election time, all he has to do is to crush the labor force participation rate to about 55%. Looks like the good folks at the BLS heard us: it appears that the people not in the labor force exploded by an unprecedented record 1.2 million.

 

No, that's not a typo: 1.2 million people dropped out of the labor force in one month! So as the labor force increased from 153.9 million to 154.4 million, the non institutional population increased by 242.3 million meaning, those not in the labor force surged from 86.7 million to 87.9 million. Which means that the civilian labor force tumbled to a fresh 30 year low of 63.7% as the BLS is seriously planning on eliminating nearly half of the available labor pool from the unemployment calculation.

 

As for the quality of jobs, as withholding taxes roll over Year over year, it can only mean that the US is replacing high paying FIRE jobs with low paying construction and manufacturing."

 

 

   

To make matters much worse, the number of long-term unemployed (27 weeks or longer) remains at a very high level of ~5.5 million and youth unemployment remains at 23%. And only 10% of the headline increase in jobs was due to additions for full-time employment, while a record 700,000 part-time workers were hired in January. ZeroHedge also follows up with a great analysis of the seasonal adjustment mechanism used by the BLS to turn manufacture millions of jobs out of thin air and turn a miss of expectations into a massive beat.

 

Explaining Yesterday's Seasonally Adjusted Nonfarm Payroll "Beat"

 

"What is very notable is that in January, absent BLS smoothing calculation, which are nowhere in the labor force, but solely in the mind of a few BLS employees, the real economy lost 2,689,000 jobs, while net of the adjustment, it actually gained 243,000 jobs: a delta of 2,932,000 jobs based solely on statistical assumptions in an excel spreadsheet!

 

So how does this data fit in specifically in the context of the just passed NFP whopper of a number? Simple. The chart below shows the January seasonal adjustment for the past 4 years, since 2009. The number of jobs added for "seasonal" purposes to the NFP number were as follows: 2009 - 2,006,000; 2010 - 1,970,000; 2011 - 2,129,000, and the all important 2012: 2,146,000.  

 

Once again, this is the number added to the NFP unrevised baseline to get a "final" number which is then blasted to the media. The chart below shows the historical January adjustment, to the NFP data, as well as the 2012 reported adjustment, and also what the statistical adjustment would be for the NFP number to have the NFP number come in line with expectations of a 140,000 beat.

 

Here is the kicker: the market mood yesterday would have been far more somber if instead of a seasonal fudge-factored statistical addition of 2,146,000 jobs, the BLS had decided on a number that is merely the simple average of the statistical adjustment of the past 3 years, which comes down to 2,035,000. In fact, had the BLS used this seasonal adjustment, the final NFP headline number (SA) would have been +132,000, or a miss of expectations of 8,000 (the Seasonal Adjustment number to get to consensus January expectations would have to be +2,043,000 to the NFP number).

 

In other words, the difference between a + and - 2% move in the stock market is based on less than a 5% variation to the entire January seasonal adjustment, as had the BLS add just the simple average, the BLS report would have been a disappointing miss, and the market would have likely dropped (although with 5 momos in charge of the entire market, the thesis would have likely promptly shifted to "more QE coming" so who really knows)."

 

 

   

The combiniation of a horrendously exclusive "labor force" definition, extremely weak internals and a goal-seeked seasonal adjustment (significantly higher than recent average) make the NFP report the most highly manipulated and misleading piece of work to come oozing out of Obama's Administration yet. And Karl Denninger does a few more calculations to determine that, not only was this not a very good employment report as claimed, but it was actually the worst since January of 2009!

 

Employment Report: Blatant And Outrageous Lies 

 

"Indeed, the total number of employed persons fell. A lot. To put a number on it, the total number of employed persons fell by 737,000 by actual count.

 

Now the cheerleaders will state that this is a common thing in January, and indeed it is. But the correct adjustment is to look at the population increase and subtract that back off as well. In other words, we take the loss of employment and add the population growth. When we do this we get a whopping 2.422 million in the wrong direction which was bested only by the -2.618 million in January of 2009 through the process of this downturn!

 

In fact other than January 2009 there has never been a single month in my table, which dates back to 1999, that put up a worse combined number. This "performance" rates a literal "second from utter despair and disaster", and the employment rate shows it:"

 

 

   

This sort of aggravated manipulation/miscontruction will become commonplace in the months ahead of November’s elections and it does carry real consequences, beyond simply buying a few points with the market. Sports radio pundits are reporting that some 5 million (!) Americans are going to buy new televisions to watch The Superbowl, and jobs reports such as this one will give them unjustified comfort when making such horrible decisions.

Why put off a several hundred dollar purchase on credit when you are confident that there are plenty of jobs waiting for you or that your current job is safe? Why not take out a few loans from Sallie Mae and enroll in that graduate program when the economy is in full recovery mode? The people lured into consumer-friendly complacency by these faux reports and the media lackeys who shill for the status quo will have a very rude awakening when all their bills come due, and it turns out the jobs were never there to begin with.

Yet, there is also a growing section of disenfranchised Americans who will be forced to trust their own lying eyes and [lack of] paychecks over the juked statistics from federal agencies or Jim Cramer's insufferable blather. Perhaps the biggest consequence of these manipulations will be to completely undermine confidence in the crony corporatist establishment. Still, it may take some more time for the harsh realities of Depression to set in across the all-consuming middle-class of America, which starkly contrasts with the situation in Europe.

Say what you will about the Eurocrats – they are power-hungry shysters who work through endless circuits of Summits and acronymous funds, turning their citizens into full-blown debt slaves just so they can keep the current crop of banksters and politicians in power, while the latter bumble, tumble and stumble towards any temporary “solution” to be had, no matter how useless, unjust or counter-productive it is – BUT they do produce much more legitimate economic and financial data than their American counterparts.

They still offer a hint of transparency to their citizens; something that has been utterly stripped away from the American populace over these increasingly painful years. There is no doubt that the peoples' plight is much more acute in Europe right now, where many of those living in the periphery are struggling to make ends meet every hour of every waking day. Eurostat gives us the latest unemployment data for the EU-27 and the Eurozone (17), and it’s grim.

Unemployment Statistics

"Eurostat estimates that 23.816 million men and women in the EU-27, of whom 16.469 million were in the euro area (EA-17), were unemployed in December 2011. Compared with November 2011, the number of persons unemployed increased by 24 000 in the EU-27 and by 20 000 in the euro area. Compared with December 2010, unemployment increased by 923 000 in the EU-27 and by 751 000 in the euro area.

 

The euro area seasonally-adjusted unemployment rate was 10.4 % in December 2011, unchanged compared with November 2011; it was 10.0 % in December 2010. The EU-27 unemployment rate was 9.9 % in December 2011, also unchanged compared with November 2011; it was 9.5 % in December 2010.

 

Among the Member States, the lowest unemployment rates were recorded in Austria (4.1 %), the Netherlands (4.9 %)and Luxembourg (5.2 %), and the highest rates in Spain (22.9 %), Greece (19.2 % in October) and Lithuania (15.3 % in the third quarter of 2011).

 

________

 

In December 2011, 5.493 million young people (under 25) were unemployed in the EU-27, of which 3.290 in the euro area. Compared with December 2010, youth unemployment increased by 241 000 in the EU-27 and by 113 000 in the euro area. In December 2011, the youth unemployment rate was 22.1 % in the EU-27 and 21.3 % in the euro area. In December 2010 it was 21.0 % and 20.6 % respectively. The lowest rates were observed in Germany (7.8 %), Austria (8.2 %) and the Netherlands (8.6 %) and the highest in Spain (48.7 %), Greece (47.2 % in October) and Slovakia (35.6 %)."

 

 

 

   

These levels of youth unemployment are obviously a recipe for disaster, economically and socially. EU peripheral nations are tasked with growing themselves out of severe, structural deficits, but the figures above, among many others, tell us just how unrealistic that has been all along. Spain wants to cut its budget deficit nearly in half over two years when close to a quarter of its population, and almost half of those under 25, are not earning a regular income.

If the Troika and Mariano Rajoy get their way and spending on healthcare, education, etc. is gutted across Spanish regions, it will be even harder for any of these people to find employment, pay off various debts and consume at anything close to levels that sustain growth. The numbers put out by the EU may be more accurate than those pubished in America, but that’s little consolation to the men, women and children across the Continent who those numbers represent.

I’d like to get back to the BLS’ latest propaganda, though, and point out one other very important consequence of the report. It appears the rabid momentum chasers are once again picking up pennies in front of a gigantic steamroller, since everything in Europe is still as uncertain and unstable as it ever was and, on top of that, the bogus U.S. data may have just killed the one thing that investors have been taking to the bank for many months now – large asset purchases by the Fed.

I wouldn’t go so far as to say that some scale of QE3 has been “priced in”, but it is clear that the markets are now thoroughly addicted to credible promises of cheap, never-ending liquidity; or, as they would tell you in AA meetings, one sip is too much and one trillion sips are never enough. The problem for them now is that there is very little credibility left underlying the Fed’s “promises”, thanks to the complete joke of a jobs report produced by the incumbent politicians guiding the BLS.

With unemployment data suddenly showing massive improvement above expectations last month (and the non-manufacturing ISM reporting price increases across several commodities), the U.S. government has placed itself back in a position where there is simply no justification for any monetary easing. The Administration will continue to goose any and all economic data it can get its hands on going into elections, which will make it that much more difficult for the Fed to act, which, in turn, will make it very difficult for the market to keep up its appearances.

I believe it would be a mistake to assume that this fact has been lost on large money managers, as the following snippet from The Guardian Blog suggests.

 

Guardian Live Blog  

 

"The drop in the unemployment rate to 8.3% means it is at the lower end of the Federal Reserve's forecast range - which could provide fuel to those in the Fed who want to hold back from further measures to boost the economy. Joshua Raymond, chief market strategist at City Index, said:

 

'This is a really stellar set of numbers and has surprised many who had expected a slowing of jobs growth after the December holiday period.

 

The jobs figures paint quite a different picture to the tone of voice used by the Federal Reserve last week, which applied a somewhat dovish tone towards US growth expectations. This naturally poses the question what are the Fed seeing further down the path that the market isn't right now?

 

And what's more, a stronger than expected labour market goes directly against the rational to increase asset purchases through quantitative easing, and this may pose a somewhat negative impact in the medium term for those investors that had factored this into their trading.'

 

Within the figures private sector jobs rose 257,000 while government jobs fell by 14,000, compared to expectations of a 20,000 drop. The increase in non-farm payrolls is the biggest since April 2011."

 

We could call it the mirror image of 2009-10, when all that mattered to the American political and financial elites was goosing the markets to manage perceptions of economic health and churn trading profits. As housing, jobs and manufacturing data naturally worsened (with exactly zero jobs created in August 2011, later revised slightly upwards) and the electioneering switch was flipped, the politicians have taken precedence over the bankers and are manipulating the source data with the belief that the markets will naturally play along.

What the politicians fail to understand is that the feedback between the real economy and the markets, to the extent it existed, has been irreversibly corrupted over the last few years through centralized intervention. You can goose all the data you want, but the increasingly fewer traders [or robots] that make up "the market" these days only want one thing – more monetization of debt. And, until now, most of them have been too clueless to figure out that unrestricted printing of money is not a guaranteed outcome in 2012.

This is something that TAE has consistently pointed out for quite some time now, while others have declared that money printing is the end all and be all of the system. Ultra-loose monetary policy and some form of printing will be a staple feature of our world for some time to come, but let’s remember that the financial system is not isolated from the sociopolitical system or vice versa. Both the probability and effectiveness of money printing will hinge on numerous variables, three of the most important being systemic deleveraging, social confidence/mood and political manuevering, and all three of those are coming to a head this year.

Jack Delano Hot Sugar January 1942 Guanica, Puerto Rico. "Burning a sugar cane field. This process destroys the leaves and makes the cane easier to harvest" Ilargi: No, I’m not talking about the fact that Germany and Holland want to take over as the de facto government in Greece, as Noah Barkin writes for Reuters (that they want to do it through Brussels is a mere technicality).

Germany wants Greece to give up budget control

Germany is pushing for Greece to relinquish control over its budget policy to European institutions as part of discussions over a second rescue package, a European source told Reuters on Friday. "There are internal discussions within the Euro group and proposals, one of which comes from Germany, on how to constructively treat country aid programs that are continuously off track, whether this can simply be ignored or whether we say that's enough," the source said. The source added that under the proposals European institutions already operating in Greece should be given "certain decision-making powers" over fiscal policy. "This could be carried out even more stringently through external expertise," the source said. The Financial Times said it had obtained a copy of the proposal showing Germany wants a new euro zone "budget commissioner" to have the power to veto budget decisions taken by the Greek government if they are not in line with targets set by international lenders. "Given the disappointing compliance so far, Greece has to accept shifting budgetary sovereignty to the European level for a certain period of time," the document said. Under the German plan, Athens would only be allowed to carry out normal state spending after servicing its debt, the FT said.

Ilargi: Nor do I mean the report from the Kiel Institute for the World Economy that Ambrose Evans-Pritchard cites for the Telegraph, and which implies a second bailout for Portugal is looming near:

Investors fear mounting losses in Portugal as second rescue looms Portugal is fighting a losing battle to contain its public debt and may be forced to impose haircuts of up to 50pc on private creditors, according to a top German institute. A report for the Kiel Institute for the World Economy said Portugal would have to run a primary budget surplus of over 11pc of GDP a year to prevent debt dynamics spiralling out of control, even in a benign scenario of 2pc annual growth. "Portugal's debt is unsustainable. That is the only possible conclusion," said David Bencek, the co-author, warning that no country can achieve a primary budget surplus above 5pc for long. "We won't know what the trigger will be but once there is a decision on Greece people are going to start looking closely and realise that Portugal is the same position as Greece was a year ago." Yields on Portugal's five-year bonds surged on Thursday to a record 18.9pc, reflecting fears that the country will need a second rescue from the EU-ECB-IMF Troika. Three-year yields hit 21pc.

Ilargi: Or even the true meaning behind the steep drop in the Baltic Dry Index, on which Sebastian Walsh reports for Financial News:

Chart of the Day: The Baltic Dry Index Statistics from the Office of National Statistics this morning showed that the UK went into reverse in the last quarter of 2011, when the economy shrank by 0.2% – but as the Baltic Dry Index shows, the global economy is looking even more worrying. The index – often used as a proxy for the health of the global economy as it reflects the prices charged for shipping commodities such as metals, coal or grain around the world – has fallen by 61% since October. The index was at 842 at yesterday’s close – down from its 12-month high of 2173 last October. Nick Bullman, managing partner at risk consultant Check Risks, said the index is a good way of looking at the risks to the global economy, "as it tends to be where they hit first".

According to Bullman, its initial collapse in October was driven primarily by a fall-off in demand from China, where declining housing prices pushed purchasing managers to cut back on orders for the raw materials whose transport the Baltic Dry Index reflects. He said: "This collapse looks similar to the falls we saw in the Baltic Dry ahead of the recessions of the late 1970s and early 1990s – but this drop is actually steeper." Bullman added that it was also a more direct indicator of global economic health than government-produced statistics. "Personally, I’m not interested in employment data and GDP figures because they’re manipulated," he said. [..] Bullman said that shipping companies have also been deliberately slowing down their journeys to save fuel, with trips from China to the US going now taking around 50% longer than they were early in 2011. Instead, he said he was surprised by how long the Baltic Dry took to fall. The NewContex index – an indicator of prices for transporting products in container ships – started falling in April last year. Bullman said: "When we saw that happening in April, we realised that risks had returned to pre-2008 levels. We thought the Baltic Dry would start falling too, but it was actually relatively resilient." "What this is signalling is that the world economy is slowing down much more quickly than people have been thinking."

Ilargi: The report I refer to in the title requires a little background info: In Holland, where I'll be for a few more days, there's a "rogue" right-wing party named PVV (Party for Freedom). It has no cabinet ministers, but the minority moderate right-wing government needs its support to stay in the saddle. The PVV, like other European right-wingers, is, among many other things, against much of what the European Union stands for. It's certainly against the Euro, and the bailouts with Dutch taxpayer money of countries like Greece and Portugal. A few months ago, the PVV announced they had commissioned a report from British financial consultancy firm Lombard Street Research on the economic consequences of staying in the Eurozone versus returning to the guilder. That report is about to be published "within days". It will prove to be highly explosive material. And the PVV will do all it possibly can to make sure it receives a lot of media attention. It may tear down the incumbent government, which is a heavy advocate of all things Europe, and which will have to quit once the PVV support dies, but for that party that's not the no. 1 concern. And if and when Holland has a large scale discussion on the report and the issues it raises, Germany won't be able to ignore it and stay behind. And then, neither will France. Max Julius of Citywire.uk did a piece on the report, without mentioning it directly, 10 days ago:

Why Germans and Dutch will exit 'suicide pact' eurozone Germany and the Netherlands are likely to quit the eurozone rather than swallow an indefinite number of 'unrequited transfers' to the union’s crisis-stricken nations, according to Charles Dumas, chief economist at Lombard Street Research. Speaking at an event in central London, he said that before joining the single currency, German incomes had stayed level but their purchasing power had increased as the Deutschmark appreciated. With the weaker euro, the economist said, they have seen 'tremendous' wage restraint, leading to huge growth in German firms’ market share but ‘no serious growth of the economy’ and a squeeze on disposable incomes. Meanwhile, consumption rose elsewhere in the eurozone, he said. 'So what you’re actually dealing with here... is a German population which has had a rotten deal – and that’s why they’re all so angry' noted Dumas, who is also chairman of the macroeconomic forecasting consultancy. Branding the monetary union a 'suicide pact', he continued: 'So what this exercise in uniting Europe has achieved is to divide Europe.' Dumas [noted that] the 'Club Med' nations needed about 5% of gross domestic product in annual debt refinancing 'more or less indefinitely'. This would amount to €150 billion a year, of which Germany would have to stump up just over €60 billion, France a little under €50 billion and €15 billion from the Netherlands, he said. And this would be on top of the shortfall in consumer spending, in addition to the fact that wages and consumption may have to be held down in the future, Dumas warned.

Ilargi: This morning, Dutch daily Algemeen Dagblad cited Dumas as saying these numbers are "cautious estimates". They are valid only if Greece and Portugal would leave the Eurozone in 2012 - which Dumas expects will happen -. If they don't, the payments will be even higher. He predicts the costs of a return to the guilder will be much less than for instance the Dutch government's Central Planning Bureau claims, which warns of huge losses if Holland were to leave the Euro. Dumas: "It's just like in a religion: first they promise you heaven, and if that doesn't work out, they threaten you with hell."

The economist dismissed the notion that the region would be able to turn itself around so as to make such support from its 'core' unnecessary. Citing the example of the persisting transfers from west to east Germany, he pointed out: 'The ones that need the money to flow in carry on needing the money to flow in, or just stay poor.' Dumas also warned that austerity was only worsening Greece’s budget deficit, and that it was 'difficult to imagine' the deeply indebted state receiving the four quarterly batches of financing it is due this year. ‘It’s almost impossible to imagine people continuing to stump up the money, because they simply have not actually gone into this thing with the intention of unrequited transfers to Greece ad infinitum,’ he said as the country resumed talks with its creditors over a planned debt swap. Calling the one-off damage of splitting up the eurozone 'seriously exaggerated', Dumas warned that as the crisis deepens, he believes 'Germany and the Netherlands will actually realise that they had better call it a day and jump out.'

Ilargi: Sure, the Dutch government, and certainly the EU and the banking system, have formidable PR machineries at their disposal. We’ll see a lot of numbers being floated that contradict Lombard's report. And we'll have to wait a few days to see exactly what numbers Dumas et al. come up with. But the people of Germany and Holland are already very nervous about the fact that they face austerity and budget cuts while billions of euros are transferred to southern Europe. Up until now, the fear of economic disaster predicted in unison by government leaders have kept them quiet. Now that a reputable economic research firm flatly contradicts these predictions, and states that, instead, it's staying within the Eurozone that will be the far more costly option, the people will grow increasingly restless. Charles Dumas again, from Algemeen Dagblad:

"The Dutch people have lost thousands of euros in purchasing power per year since the currency was introduced."

Governments in Berlin and The Hague will have a lot of explaining to do. They have to do so against a backdrop of (near-)failing Greek debt swap talks, which will at the very least force them to admit that they have a lost tens of billions in taxpayer money to Club Med countries already. With a second Portugal bailout waiting in the wings. And lots of negative news on Italy and Spain. And more domestic budget cuts. They’ll realize that their governments have painted far too rosy pictures about the issues so far. And they’ll expect them to deliver more of the same. This is what we call a receding trust horizon. It's not the report alone, it's the entire combination of factors. The report will "merely" serve as the catalyst that blows up the powder keg. It may take a few months, but it will happen. The publicity hungry rogue PVV party that commissioned it, followed by anti-Eurozone voices elsewhere, will make sure of that.

Here's another interview with Nicole, conducted by Nicholas Bawtree for Italian magazine Terra Nuova, October 2011 in Florence, Italy.

 

Tyne & Wear Archives and Museums Just watch me June 9 1902 Fron album of prisoners brought before the North Shields Police Court in England between 1902 and 1916.

 

"Time has stopped before us The sky cannot ignore us No one can separate us For we are all that is left The echo bounces off me The shadow lost beside me There's no more need to pretend Cause now I can begin again." Smashing Pumpkins, The Beginning is the End is the Beginning

 

Ashvin: The latest revolution of the Euro Crisis Cycle has brought us back to talks of restructuring Greek sovereign debt through "Private Sector Involvement" (PSI), which are somehow taking place in a Universe where debt restructuring is not allowed to be confused with "debt default" or "bankruptcy". On Friday January 20, the IIF (representing some of Greece’s creditors) and the Greek government announced that they had finally reached an "agreement" on the basic structure of the restructuring (or the basic restructuring of the structure?).  Here’s the live blog update from The Guardian on Friday, which really stood out to me:  

A framework of the deal -- the basic structure of the bond swap that the Greek finance minister Evangelos Venizelos wants to present at Monday's eurogroup meeting -- has been accepted by both sides, "put in place" and I understand committed to paper. But it would also seem that other aspects of the agreement - be them legal, technical or matters of substance -- remain unresolved and will be discussed at negotiations that resume at 7:30pm local time [6.30 GMT] and look set to continue over the weekend. If Greece's massive €360 bn debt load is to be made manageable much will depend "on the inter-related role of all the interests at stake" insiders say. Even if a decisive agreement is reached, the proposal will have to be put to technocrats -- given the complexity of the deal -- and they could very likely change it again. "The outline won't be the end of the beginning but the beginning of the end," said another source again requesting blanket anonymity because of the delicacy of the talks.

That’s how these anonymous blankets, with their linear mindsets and scripts, really think about the process and justify the charade to everyone else who looks on in anticipation. We have not reached the end of the beginning, but the beginning of the end! Or is it really the beginning of the end of the beginning? Let’s just go ahead and say that the end is the beginning, which is also the end. It’s a circle, a cycle, a never-ending series of revolving points; an optical and psychological illusion of mass proportions.

 

 

Of course, not more than two hours after the live update from above, I stumbled across another live update from The Guardian that, in combination with all the reports over the course of just one week, was starting to make the Escher Stairs look like a straight, non-stop, round trip flight from Athens to Brussels and then back to Athens… and then back to Brussels.  

"At the risk of just adding to the confusion over what is or is not happening with the discussions between Greece and the private bondholders, CNBC is reporting no deal has been reached on the terms of a debt swap. Nor is there apparently a press conference planned for tonight. However that does not rule out the idea that a framework has been agreed, and further details will be hammered out over the weekend, as we reported earlier."

 

So now we should just be glad that we can’t "rule out" the possibility that a framework has been established to "hammer out" further details in upcoming days. What all of this really means is that there are way too many vested interests fighting over the pieces of the same wealth pie which is continuously dwindling in size, and it will take way too long for them to actually sign their names to an agreement that is suitable to all interested parties, as opposed to continuously cycling rumors of "progress" being made. But, alas, even the framework of a deal didn’t last past Saturday, as the parties involved kept making right turns until they came full circle to the point of "stalled talks". Here’s a report from Dow Jones on Saturday January 21, via ZeroHedge:

 

Greek Bondholder Talks Stalled, Agreement Unlikely By Monday Deadline Talks between Greece and its private sector creditors over a debt writedown plan appeared to stall Saturday as the banks' top negotiator left Athens amid signs of fresh disagreements over how much Greece would pay its bondholders in the future. Officials close to the talks said they may not conclude before a meeting Monday of euro-zone finance ministers where a second bailout which will keep Greece from defaulting is supposed to be discussed. Without a deal on the write-down of the debt held in private hands, the loan can't be released. Institute of International Finance chief Charles Dallara, who has been negotiating with Greek officials on the bond swap plan for the last two days, left Athens Saturday as hurdles remained over the interest rate the new bonds would pay private sector creditors. "Right now there are no talks. There will be consultations with the EU and the IMF to determine where we stand and then we'll see. It (negotiations) has again become complicated with the new demands over the coupon," said a person with direct knowledge of the talks.

And here’s Paul Anastasi and Farry White from The Telegraph with a similar report, except with a slightly more optimistic spin, courtesy of official "spokespersons" from the IIF and Greek government.

 

Greek debt deal hits setback as talks suspended Charles Dallara, managing director of the Institute of International Finance (IIF), a lobby group representing private creditors who have lent €47bn (£39bn) to the Greek government, has so-far failed to reach agreement on the key interest rate of the new bonds Greece will issue. Athens was anxious to strike a deal ahead of a meeting of eurozone finance ministers on Monday, which could have set in motion the paperwork and approvals necessary to give Greece its next tranche of aid, worth about €130bn. This will prevent a disorderly debt default when €14.5bn of Greek bonds mature in March. However, Greek government officials said on Saturday that the crisis talks had now been postponed for a few days. A spokesman for the IIF said that Mr Dallara had travelled to Paris for a long-standing social arrangement and his departure was "in no way a reflection on the talks". The talks have made "substantial" progress, the spokesman said, noting that Mr Dallara was in phone contact with the Greek prime minister and could return to Athens at any point. International private creditors have already accepted a 50pc "haircut" or loss of their investments in Greek bonds, a move that would cut €100bn from Greece's €360bn debt pile. However, the sticking points appear to be the term to maturity of the new replacement bonds and the rate of interest, or coupon, that they will pay. "We are now expecting a solution in a few days," the Greek government official said. "Nobody expects a failure, as that could raise the spectre of a default. But it would have been convenient to have wrapped things up this weekend, because of the simultaneous presence in Athens of the Troika.

 

Not much commentary necessary, right? "Back to the drawing board" would imply that they had actually managed to upgrade from the drawing board to some more concrete stages of action, so that doesn’t work. The talks allegedly continue, but the questions of about what, between whom and to what end are all blowing in the wind. These PSI talks, and the Eurozone in general, are still stuck in the depths of an Escher diagram, where every ounce of "progress" is simply a function of some Eurocrat and mainstream media outlet declaring it to exist.

No one wants to accept the fact that, until the entire system is fundamentally transformed (through disorderly collapse or otherwise), this vicious crisis cycle will never end. The Greek PSI negotiations are a perfect example of the hamster wheel that is Europe. In theory, it is both necessary and just for private creditors (mainly banks) to take large haircuts on the net present value of their Greek bond holdings. But as long as the "restructuring" is treated as a means to avoid outright default/bankruptcy, stabilize the structurally imbalanced Eurozone and continue business as usual in the future, it will fail to produce any meaningful results. You simply can’t satisfy all of the vested parties in a fundamentally broken and collapsing system. After a prolonged period of running around in circles, someone is bound to crash into someone else. The revolutions of the Euro Crisis Wheel are bound to spark an actual revolution that forces the system to do that which is unspeakable - change. It is now starting to look like the disorderly Greek default in March (there is no "orderly" version), which was always inevitable but never until now capable of being marked on a calendar, will be the event that sets that particular ball rolling. Let’s face it – even after a credit market "rally", the Greek government is paying close to 400% for a year’s worth of money. The hold outs in the PSI right now are the hedge funds who have loaded up on Greek bonds and CDS insurance, as they figure it is better for them to try and get paid out in full on one or the other than agree to "voluntarily" participate in the swap deal and relinquish their rights as bondholders. Indeed, this literal leverage has given them a degree of negotiating leverage that was certainly under-estimated by the mainstream until now. If they do not take place in the debt swaps, then they can avoid taking a haircut on their bonds, and if they are "coerced" into a restructuring by retro-actively inserted "collective action clauses" (allows a majority of creditors to override the minority), then the CDS most likely get triggered. On top of that, ZeroHedge just produced a lengthy and complex report that describes, among many other things, the various other implications of a retro-active change of local law.

 

Subordination 101: A Walk Thru For Sovereign Bond Markets In A Post-Greek Default World Before we, like Reuters and like JP Morgan, accept that even the local-law debt can be crammed down, we point readers to a seminal paper by none other than Lee Buchheit, the same one who is currently advising Greece on its bankruptcy negotiations (to call a spade a spade), called How To Restructure Greek Debt from May 2010, in which he says the following: [Buchheit] 'No country in Greece’s position would lightly consider a change of local law as an easy method of dealing with a sovereign debt crisis. The following factors, among others, counsel extreme caution before embarking on such a remedy. • If done once, future investors will fear that it could be done again. The debtor country may therefore be compelled in future borrowings (in which international investor participation is sought) to specify a foreign law as the governing law of its debt instruments. • A dramatic change in local law by one country might allow a worm of doubt to slip into the heads of capital market investors in other similarly-situated countries, driving up borrowing costs around the board. • The official sector supporters of the debtor country will presumably balk at any action of this kind that could unleash the forces of contagion and instability upon other countries whose debt stocks also contain predominantly local law-governed instruments. • The more dramatic or confiscatory the effect of the change of law, the higher the likelihood that it would be subject to a successful legal challenge.

The report also describes how a stripping of the creditor protections offered by Greek bonds issued under U.K. law, which contain CACs and have been accumulated by these holdout hedge funds, will probably have even more severe implications for sovereign bond markets around the world. We should also remember that no one really knows what the knock-on effects of CDS triggers would be throughout the global financial system, since it is entirely unclear how many billions worth of derivatives have been written on Greek debt. It’s really the space between a huge, jagged rock and a very hard place for just about everyone involved, as it has always been. Besides the two direct parties involved (Greece and its creditors), we also have the European Commission, ECB and IMF, who obviously don't want the Greek government to compromise to the point where no meaningful debt reduction is made and they are simply writing checks (endorsed by Western taxpayers) to both the Greek government and its bondholders for nothing in return. English language Katimerini reports a bit on this angle:  

Dallara suddenly leaves Athens Talks between Athens and the steering committee of private creditors concerning the Private Sector Involvement plan (PSI+) will resume by telephone on Sunday as the committee’s head, Charles Dallara, left Greece unexpectedly on Saturday. According to reports on Skai radio the International Monetary Fund, the European Commission and the European Central Bank are not happy with the provisional agreement between the Greek government and its private creditors, as they believe it does not secure the sustainability of the Greek debt. As a result Dallara, who is also the head of the Institute of International Finance flew to Paris on Saturday to discuss developments with lenders and funds which hold the bulk of the privately-held Greek bonds worth 206 billion euros. Finance Minister Evangelos Venizelos told reporters on Saturday that negotiations would continue on Sunday by phone. Both the IIF and the government have leaked that there is progress in the talks but any agreement would require the approval of Brussels, Berlin and the IMF. Sources suggest that the Greek side proposed to private creditors a 3.5 percent interest rate for bonds maturing by 2014, 3.9 percent for those maturing by 2020 and 4.6 percent for those expiring after 2021. There will be a 10-year grace period and the new bonds will be under British law. Reuters cited an unnamed source saying that "things are complicated, we are getting closer on the numbers but there is still quite some work ahead. An agreement is unlikely before next week, if there is an agreement at all.

For argument’s sake, though, let’s say the Troika, the Greek government and the holdout creditors manage to come back full circle (via telephone conference) to "progress" being made and a deal "nearly within reach" in the next night or two, and then put an actual deal to paper. What will that mean for the Euro Crisis Cycle? Simple – it will continue rolling on in a broader and more devastating fashion. First of all, Greek debt will still not be sustainable in any meaningful sense of that word, as this comprehensive report from Barclays makes clear (via ZeroHedge).  

Greek Debt Likely Unsustainable Even With Haircuts, Barclays Complete Q&A On PSI 6) Does the PSI in its current form make the Greek debt sustainable? The October Troika debt sustainability report highlights that the current PSI with nearly universal participation gets debt/GDP close to 120% by 2020. First, this number is still on the high side to conclude that Greek debt is sustainable. Second, the underlying macroeconomic assumptions by the October Troika report in terms of GDP growth and primary balance post-2015 are still optimistic (c.3.8% average nominal growth and average 4% primary balance). If these macroeconomic assumptions are reduced to a more realistic 2.5-3%, then the debt sustainability picture would look much worse. As seen in Figure 1, a 50% national haircut with 50% participation does not get Greece close to 120% debt/GDP by 2020, as envisaged even with the relatively optimistic macro economic assumptions of the Troika. Only if 100% participation is achieved would close to a 120% debt/GDP target be reached. For this reason, the Troika does not want to sacrifice universal participation and is determined to do whatever is necessary to maintain it. When worse macroeconomic assumptions are used, the notional haircut needed for a reasonably sustainable debt path is about 80%. Therefore, if Greece and the Troika go ahead with October summit broad parameters for the PSI, even with 100% participation Greek debt is not likely to be sustainable in the absence of substantial fiscal and structural adjustment by Greece in the years ahead.  

 

That's right - even if 100% of private creditors participated in the proposed debt swap arrangement for a 80% haircut to notional value (not going to happen!), Greece's debt would still remain at entirely unsustainable levels for many years to come (and that's assuming a 100-120% debt/GDP ratio is the threshold for sustainability). Secondly, the Greek situation is obviously only one piece of a much larger puzzle in Europe. Peter Tchir remarks on those other debt-swamped Eurozone countries who sure would love to have some "voluntary debt swaps" of their own.

Greek PSI Here We Come? Be Careful What You Wish For "So it looks like we should get an announcement sometime today about the proposed Greek PSI deal.  Yes, proposed, not finalized.  Asides from the obvious fact that there will be limited or no documentation for the deal, we still have no clue who has agreed to what. As far as I can tell, no one has given the IIF negotiators any binding power.  Obviously some of the institutions that the IIF negotiators are associated would have trouble not approving the "deal", but how many bonds do they really represent? I think this will be a relatively small portion of bondholders and then the real game begins.  The carrot and stick that the EU and ECB can use with other holders and the desire to maximize profits (or minimize losses) on the other side.  So far, this news seems to be acting inversely to the "downgrades" price action, as early front-running is meeting sell the news. If the terms of the deal being leaked are true, it will be extremely interesting to see what other countries do.  Not only will Greece receive a 50% notional reduction (except from the ECB and other "public" holders), but they will get very long dated money at very low rates.  Who wouldn't want that?  Why should Spain be going through semi-legitimate auctions when Greece can get longer dated money at lower rates?  Why should Portugal or Hungary bother with painful steps to reduce debt when the alternative is spend more, reduce debt via restructuring, and get lower rates on that reduced debt?"

 

There is absolutely no way that European private banks can afford to take another 50-100% haircut on the bonds of Portugal or Ireland on top of Greece, let alone Spain or Italy. Any attempts towards such an outcome would be even less "voluntary" than the Greek swaps, and that’s really saying something.  And who would even want to buy the bonds of these countries after the most coercive restructuring in history just took place? This time it was a few hedge funds that have brought us to the brink of potentially catastrophic debt deflation, next time (if there is one) it will be a much broader force of resistance.

 

 

The economic, financial and political divides within Europe will simply deepen to the point where the internal hemorrhaging overwhelms any and all top-down "solutions". So IF this Greek PSI deal is finalized soon, the IMF bailout money is disbursed and Greece gets through the next few months, the focus will simply shift back to those equally troubled and much bigger debt issuers across Europe (and perhaps the world). We’ll be right back at the end of the beginning or the beginning of the end, depending on which way the crisis propaganda decides to spin on any given day.