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Sunday, 26 July 2015

Reports Of Secret Drachma Plots Leave Tsipras Facing Fresh Crisis

On Friday, we brought you the

 shocking story 

of the rebellion that never was in Greece.

According to FT, Former Greek Energy Minister and maverick among mavericks Panayotis Lafazanis convened a “secret” meeting at the Oscar Hotel in Athens on July 14 at which he attempted to convince Syriza hardliners (including, in FT’s words, “supporters of the late Venezuelan president Hugo Ch├ívez [and some] old-fashioned communists”) to storm the Greek mint, seize the country’s currency reserves, and, if necessary, arrest central bank governor Yannis Stournaras.

Obviously, the plan was never implemented, but if the story is even partly true it betrays the degree to which Greece teetered on the edge of social upheaval and even civil war in the days that followed PM Alexis Tsipras’ decision to concede to creditors’ demands and abandon not only Syriza’s election mandate but the very referendum outcome he had himself campaigned for just days prior.

Now that Tsipras has succeeded in compelling Greek lawmakers to cede the country’s sovereignty to Brussels in exchange for the right to use the euro, tales of unrealized redenomination plots have come out of the woodwork so to speak, and now, in addition to the scheme described above and rumors that a return to the drachma was nearly financed by a loan from the Kremlin, we get a glimpse at yet another plan hatched behind the scenes, this time courtesy of a recorded conference call between Yanis Varoufakis and “members of international hedge funds.”

Here’s the story from Kathimerini:

Former Finance Minister Yanis Varoufakis has claimed that he was authorized by Alexis Tsipras last December to look into a parallel payment system that would operate using wiretapped tax registration numbers (AFMs) and could eventually work as a parallel banking system, Kathimerini has learned.

In a teleconference call with members of international hedge funds that was allegedly coordinated by former British Chancellor of the Exchequer Norman Lamont, Varoufakis claimed to have been given the okay by Tsipras last December – a month before general elections that brought SYRIZA to power – to plan a payment system that could operate in euros but which could be changed into drachmas “overnight” if necessary, Kathimerini understands.

Varoufakis worked with a small team to prepare the plan, which would have required a staff of 1,000 to implement but did not get the final go-ahead from Tsipras to proceed, he said.

The call took place on July 16, more than a week after Varoufakis left his post as finance minister.

The plan would involve hijacking the AFMs of taxpayers and corporations by hacking into General Secretariat of Public Revenues website, Varoufakis told his interlocutors. This would allow the creation of a parallel system that could operate if banks were forced to close and which would allow payments to be made between third parties and the state and could eventually lead to the creation of a parallel banking system, he said.

As the general secretariat is a system that is monitored by Greece’s creditors and is therefore difficult to access, Varoufakis said he assigned a childhood friend of his, an information technology expert who became a professor at Columbia University, to hack into the system. A week after Varouakis took over the ministry, he said the friend telephoned him and said he had “control” of the hardware but not the software “which belongs to the troika.”

Apparently, Varoufakis planned to take control of the computers first, then hack into the ministry’s software, steal the code, and design the parallel payments system. Here are excerpts from the call, again from Kathimerini, quoting Varoufakis:

“The prime minister before he became PM, before we won the election in January, had given me the green light to come up with a Plan B. And I assembled a very able team, a small team as it had to be because that had to be kept completely under wraps for obvious reasons. And we had been working since the end of December or beginning of January on creating one.

“What we planned to do was the following. There is the website of the tax office like there is in Britain and everywhere else, where citizens, taxpayers go into the website they use their tax file number and they transfer through web banking monies from the bank account to their tax file number so as to make payments on VAT, income tax and so on and so forth.

“We were planning to create, surreptitiously, reserve accounts attached to every tax file number, without telling anyone, just to have this system in a function under wraps. And, at the touch of a button, to allow us to give PIN numbers to tax file number holders, to taxpayers. 

“That would have created a parallel banking system while the banks were shut as a result of the ECBs aggressive action to deny us some breathing space.

“This was very well developed and I think it would have made a very big difference because very soon we could have extended it, using apps on smartphones and it could become a functioning parallel system and of course this would be euro denominated but at the drop of a hat it could be converted to a new drachma.

“But let me tell you – and this is quite a fascinating story – what difficulties I faced. The General Secretary of Public Revenues within my ministry is controlled fully and directly by the troika. It was not under control of my ministry, of me as minister, it was controlled by Brussels. 

Ok, so problem number one: The general secretary of information systems on the other hand was controlled by me, as minister. I appointed a good friend of mine, a childhood friend of mine who had become professor of IT at Columbia University in the States and so on.  I put him in because I trusted him to develop this.

“At some point, a week or so after we moved into the ministry, he calls me up and says to me: ‘You know what? I control the machines, I control the hardware but I do not control the software. The software belongs to the troika controlled General Secretary of Public Revenues. What do I do?’

“So we decided to hack into my ministry’s own software program in order to be able break it up to just copy just to copy the code of the tax systems website onto a large computer in his office so that he can work out how to design and implement this parallel payment system.

“And we were ready to get the green light from the PM when the banks closed in order to move into the General Secretariat of Public Revenues, which is not controlled by us but is controlled by Brussels, and to plug this laptop in and to energize the system.

In short, Varoufakis claims Tsipras had pre-approved the creation of secret accounts for every tax filer (which, knowing Greece, might have left Varoufakis short on accounts for quite a few citizens). Greeks would be made aware of the accounts’ existence in the event the banking system ceased to function altogether, and Athens would effectively facilitate payments through the new system in defiance of the EMU. Clearly, this would not have been well received by Brussels – especially the bit about hacking their software – but ultimately, because the new system would be entirely controlled by Varoufakis’ finance ministry, it could be converted to the drachma immediately.

Kathimerini goes on the quote Varoufakis as saying that German FinMin Wolfgang Schaeuble intended to use Grexit as leverage to force France into supporting a system that ceded fiscal decision making to Brussels (which would of course mean giving Berlin more say over EMU countries’ finances):

“Schaeuble has a plan. The way he described it to me is very simple. He believes that the eurozone is not sustainable as it is. He believes there has to be some fiscal transfers, some degree of political union. He believes that for that political union to work without federation, without the legitimacy that a properly elected federal parliament can render, can bestow upon an executive, it will have to be done in a very disciplinary way. And he said explicitly to me that a Grexit is going to equip him with sufficient bargaining, sufficient terrorising power in order to impose upon the French that which Paris has been resisting. And what is that? A degree of transfer of budget making powers from Paris to Brussels.”

The new revelations raise serious concerns for Alexis Tsipras. The deep divisions within Syriza are by now well publicized, but reports of covert plans to establish parallel banking systems using tax filers’ IDs and the idea that elements within the ruling party plotted to seize billions in currency reserves and take control of the central bank have left some lawmakers demanding answers. Here’s Reuters:

The center-right New Democracy party and the centrist To Potami and the Socialist Pasok parties, which all backed Tsipras in parliamentary votes on the bailout this month, demanded a response to the reports.

“The revelations that are coming out raise a major political, economic and moral issue for the government which needs in-depth examination,” it said in a statement.

“Is it true that a designated team in the finance ministry had undertaken work on a backup plan? Is it true they had planned to raid the national Mint and that they prepared for a parallel currency by hacking the tax registration numbers of the taxpayers?”


Tsipras thus finds himself in an extraordinarily difficult spot. Passing two sets of prior bailout actions through parliament cost him dearly on the political front as more than 30 Syriza MPs defected on both votes. This means he’ll be forced to rely on the support of opposition lawmakers to govern going forward or at least until he can call for elections and get a “clean start” after the third troika program is formally in place.

If Syriza’s political opponents come to believe that their efforts to back Tsipras on the way to keeping Greece in the euro are being subverted in secret by members of Tsipras’ own party, their support could dry up quickly leaving the PM with no support from either side of the aisle.

Given all of this, it’s easy to see why many analysts and commentators still believe that Grexit – and everything that comes with it both for Greece and for the EMU – is still the most likely outcome.

Rampant Corporatism: SCOTUS Justices Rule in Favor of Companies they Own Stock In, 90% of the Time

Chief Justice John Roberts and Associate Justices Stephen Breyer and Samuel Alito own shares in several publicly traded companies, according to their 2014 financial disclosure reports. From July 2014 through June 2015, seven cases before the Supreme Court featured amicus curiae ‒ or friend of the court ‒ briefs by companies in which the three justices were stockholders. These filings allow parties that will be affected by a ruling, but are not directly involved in a case, to introduce“relevant matter not already brought to [the Court’s] attention,” the Supreme Court rules read.

Justices are not obligated by law to disclose if they have relation to parties that act as amici ‒ Latin for “friends” ‒ although they have to sit out if they are involved with one of the named parties.

None of the three men recused themselves from the bench in any of those seven cases. On top of not recusing themselves, the three justices “sided with their amici 89 percent of the time, or eight out of nine times,” an analysis by Fix the Court, a non-partisan organization dedicated to increasing transparency and accountability by the Supreme Court, found (emphasis original).

In two of the cases, Nautilus v. Biosig Instruments and Obergefell v. Hodges, companies the justices invested in filed briefs for both sides. In the former, Cisco Systems, in which Breyer owns up to a $100,000 stake, filed an amicus in favor of Nautilus, while Nokia, in which Breyer owned stocks until June 2014 and Roberts owns less than a $15,000 stake, filed on behalf of Biosig. The Supreme Court unanimously found for Nautilus in the patent case.

How justices voted when they owned stock in a company filing an amicus brief.

How justices voted when they owned stock in a company filing an amicus brief., Free /

© Fix the Court

In Obergefell v. Hodges, in which the Supreme Court voted 5-4 to legalize same-sex marriage throughout the country, at least nine companies that were part of the three justices’ portfolios, filed amicus briefs supporting lead petitioner Jim Obergefell’s right to have his home state recognize his marriage to John Arthur, his partner of over two decades. Breyer once again sided with Cisco, while Roberts and Alito were part of the minority, siding against amici Microsoft ‒ in whichRoberts owns a stake valued between $250,000 and $500,0000 ‒ and DuPont, Johnson & Johnson, JPMorgan Chase, MillerCoors, Oracle, PepsiCo and Procter & Gamble ‒ all of which are part of Alito’s stock portfolio.

In ABC v. Aereo, Roberts and five others sided with amicus Time Warner, in which he owns up to $500,000 in shares. In Teva Pharmaceuticals USA v. Sanoz Inc, Breyer and Roberts sided with the majority in favor of amici EMC Corp. and Hewlett-Packard. In Limelight Networks v. Akami Technologies, all three sided with Limelight after Cisco, Oracle (owned by Alito) and Microsoft filed briefs. In Alice Corp. v. CLS Bank International, Roberts ruled in favor of CLS Bank, which was supported by two companies in his portfolio, Microsoft and HP.

Justices, like all federal judges, already sit out cases in which they have a conflict of interest, including when they own a financial stake in one of the involved parties. During the Supreme Court’s last term, which ended June 30, Breyer recused himself from a patent case in which Cisco was a named party. Roberts and Alito, however, did factor into the Commil USA v. Cisco Systems decision, siding with Cisco and its amici HP and Oracle.

Critics, like Fix the Court, are asking justices to either recuse themselves from cases in which there is even a hint of a conflict of interest or to place their stocks in a blind trust controlled by a third party so that they do not know in what companies they are stockholders.

 “Fix the Court is renewing its calls for Justices Roberts, Breyer and Alito to place their securities into blind trusts as long as they are on the bench,” the organization said. “We sent a petition signed by more than 2,400 activists to the court on July 20 asking just that.”

This solution would prevent the perception of a conflict, Fix the Court’s founder Gabe Roth told the New York Times

“There is no way to prove the conflict is real,” Roth said. “But it is the appearance of impropriety that is the problem.”

The legislative and part of the executive branches have already attempted to remove such appearances of impropriety. Under the provisions of the Stop Trading on Congressional Knowledge (STOCK) Act, passed in 2012, federal legislators, their aides and certain government agency officials are required to disclose their securities transactions within 45 days.

Greek Capital Controls To Remain For Months As Germany Pushes For Bail-In Of Large Greek Depositors

Two weeks ago we explained why Greek banks, which Greece no longer has any direct control over having handed over the keys to their operations to the ECB as part of Bailout #3's terms, are a "strong sell" at any price: due to the collapse of the local economy as a result of the velocity of money plunging to zero thanks to capital controls which just had their 1 month anniversary, bank Non-Performing Loans, already at €100 billion (out of a total of €210 billion in loans), are rising at a pace as high as €1 billion per day (this was confirmed when the IMF boosted Greece's liquidity needs by €25 billion in just two weeks), are rising at a pace unseen at any time in modern history.

Which means that any substantial attempt to bailout Greek banks would require a massive, new capital injection to restore confidence; however as we reported, a recapitalization of the Greek banks will hit at least shareholders and certain bondholders under a new set of European regulations—the Bank Recovery and Resolution Directive—enacted at the beginning of the year. And since Greek banks are woefully undercapitalized and there is already a danger of depositor bail-ins, all securities that are below the depositor claim in the cap structure will have to be impaired, as in wiped out. 

Now, Europe and the ECB are both well aware just how insolvent Greek banks are, and realize that a new recap would need as little as €25 billion and as much as €50 billion to be credible (an amount that would immediately wipe out all existing stakeholders), and would also result in a dramatic push back from local taxpayers. This explains why Europe is no rush to recapitalize Greece - doing so would reveal just how massive the funding hole is.

However, with every passing day that Greece maintains its capital controls, the already dire funding situations is getting even worse, as Greek bank NPLs are rising with every day in which there is no normal flow of credit within the economy.

This has led to a massive bank funding catch-22: the longer capital controls persist, the less confidence in local banks there is, the longer the bank run (capped by the ECB's weekly ELA allotment), the greater the ultimate bail out cost, and the greater the haircut of not only equity and debt stakeholders but also depositors.

To be sure, we have explained this dynamic consistently over the past several months. Now it is Reuters' turn, which reports this morning that, far from an imminent end to capital controls, Greeks will be unable to access their full funds for months, if not years:

Greek banks are set to keep broad cash controls in place for months, until fresh money arrives from Europe and with it a sweeping restructuring, officials believe.

But as explained previously, new money will only arrive if and when the same banks suffer a confidence crushing stakeholder and/or a depositor bail in:

Rehabilitating the country's banks poses a difficult question. Should the euro zone take a stake in the lenders, first requiring bondholders and even big depositors to shoulder a loss, or should the bill for fixing the banks instead be added to Greece's debt mountain?

And here is Reuters' realization of how our readers have known for months is a huge feedback loop dynamic:

Answering this could hold up agreement on a third bailout deal for Greece that negotiators want to conclude within weeks. The longer it takes, the more critical the banks' condition becomes as a 420 euro ($460) weekly limit on cash withdrawals chokes the economy and borrowers' ability to repay loans.

"The banks are in deep freeze but the economy is getting weaker," said one official, pointing to a steady rise in loans that are not being repaid.

Also last week Fitch calculated a Greek NPL number which we first suggested was accurate to much disagreement by the mainstream: it is now accepeted that more than half of all Greek loans are likely to be non-performing.

Fitch noted that the total amount proposed of 25 billion euros for the Greek bank recap is sufficient unless deferred tax assets stop being considered as core capital. According to Fitch, 45 percent of the four systemic lenders’ core capital consists of deferred tax assets. The agency estimated the capital requirements at 11.2 billion euros on the condition that nonperforming loans amount to 52 percent of loan portfolios, while the adverse scenario seeing bad loans at 60 percent would entail capital needs of 15.9 billion euros.

A 60% NPLs on €210 billion in loans would mean that up to 30% of Greek deposits of about €120 billion currently would be wiped out, or "bailed-in."

And that is the optimistic scenario. The likelihood is that the Greek economy has collapsed to a level where nobody is paying their loan interest or maturity. As such as an even greater NPL percentage is now quite probable. But one thing is certain: with every passing day in which Greece does not have a viable resolution of its banks, the NPLs will keep rising, and the ultimate deposit haircut will be that much greater.

As a result Germany is already demaning a bail-in of large depositors, those holding over the "insured" threshold of €100,000 with Greek banks, in a repeat of the Cyprus depositor bail-in template.

"We want, if possible, an initial amount to be ready for the first needs of the banks," said one official at the Greek finance ministry, who spoke on condition of anonymity. "That should be about 10 billion euros."

Others, including Germany, however, are lukewarm and could push for losses for large depositors with more than 100,000 euros on their accounts, or bondholders.

The amount of large depositors in Greece is about €20 billion according to Reuters calculations (far greater than the €3 billion in bonds issues which will certainly be wiped out in any major recap), which suggests that if a bail-in takes place, then some depositors with savings of less than €100,000 will also have to be impaired.

Furthermore, as we also explained a month ago, unlike in Cyprus where the biggest depositors were Russian billionaire oligarchs, who had zero leverage and even less sympathy with Europe's depositors, in Greece the situation could not be more different especially since the local shipping magnates keep the bulk of their cash overseas:

Imposing a loss, something the Greek government has repeatedly denied any planning for, would be controversial, not least because much of this money is held by small Greek companies rather than wealthy individuals.

"This is not like Cyprus where you can say these are just Russian oligarchs," said an insolvency lawyer familiar with Greece. "It's the very community everyone is hoping will resuscitate Greece, namely the corporates. You'll end up depriving them of their cash."

None of this should be a surprise either: recall in June 2013 we explained that "Europe Make Cyprus "Bail-In" Regime Continental Template." But while the French member of the ECB, Christian Noyer, is against depositor bail-ins, Germany is all for it:

The tone in Berlin is different, where some advocate not only that bank creditors foot the bill but also that the ESM steer clear of any direct stake, lumbering Athens with the banks' clean-up.

"The recapitalization will have to be done by the Greek government so that means more money in the third program," said Marcel Fratzscher, president of the Berlin-based German Institute for Economic Research. "It's a loan they have to repay but there is no risk-sharing on the European side. They will have to bail in the private creditors. I can't see how this could not happen."

The most likely outcome for the Greek banks is a wholesale bailout by the ESM. That, however, comes with major strings attached:

One option, according to euro zone officials, is the direct recapitalization of Greece's banks by the euro zone's rescue fund, the European Stability Mechanism (ESM).

This could grant the Luxembourg-based authority a direct stake in the banks and greater control over their future.

That, however, would take Greece closer to the Cyprus model. Any such direct ESM aid requires that losses first be imposed on some of the banks' bondholders and even large depositors.

So Greece is damned if it does, and damned if it doesn't.

And here is why we made such a big deal of Greece handing over controls of its banks to the ECB as we reported in mid July: 

To avoid such orders, Athens is battling to keep autonomy in deciding the fate of its banks. Ceding further control could cost it dearly. Bondholders are nervous.

Alas, Greece already ceded control, remember: that was one of the main conditions for the Third Greek bailout, all of which we explained on July 13 in "Greece Just Lost Control Of Its Banks, And Why Deposit Haircuts Are Imminent."

At this point the only leverage Greece may have, having squandered all of its true leverage when it decided not to pursue a "parallel-currency" system after the Referendum, is mere empathy with the rest of Europe's population; however with its ruling socialists backtracking on all their promises and in fact pushing Greece into an austerity program harsher than anything seen yet, not even the leftist parties in Europe care any more if Tsipras' government survives.

Indeed, Reuters summarizes the situation quite well when it says that "with its economy starved of cash and the threat of its departure from the euro zone hanging over talks, Athens' room for maneuver is limited. One euro zone official summarized the mood: "Whatever sympathy there was for Greece has evaporated."

Which is indeed the truth, and this time, Greece only has itself to blame.

BRICS Bank, AIIB Pledge Partnership, Loans To Be Issued In Yuan

Over the first half of the year, we’ve built on several narratives that we believe are critical when it comes to understanding how the intersection of geopolitics and economics is set to shape the world going forward.

One of these narratives revolves around the extent to which three China-led ventures are set to supplant traditionally dominant supranational lenders on the way to embedding the yuan in international trade and investment. 

The new ventures are the BRICS bank, the Asian Infrastructure Investment Bank, and the Silk Road Fund. We’ve discussed each of these at length and we’ve also shown that in one way or another, they all represent a shift away from the multilateral institutions that have dominated the post-war economic order. 

In short, they are a response not only to the IMF’s failure to provide the world’s most important emerging economies with representation that’s commensurate with their economic clout, but also to the perceived shortcomings of the IMF and ADB. In other words, they are far more than a new foreign policy tool for Beijing to deploy on the way to cementing its status as regional hegemon.

The role of these new institutions in helping the yuan to replace the dollar as the world’s reserve currency (something which many still claim is an absurd proposition despite all evidence to the contrary) was made clear when, in April, we noted that although Beijing has sought to play down the degree to which the ventures will serve to help establish a new world economic order with China at the helm, the fact that Beijing "may encourage the $100b AIIB and $40b Silk Road Fund to issue loans directly in yuan" (via Bloomberg) and the fact that "the AIIB will establish a currency basket with China set to push for the yuan to take a prominent role" (via The South China Morning Post) suggested otherwise.

Now that the AIIB and the BRICS bank have officially launched (see here and here) and are expected to begin operations soon, it appears that not only will the yuan play a key role for both lenders, but in fact, the two development banks may effectively merge. Here’s more via The BRICS Post:

The BRICS New Development Bank will name its first investment in April next year and the first loan will be issued in yuan not dollar, top officials confirmed.

The first president of the Bank, Kundapur Vaman Kamath said in Shanghai that the new lender will work closely with the China-led Asian Infrastructure Investment Bank.

"We have partnerships that we will forge with the AIIB, the national loan banks and indeed, the existing market loan banks," he said.

The NDB with about $50 billion in capital to invest in public infrastructure will compete with institutions where the US has considerably more influence—organizations such as the World Bank and the International Monetary Fund.

The paid-in reserves are planned to be denominated in each country’s currency. The Chinese renmimbi is also expected to replace the dollar at the BRICS Bank, especially for projects in Asia.

And that is your de-dollarization du jour. While the IMF (and by extension, Washington) bickers with Berlin about just what went wrong with Greece's first two bailouts and whether or not the third iteration is feasible without massive writedowns, the world's new multilateral institutions are busy planning to make development loans in yuan. We'll close with the following quote from Nomura's Richard Koo:

It is difficult to say at this point whether the AIIB will have a negative or a positive impact on the global economy. At the very least, however, the emergence of an international institution with a viewpoint different from that of western creditors will help enhance the quality of debate over emerging economies’ debt problems.