Grexit?, BIS Warning, Chinese Market Crash & Systemic Risk Shake the Global Economy

- Persistent low rates leave central banks with no ammunition to fight next crisis
- BIS says short-sighted central banks and governments contributed to current weaknesses
- Lack of policy options have forced some central banks to stretch “boundaries of the unthinkable”
- Bust in developed economies the main risk facing global economy
- Greece prepares to default
- China markets routed overnight
- Gold will be last man standing when currencies collapse

Greeks line up to an ATM in a run on Greek banks

Greece embarked on capital controls as talks over the weekend between Tsipras’ leftist government and foreign lenders fell apart.

All banks and the Greek stock exchange are closed today. Greek citizens cued in long lines at ATMs or cash machines over the weekend and a run on the banks left most ATMs empty. There is a €60 limit on withdrawals from cash machines under strict capital controls. The ATMs will reopen tomorrow. Citizens are also lining up for petrol and food.

Central banks have run out of options to deal with the next global financial crisis the Bank of International Settlements (BIS) has warned in its annual report. Failure to make difficult policy decisions and raise rates throughout the “recovery” have left central banks with no stimulus options with which to juice the economy when the next downturn arrives.

The BIS, which is central bank of the central banks based in Basel, Switzerland, points to the short-sighted policies of governments and national central banks over the past few years who preferred to try keep their economies afloat using excessive debt rather than take unpopular steps to reform their economies.

Dangerously low interest rates for too long by Central Banks

The Telegraph puts it thus:

“The BIS claimed that central banks have backed themselves into a corner after repeatedly cutting interest rates to shore up their economies. These low interest rates have in turn fuelled economic booms, encouraging excessive risk taking. Booms have then turned to busts, which policymakers have responded to with even lower rates.”

“Rather than just reflecting the current weakness, they may in part have contributed to it by fuelling costly financial booms and busts and delaying adjustment. The result is too much debt, too little growth and too low interest rates…In short, low rates beget lower rates,” according to Claudio Borio, who heads the monetary and economic department at the BIS.

The BIS is critical of the low interest rate environment and is, apparently, appalled by the actions of some central banks – namely, those of Switzerland, Sweden and Denmark – who have introduced negative interest rates which it describes as “stretching the boundaries of the unthinkable”.

The organisation rejects the argument that the current status quo of very low rates is some kind of “equilibrium”. Jaime Caruana, General manager of the BIS says:

“True, there may be secular forces that put downward pressure on equilibrium interest rates … [but] we argue that the current configuration of very low rates is neither inevitable, nor does it represent a new equilibrium”.

Low rates are gradually whittling away the balance sheet of banks as low rates are a disincentive to savers, particularly when the cost of many necessities is rising.

The greatest threat facing the global economy today is another bust in developed economies according to the bank. Persistent low rates may “inflict serious damage on the financial system”.

Economies driven by excessive debt, rather than productivity, has caused labour to migrate into less productive sectors of the economy which would not have survived the bust had authorities not intervened. Productivity in the west is therefore weaker than it should be in a recovery.

The report cites Greece as an example of this type of mismanagement where a “toxic mix” of “private and public debt being used as a solution to economic problems, rather than making the proper commitment ‘to badly needed’ structural reforms” as the Telegraph puts it.

The release of the report coincides with Greece preparing to default and a major stock market correction in China. Indeed the crisis to which the BIS says the central banks have no solutions may already be upon us.

An acknowledged default of Greece will trigger credit default swaps in the opaque derivatives market. If a major bank – such as Deutsche Bank, with its enormous derivatives exposure that dwarfs the GDP of Germany – were caught on the wrong side of a trade, we would be immediately in the midst of a truly unprecedented global crisis.

At the same time China is experiencing major difficulties as its stock markets have doubled in the past year and now has shed over 21% of its value in recent days.

It seems certain that a new crisis is imminent. When the public finally lose faith in central banks and the money they print, currencies will rapidly devalue. Holding an allocation of physical gold outside the financial system will prove to be valuable insurance.

Please Read: Gold Is a Safe Haven Asset

MARKET UPDATE

Today’s AM LBMA Gold Price was USD 1,176.50 , EUR 1,060.82 and GBP 749.10 per ounce.
Friday’s AM LBMA Gold Price was USD 1,174.40, EUR 1 ,048.38 and GBP 745.89 per ounce.

Gold rose $1.00 or 0.09% percent Friday to $1,174.10 an ounce. Silver slipped $0.07 or 0.44 percent to $15.80 an ounce. Gold and silver both fell last week at 2.22% and 1.92 percent respectively.

Gold in U.S. Dollars – 5 Day

Gold in Singapore for immediate delivery climbed 0.7 percent to $1,183.18 an ounce near the end of the day.

The yellow metal rose today as investors piled into safe haven assets as the Greek debt crisis took a turn for the worse over the weekend and a Grexit appear imminent.

U.S. gold futures also climbed 1 percent to a session high of $1,187 before capping gains. Silver rose nearly 1 percent along with gold.

Riskier assets fell such as U.S. equity futures, Asian stock markets and the euro fell as investors made a beeline into safe-haven assets like gold and silver.

Friday’s U.S.CFTC data showed speculators upped bullish bets in COMEX gold futures and options and switched to a net short position in silver for the week ending June 23.

In Asia, the People’s Bank of China slashed its one-year lending rate by 25 basis points to 4.85 percent,  and lowered the amount of reserves certain banks are required to hold by 50 basis points. This has been its fourth cusince November. The central bank also decreased its one-year deposit rate rate by 25 basis points to 2.0 percent.

In late morning European trading gold is up 0.09% or $1,176.38 an ounce. Silver is up 0.05 percent at $15.80 an ounce, while platinum is off 0.94 percent at $1,067.88 an ounce.

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Submitted by Howard Kunstler via Kunstler.com,

“The problem with the post-2007 world is that we are not in a cyclical recovery; we are in a structural depression defined as a sustained period of below-trend growth with no end in sight. The U.S. has caught the Japanese disease. Structural depressions are not amenable to monetary solutions, they require structural solutions.”
–James Rickards

Can anyone stabilize this bitch? At daybreak, anyway, the Federal Reserve governors were all bagging Z’s in their trundle beds. Maybe after a few pumpkin lattes they’ll jump in and tell their trading shills to BTFD. The soma-like perma-trance among those who follow markets and money matters appears to be ending abruptly with the recognition that sometimes robots and humans alike run shrieking to the exit. A pity when they get to the door and discover it opens onto a cliff-edge. Look out below.

All this trouble with money comes from one meta problem: aggregate industrial growth has ended. It has stopped more in some parts of the world than others, while in the USA it has actually been contracting. The cause is simple: the end of cheap energy, oil in particular. At over $70-a-barrel the price kills economies; under $70-a-barrel the price kills oil production. The bottom line is that, in the broadest sense, the world can no longer count on getting more stuff, except waste, garbage, political unrest, and the other various effects of entropy. From now on, there is only less of everything for a global population that has not stopped growing. The folks on-board are still having sex, of course, which has a certain byproduct.

This dynamic was plain to see a decade ago, but the people who run finance and governments thought it would be a good idea to maintain the appearance of growth via the usufruct mechanisms of central banking: ZIRP, QE, market intervention, and universal accounting fraud. It’s not working so well. Debt was generated in place of the missing growth, and now there is too much of it that can’t be repaid on a coherent schedule. Many nations, parties, and entities are in trouble with debt and the prospective defaults are starting to pile up like SUVs on a fog-bound highway. Greece is just the first one fishtailing into a guard-rail.

The magic moment will come when it becomes obvious that these systemic quandaries have no solution. The system itself is programmed for implosion, in particular and most immediately the banking sector, where most of the untruth and illusion is lodged these days. As it stands exposed, the people are compelled to shake off their faith in what it represents: order, authority, trust. Institutions fail and each failure acts as a black hole, sucking air, light, and even time out of the system.

In the natural course of things, structural reform can occur, but that natural course entails some degree of disorder and loss. If Deutsche Bank or Goldman Sachs founders a lot of people will be living in their cars — a first stop perhaps to not living at all. Sooner or later, though, the survivors will all have to live differently. Structural reform means, for instance, that you can no longer count on getting food the way you were used to getting it. No more 3000-mile Caesar salads and take-out tubs of Kung Po Chicken. That will be very traumatic in the early going. Eventually in the places where it is possible to grow food on a smaller scale, it will be done. Maybe not so much in the Central Valley of California anymore, but in other places: Ohio, Michigan, even New Jersey (“the garden state”). And once grown, it will be sold by means that differ from the supermarket.

Americans think that WalMart and its brethren are here to stay. They’re mistaken. Structural reform means reorganizing many layers of commerce around town centers — Main Streets — while the disintegrating strip malls await the salvage crews. Are we ready for that? Rebuilding local economies would put a lot of people back to work doing real things. All the blabber about “job creation” for the moment is only about increasing the share price of predatory corporations and the bonuses of their mendacious executives. Will the world miss them? Can we still make some things and move them around and put them up for sale? I think so.

Are you disturbed about the pervasive racketeering in health care (so-called) and higher education? Well, those grifts are eating themselves alive. Structural reform probably means far fewer and smaller colleges and far more and smaller local clinics free of the stupendous insurance chicanery that mystifies the public while it swindles them. There will be a lot of useful work for people who want to take care of other people, and certainly fewer MRIs.

Do you fear the end of mass motoring and the suburban infrastructure that it operates in? Maybe your children and their children will be happier in walkable neighborhoods — outlandish as that sounds. There is a hell of lot of rebuilding to do. It may not involve materials like strand-board and vinyl siding, but the newer and smaller buildings will probably last a whole lot longer and look better. And a lot of hands will be needed to do the work.

Will we ever again know banking on the JP Morgan scale? Not on any horizon I can imagine. But there are other ways to establish mediums of exchange, stores of value, and pricing mechanisms. You can be sure that banking will never again occupy 40 percent of gross economic activity in this land.

Today may not be the true event horizon for our diseased status quo, but it is probably, at least, the coming attraction trailer. Try not get puked on.

Spin revolving door, spin. 

Recently “retired” Dallas Fed chief Richard Fisher — who really, really believed that talk of falling oil prices negatively affecting the Texas economy amounted to “bull droppings” until a JP Morgan analyst reminded him that the “only thing dropping in the Texas economy [was] jobs” — is following proudly in the footsteps of Ben Bernanke, Jeremy Stein, and Janet Yellen (if you count unofficial, off-the-record ‘consultations’) by becoming the latest Fed policymaker to ink a lucrative deal ‘advising’ the private sector.

As WSJ reports, Fisher will become a “senior advisor” to Barclays starting on July 1:

Barclays PLC on Monday named Richard Fisher, who recently retired from his post as head of the Federal Reserve Bank of Dallas, as senior adviser at the bank.

 

 

“His exceptional knowledge and extensive experience in monetary policy, financial markets and services, global trade negotiations and regulatory matters will be of tremendous value to Barclays and to our clients,” said Tom King, who is chief executive of the investment bank at Barclays.

Yes, we imagine it will.

Also of “tremendous value” to the bank (which, you’re reminded, somehow managed to get itself involved in each and every financial scandal that’s come to light over the past half decade or so) will be Fisher’s connections and pull, because as we’ve seen time and again with Deutsche Bank and the SEC, the next best thing to installing former employees in key regulatory and policymaking roles is having former regulators and policymakers on the payroll. And he'll be a particularly handy guy to bounce ideas off of for anyone at the bank who covers AT&T or Pepsi. 

This would be appalling if it weren't so commonplace.

About the only thing worse would be if a former Fed Chair joined the world's most influential, highly leveraged HFT hedge fund. Oh, wait...

Submitted by Ben Hunt via Salient Partners' Epsilon Theory blog,

 Nothing like a good Friday-after-the-close blockbuster to set the stage for an interesting week.

At 1am Saturday morning Athens time, the Greek government called for a nationwide referendum to vote the Eurogroup's reform + bailout proposal up or down. The vote will happen on Sunday, July 5th, but Greece will default on its IMF debt this Wednesday, and as a result the slow motion run on Greek banks is about to get a lot more fast motion unless capital controls are imposed. If you want to get into the weeds, Deutsche Bank put out a note, available here, that I think is both a well-written and comprehensive take on the facts at hand. As for the big picture, I've attached last week’s Epsilon Theory note ("Inherent Vice"), as this referendum is EXACTLY the sort of self-binding, "rip your brakes and steering wheel out of the car" strategy I wrote about as a highly effective way to play the game of Chicken.

Look, I have no idea whether or not Tsipras will be successful with this gambit. But I admire it. It’s a really smart move. It’s a wonderful display of what de Tocqueville praised as the “condition of semi-madness” that was so politically effective in 1848, and I suspect will be today. Plus, you can’t deny the sheer entertainment value of hearing Dijsselbloem splutter about how he was open to a revised, revised, Plan X from Greece all along, if only Tsipras would continue with this interminable charade. “The door was still open, in my mind.” Priceless.

So long as Tsipras can avoid market anarchy and TV coverage of violent ATM mobs this week, I think the NO vote is likely to win. The referendum is worded and timed in a way that allows very little room for Antonio Samaras and other Syriza opponents to turn the vote into a referendum on the Euro itself, which has proven to be a successful approach in the past. Particularly as the Eurogroup rather ham-handedly denied the request for a one-week extension in the default deadline, the referendum is being framed by Syriza as what Cormac McCarthy called a “condition of war”, an over-arching game where “that which is wagered swallows up game, player, all.” It may well be a close vote, but it’s hard to vote YES for a public humiliation of your own country under any circumstances, much less when that YES vote is being portrayed as giving aid and comfort to the enemy.

Here’s how I see the game playing out after the vote.

If Greece votes to accept the Eurogroup reform proposal after all, then the game of Chicken resolves itself within the stable Nash equilibrium of a shamed Greece and a triumphant Euro status quo. I would expect an enormous risk-on rally in equities and credit, particularly in Euro-area financials. Hard to say about rates ... peripheral Euro debt (Italy, Spain) should rally, and German Bunds might, too, as the Narrative will be that Germany "won". But reduction of systemic risk is a negative for any flight-to-safety trade, so this outcome is probably not good for Bunds in the long term, or US Treasuries over any term.

If Greece votes to reject the proposal, then either the game resolves itself within the stable Nash equilibrium of a shamed Euro status quo and a triumphant Greece (if the ECB and EU decide to cave to some form of the original Greek proposal), or we enter the death spiral phase of a game of Chicken, as all parties start to talk about how they “have no choice” but to crash their cars. That latter course is the far more likely path, I think, given how the various Euro Powers That Be are already positioning themselves. It’s all so very 1914-ish. Draghi’s cap on bank-supporting Emergency Liquidity Assistance (ELA) is the modern day equivalent of Czar Nicholas II’s troop mobilization. Good luck walking that back.

If we go down the death spiral path and some form of Greek exit from the Euro-system, I expect the dominant market Narrative to be that Greece committed economic suicide and that the rest of Europe will be just fine, thank you very much. That should prevent a big risk-off market move down, or at least keep it short-lived (although you should expect Bunds and USTs to do their risk-off thing here). Unless you’re a hedge fund trying to make a killing on those really cheap Greek bonds you bought two years ago, there’s no reason to panic even if we’re on the death spiral.

Over time, however, I expect that dominant Narrative to be flipped on its head. Greece will quickly do some sort of deal with Russia (hard currency for port access?), and then the IMF will strike a deal because that's what the IMF does. More and more people will start to say, "Hey, this isn't so bad", which is actually the worst possible outcome for Draghi and Merkel. At that point, you’ll start to see the Narrative focus on the ECB balance sheet and credibility, and as Italian and Spanish rates start to creep up and as the spread to Bunds starts to widen, people will recall that ECB QE only has national banks buying their own debt ... the Bundesbank ain't propping up Italian sovereign debt. I suspect it will be a slow motion contagion, all taking place in the Narrative and expressed in Italian, Spanish, and French politics over the next 12 months or so.The Red King will start to wake.

One last point on how the market Narrative will shift if we go down the death spiral path, and that’s the dog that will stop barking. The incessant and often silly focus on Fed “lift-off” is about to go on summer hiatus, which can’t happen soon enough for me.

• EU in last-ditch bid to Greece, urges "yes" vote to bailout (Reuters)
• In? Out? In between? A Greek legal riddle for EU (Reuters)
• Tsipras Says EU Won’t Eject Greece as Cost ‘Immense’ (BBG)
• Empty Greek ATMs Force Tourists to Stiff Santorini Cabbies (BBG)
• Anti-austerity protests in Greece as bank shutdown bites (Reuters)
• Puerto Rico governor calls for bankruptcy; adviser says island 'insolvent' (Reuters)
• Puerto Rico Urges Concessions From Creditors (WSJ)
• Beijing works to calm tumbling stock market (FT)
• Hilsenrath - For Fed to Delay Rate Hikes, Global Tumult Would Need to Infect U.S. (WSJ)
• Draghi’s ‘Whatever It Takes’ Drives Euro Gains Amid Greek Crisis (BBG)
• How Global Threats Have Crowded Obama’s Diplomacy Agenda (WSJ)
• Uber Bonds Term Sheet Reveals $470 Million in Operating Losses (BBG)
• Foreign Grad-School Applications Rise, Driven by Indian Candidates (WSJ)
• Willis Group, Towers Watson Agree to $18 Billion Merger (BBG)
• High Court Strikes Down EPA Limits on Mercury Emissions (WSJ)
• Blackstone and BlackRock Are Getting Into Each Other’s Business (BBG)
• China drafts rules to give pension funds access to stock market (Reuters)
• Iran Talks to Miss Deadline as Officials Say Deal’s Within Reach (BBG)

Overnight Media Wrap

WSJ

* The Supreme Court dealt a setback to the Obama administration's environmental agenda by rejecting the first-ever rules requiring power plants to cut mercury emissions and other toxic air pollutants. (http://on.wsj.com/1g4HByu)

* The Supreme Court on Monday upheld Arizona's method of drawing congressional district lines, giving new life to a tool designed to end partisan gerrymandering. (http://on.wsj.com/1eVJZan)

* The California Senate on Monday passed a much-debated bill to restrict vaccine exemptions, putting one of the country's strongest state-level efforts to clamp down on unvaccinated students in the hands of Governor Jerry Brown. (http://on.wsj.com/1GJkI9g)

* Trian Fund Management has built a stake of 7.24 percent in Pentair Plc, a maker of pumps and valves, and is asking the company to consider buying up rivals. (http://on.wsj.com/1efMpQp)

* The Supreme Court denied Google Inc's attempt to overturn a ruling in favor of Oracle Corp in a closely watched case over software copyrights. (http://on.wsj.com/1dsZTHI)

* Sysco Corp abandoned its planned acquisition of rival US Foods Inc following a federal judge's ruling against the deal, forcing the food-distribution giant to find a new strategy for its future that is likely to include smaller acquisitions. (http://on.wsj.com/1LEZalu)

FT

Former Xstrata boss Mick Davis' X2 Resources is in "serious" talks to purchase some of Rio Tinto Plc's Australian coal assets.

German prosecutors have launched preliminary inquiries into the roles individuals may have played in connection with Deutsche Bank's participation in the interest rate-rigging scandal.

Uber has confirmed that two of its most senior executives in France have been held in police custody in relation to a complaint filed last year by one of the country's taxi unions.

Chancellor George Osborne has announced help for British pensioners living in Greece and support for exporters that were impacted by the crisis in Greece. Osborne also advised British tourists to carry hundreds of euros in cash while travelling to Greece

NYT

* Beyond Greece and Puerto Rico, high borrowing is also bogging down the globally significant economies of Brazil, Turkey, Italy and China. (http://nyti.ms/1g4wRjt)

* Seeking to calm a whirlwind of uncertainty that has battered global markets, opened deep fissures in European unity and threatened to push Greece out of the eurozone, European leaders insisted on Monday that a deal was still possible to settle Greece's spiraling debt crisis. But they gave no indication that this could happen before Athens runs out of cash to pay loans due on Tuesday. (http://nyti.ms/1Jm5g75)

* Limited to withdrawing 60 euros a day, Greece's citizens must decide how to vote in a referendum that could determine whether they abandon the currency. (http://nyti.ms/1Jm2yyt)

* Puerto Rico's governor, saying he needs to pull the island out of a "death spiral," has concluded that the commonwealth cannot pay its roughly $72 billion in debts, an admission that will probably have wide-reaching financial repercussions. (http://nyti.ms/1GLP5N8)

* The SEC on Monday said that private equity giant Kohlberg Kravis Roberts & Company breached its fiduciary duty when it passed along more than $17 million in "broken deal" expenses to its investors. The action is expected to lay the groundwork for similar cases in the coming months. (http://nyti.ms/1dtNdAd)

Canada

THE GLOBE AND MAIL

** WestJet Airlines Ltd says six passengers sustained injuries during an emergency evacuation when one of its flights was diverted to Winnipeg on Monday night due to what the company has only termed "a threat". (http://bit.ly/1GJJbLC)

** Ottawa has warned Canadians travelling to Greece to expect long lines at ATMs amid a shortage of hard currency throughout the country, and to have more than one means of payment, including enough cash to cover all travel expenses. (http://bit.ly/1egg23R)

** The Grain Farmers of Ontario has gone to court to delay the implementation of restrictions on the use of pesticides some blame for the decline in populations of bees and other pollinators. (http://bit.ly/1LFqNLj)

NATIONAL POST

** Quebec Premier Philippe Couillard officially launched the Liberal's maritime strategy on Monday, presenting a blueprint for an estimated C$9 billion ($7.27 billion)in investments over the next 15 years to develop industry and commerce in the province along the St. Lawrence River to where it meets the Atlantic Ocean. (http://bit.ly/1FN7M1h)

** Liberal Leader Justin Trudeau has unveiled his environmental platform, saying he would work with the provinces to put a price on carbon pollution if he becomes Canada's next prime minister. (http://bit.ly/1IpEOee)

** Porter Airlines has been fined C$150,000 for violating the CRTC's anti-spam legislation. The CRTC says the Toronto-based airline has agreed to pay the fine for sending emails without an unsubscribe button or one that was clearly labelled. (http://bit.ly/1GWAWPC)

China

 SECURITIES JOURNAL

- The upward trend in China's stock market has not changed given a growing economy, ample liquidity and expectations of further reform policies, the newspaper said in a commentary, citing analysts.

21st CENTURY BUSINESS HERALD

- China's economic growth could be 6.96 percent in the first half of this year and 6.97 percent in the whole year, said Wang Hongju, director of the Chinese Academy of Social Sciences, adding the nation could continue to cut interest rate in the next six months.

- Approvals by the National Development and Reform Commission for infrastructure project investment in June hit 250 billion yuan ($40.27 billion), according to the newspaper's calculations.

Britain

The Times

The Bank of England's chief economist has warned that an interest rates rise could damage Britain's fragile economic recovery. Andy Haldane will use a speech on Tuesday to say that the prospect of a rise in rates is just as likely as a cut, as he lays out his argument for why consumers and businesses would struggle. (http://thetim.es/1JtH7ys)

Sterling touched a 7-1/2-year high against the euro yesterday as rattled investors reacted badly to the breakdown of talks between Greece and its creditors. (http://thetim.es/1GVZCaV)

The Guardian

Tate & Lyle has given its new finance director, Nick Hampton, 700,000 pounds ($1.10 million) in shares, after the company's poor performance made it unlikely he would collect the full share bonus he had expected when he joined the company. Nick Hampton was promised 2.6 million pounds in shares, but one portion of that has been replaced following a fall in the company's market value. (http://bit.ly/1JljBAJ)

British Secretary of State for Business Sajid Javid on Monday night criticised the Confederation of British Industry's stance over the European Union referendum, overshadowing the appointment of its new boss, Carolyn Fairbairn. (http://bit.ly/1efqt7Z)

The Telegraph

French authorities have detained two executives working for ride-sharing company Uber in an ongoing battle over the service's legality. Authorities said that they were being questioned over "illicit activity." (http://bit.ly/1SZbDSd)

Greece has threatened to seek a court injunction against European Union institutions, both to block the country's expulsion from the euro and to halt asphyxiation of the banking system. "The Greek government will make use of all our legal rights," said the finance minister, Yanis Varoufakis. (http://bit.ly/1eVXV4a)

Sky News

The BBC has lost control of the rights to the Olympic Games after the International Olympic Committee sealed a 920 million pound pan-European deal with Discovery, the U.S. broadcaster that owns Eurosport. Discovery will take control of the UK rights from 2022, as the BBC has already secured exclusive rights to the 2016, 2018 and 2020 Games. (http://bit.ly/1FLxhQu)

Plans by Cuadrilla Resources to frack for shale gas in Lancashire have been rejected by county councillors. The company had been seeking permission for exploratory drilling and fracking in Little Plumpton, between Preston and Blackpool. (http://bit.ly/1R0nq5e)

The Independent

The British government is reportedly considering moving the state-owned broadcaster Channel 4 to Birmingham. If such a move was agreed, Channel 4 would sell its headquarters in Westminster and follow HSBC Holdings, Deutsche Bank and others in moving staff to Birmingham. (http://ind.pn/1NuDaHN)

In perhaps the best example of just how massive the impact of returns to shareholders have become, Deutsche Bank shows a snapshot the S&P's consolidated income statement as of 1995 and 2015. While there are some clearly material changes transformations: the rise of financials' revenues above energy companies for one, the drop in net interest expense margin courtesy of ZIRP, the record high net income margin as a result of massive, if double seasonally-adjusted layoffs, one thing stick outs: virtually all of the corporate Free Cash flow in 2015 will go back to shareholders, as dividends and buybacks represent 94% of total S&P FCF uses.

Contrast this with "only" 60% of FCF in 1995 going back to shareholders and one can see why the US economy is caught in secular contraction in which virtually nobody wants to invest for the future and instead is forced to distribute all unretained earnings here and now.

• Tsipras backs down on many Greece bailout demands (FT)
• Creditors skeptical of Tsipras' offer (Reuters)
• Greek Pension Rationing Begins; Poll Shows Tsipras Backed (BBG)
• Greek referendum poll shows lead for 'No' vote, but narrowing (Reuters)
• Greek Bank Controls Heap More Pain on Crisis-Weary Citizens (BBG)
• Greek Crisis Ripples Across European Companies as Markets Swing (BBG)
• China Stocks Fall: Shanghai Composite Index Drops 5.2% (BBG)
• China June factory, services surveys fuel hopes economy leveling out (Reuters)
• Some Chinese Are Taking 22% Margin Loans to Finance Stock Purchases (BBG)
• Puerto Rico Utility, Creditors Close to Deal to Avoid Default (WSJ)
• State Department Releases 3,000 Pages of Hillary Clinton's E-Mails (BBG)
• Clinton struggled to fit in with Obama's White House, emails show (Reuters)
• Bosses Reclassify Workers to Cut Costs (WSJ)
• China June factory, services surveys fuel hopes economy leveling out (Reuters)
• Ace Agrees to Buy Rival Insurer Chubb (WSJ)
• To many ordinary Iranians, nuclear deal means money, food and jobs (Reuters)
• Nearly one in three Americans owns a gun (Reuters)

Overnight Media Digest

WSJ

* At home and in the streets, Greeks are weighing the monumental choice they have to make on Sunday: more financial pain to stay with the euro, or the uncertainty of being cut loose. (http://on.wsj.com/1dvP5Zt)

* Greece became the first developed country to default on the International Monetary Fund, as the rescue program that has sustained it for five years expired and its creditors rejected a last-ditch effort to buy more time. (http://on.wsj.com/1U406Tl)

* French prosecutors have ordered two Uber executives to stand trial on charges they enabled nonprofessional drivers to operate illegal services. (http://on.wsj.com/1LSJic8)

* Children who accidentally burst laundry pods experience a wide range of medical outcomes, making it hard to pinpoint what makes these packets so much more potentially hazardous than liquid detergent. (http://on.wsj.com/1Nu2iPi)

* Phil Knight has laid the groundwork for his exit from Nike Inc, the company he started by selling shoes out of his car trunk in the 1960s and built into the world's biggest sportswear maker with $30 billion in revenue. (http://on.wsj.com/1dvP5Zt)

* The Puerto Rico Electric Power Authority and its creditors were close to a deal that would allow the cash-strapped utility to pay more than $400 million to bondholders, staving off what investors feared might be the first default of many from the U.S. commonwealth. (http://on.wsj.com/1NvUAUb)

FT

A last-minute appeal by Greek Prime Minister Alexis Tsipras, to extend the country's bailout was rejected by the finance ministers of Eurozone. Greece missed its 1.5 billion euros ($1.7 billion) payment to the International Monetary Fund due on Tuesday.

Santander's British arm has set up a structure to meet new rules requiring banks to separate their retail banking arms, and appointed bosses for its retail and corporate divisions.

Deutsche Bank AG has denied allegations that its outgoing co-head, Anshu Jain pressed for a joint bonus as high as 130 million euros for him and another trader, telling the bank's chairman at the time that they were "good guys".

80-year-old British film studio group Pinewood has seen its revenue surge to record high as U.S. film producers come to the UK to take benefits of its highly regarded production facilities, favourable exchange rate and sector tax relief provided by the government.

NYT

* Greece missed a crucial debt payment to the International Monetary Fund, the fund said early Wednesday, deepening a crisis that has haunted world leaders and financial markets over the past week. The development came as Greece's European creditors each rejected an 11th-hour attempt by Athens to extend the country's international bailout program. (http://nyti.ms/1KrDTeR)

* The insurance broker and risk management advisory firm Willis Group Holdings Plc said on Tuesday that it had agreed to an all-share merger with the professional services firm Towers Watson & Co that would create a company with an $18 billion market value. (http://nyti.ms/1T3LlOW)

* Donald Trump filed a lawsuit against Univision for $500 million on Tuesday, following the network's announcement last week that it would no longer broadcast the Spanish-language version of his "Miss USA" beauty pageant. (http://nyti.ms/1BW3PMS)

* The French telecommunications company Orange SA has reached a deal allowing for a parting of ways with an Israeli mobile service provider, weeks after a squabble over a possible withdrawal of the brand from Israel's cellular market caused a diplomatic storm. Under a previous agreement, the Israeli provider, Partner Communications, was licensed to use the Orange brand until 2025. But the two companies announced Tuesday that they had signed a new agreement that gives each the right to terminate the brand license agreement in the next two years. (http://nyti.ms/1LTG1cx)

* Adding another female executive to its predominantly male senior ranks, the Walt Disney Co on Tuesday named Christine McCarthy as its next chief financial officer, succeeding James Rasulo. (http://nyti.ms/1LGWDaC)

* Goldman Sachs Group Inc is paying a $7 million penalty to the Securities and Exchange Commission to settle civil administrative charges that it did not maintain adequate safeguards to prevent the trading incident that erroneously sent thousands of stock options trades into the market two summers ago, from occurring. (http://nyti.ms/1Hwf4xU)

* General Electric Co said on Tuesday that it had agreed to sell a division that finances leveraged buyouts in Europe to a unit of the Japanese bank Sumitomo Mitsui Banking Corporation for about $2.2 billion. (http://nyti.ms/1HwfdBt)

* The French investment firm Wendel SA said on Tuesday that it had agreed to acquire AlliedBarton Security Services, one of the largest providers of security guards in the United States, from the Blackstone Group for about $1.67 billion, including debt. (http://nyti.ms/1GNn200)

* Under pressure from a prominent activist shareholder, ConAgra Foods Inc announced plans on Tuesday to shed its private-label brands operation - less than three years after buying the business. (http://nyti.ms/1LBRvUk)

China

CHINA SECURITIES JOURNAL

- Thirteen top Chinese private fund companies said China's recent stock market dive is a golden investment opportunity for investors

- The China Insurance Regulatory Commission (CIRC) said China Pacific Insurance would be allowed to invest 500 million yuan ($80.65 million) to purchase a 100 percent stake in Taiping Senior Living Investments Co. Ltd.

21st CENTURY BUSINESS HERALD

- No more than 600 billion yuan - or 30 percent of China's pension fund's net worth - would be invested in the stock market, an official at the Ministry of Human Resources and Social Security.

SHANGHAI SECURITIES NEWS

- China has invested 3.1 trillion yuan in projects including infrastructure, clean energy and mining, to stimulate economic growth, said Li Pumin, spokesman for the National Development and Reform Commission on Tuesday, according to the newspaper.

CHINA DAILY

- China's belief in and support of a strong eurozone provides EU leaders with the opportunity to take a longer term perspective when dealing with the Greek crisis, an editorial in the newspaper stated.

- McDonald's is opening three "Create Your Taste" concept stores in China, McDonald's China CEO Phyllis Cheung told the newspaper on Tuesday.

Britain

The Times

The world's biggest potash mine is to be built by Sirius minerals in the North York Moors National Park after a planning committee decided that the economic benefits outweighed the environmental damage. The 1.7 billion pounds($2.67 billion) project will create up to 1,000 jobs. (http://thetim.es/1Hw3anI)

The Labour party has abandoned its call for the government to reinstate the 50p top rate of tax, the shadow chancellor indicated yesterday. Chris Leslie said that the moment to fight the Conservatives on their decision to cut the rate paid by those on more than 150,000 pounds a year had passed. (http://thetim.es/1Hw2JJY)

The Guardian

Hundreds of jobs are expected to be axed by the BBC as it tries to become "leaner and simpler" at a time when it is facing a 150 million pounds-a-year shortfall in funding and growing political pressure from the Conservative government. (http://bit.ly/1ehuAAi)

Drugmakers are drawing up emergency plans to deal with the fallout from a potential Grexit, as the industry issued a stark warning that Greece's exit from the euro could lead to severe shortages of life-saving medicines and unleash a public healthcare crisis. (http://bit.ly/1Hw3DpP)

The Telegraph

Spain's Banco Sabadell has received approval from Britain's financial regulators for its 1.7 billion pounds takeover of Britain's TSB, increasing competition for the UK's biggest banks. (http://bit.ly/1Hw2SgG)

Virgin Atlantic Ltd has revealed it is cutting about 500 jobs just months after announcing it had returned to profit following three years of losses. It said the jobs that will be lost are in managerial and support roles, leaving customer-facing employees untouched. (http://bit.ly/1Jvau3e)

Sky News

Euro zone finance ministers will resume talks on the Greek crisis on Wednesday after refusing the country's request for a two-year financial aid package, according to a Greek government source. (http://bit.ly/1LGfWAO)

A former boss of Thomas Cook Group will receive a lower-than-expected payout following recent scrutiny of the company's response to the deaths of two children in Corfu nine years ago. The company has confirmed it is awarding Harriet Green 4.1 million shares, at the lower end of expectations. (http://bit.ly/1Hw3d2T)

The Independent

The European Union is to do away with roaming charges on the continent, letting people avoid huge fees for downloading on holiday, and will force internet providers to conform with net neutrality. (http://ind.pn/1ehrGvi)

Amazon.com Inc will now deliver to London addresses in just an hour, as it rolls out its Prime Now service outside of the U.S. It's been available in the U.S. since last year but the company is taking it outside of the country for the first time. (http://ind.pn/1Hw40Rq)

Forget sell in May. So far the theme of 2015 has been sell on December 31, 2014 and go away because, as of June 30, the S&P closed essentially unchanged for the year.

Not so for other markets and asset classes and markets.

So which were the best and worst performing assets in the first half of 2015? As luck would have it, in this massively volatile global "market" (except for the ongoing artificialy calm of the S&P 500) where everything is now controlled by central bankers, the best performing asset/market in the first half of the year was also June's worst performer, and unless the PBOC can halt the bursting of the Chinese stock bubble, the best asset class of 2015 will hardly be that at the end of the year. Considering China's success at halting that other bursting bubble, housing, we are not very optimistic.

Gere is a quick summary of the top and bottom performers in both June and the first half, courtesy of Deutsche Bank:

Uncertainty over Greece meant that June proved to be a negative month for a broad range of asset classes with negative total returns seen across key equity, credit, and rates benchmarks. Performances were clearly weighed by the Greek referendum announcement only two trading days before month-end. Indeed key US and European equity indices were either up or just about breaking even right before the 'Greece referendum weekend'.

All in all total returns for the Stoxx600, DAX, IBEX, FTSEMIB, and the S&P 500 were down anywhere between 1.9% to 4.4% in June with the month also proving to be the worst month for European equities this year. Staying on equities, the sharp sell-off in Chinese equities was clearly the other notable market move we saw in June. The Shanghai Composite finished the month around 7% lower (total return basis) on supposedly margin call/valuation concerns. This marks the worst monthly performance for Shanghai Composite since June 2013 and also makes it the worst performer in June even though the Chinese stock market remains the best performing asset on a YTD basis (+33%). The last day of the month saw a c.11% range, ending up 5.5% higher reducing the monthly loss.

Elsewhere, most European equities are still sitting on double-digit gains this year (in EUR terms) although on a USD basis these are partly offset by the EUR weakness. The total return for S&P 500 was down -1.9% in June but despite being lower in price YTD, including dividends the total return is +1.2% in 2015 so far.

Moving on to fixed income, core rates on both sides of the Atlantic had a rather challenging time in June. Total returns for Treasuries and Bunds indices were down 1%-2% on the month even with the sharp rally following the Greek referendum weekend. The weakness in core rates was clearly a drag for Credit returns. Both EUR and USD IG credits were down around 2% on a total return basis with spreads also generally finishing the month wider across the board. The Greek headlines clearly did not help with all things peripheral with BTPs and Spanish bonds down around 2.5% in June.

On a YTD basis, total returns for most European rates and credit indices are generally 1-2% lower whereas US equivalents are fairing moderately better. As we approach the half year mark, it is fair to say that equities generally are having a much better year than fixed income so far given their relative performances.

Before we wrap up, it is worth noting that Wheat (+22%) and Corn (+9.0%) have had a fantastic month in June which helped them retrace bulk of the YTD losses. Weather related factors were apparently the main drivers behind the performance in these soft commodities. Elsewhere both Brent and WTI finished the month lower despite the weakness in the Dollar.

The full MTD and YTD charts and tables are below.

June:

YTD:

Submitted by George Kintis of Alcimos

Our Heretic (And Not-So-Simple) Views On The Greek Referendum

Conventional wisdom has it as follows: Tsipras is a hardline communist, who overplayed his hand with the troika (or “the three institutions”, as he calls them). The referendum was a last-ditch play to retain power by stoking a nationalistic response to the standoff with creditors.

We believe the current stand-off with Greece’s creditors is just part of the ongoing tug-of-war between Germany and the IMF on a possible haircut on Greek debt. The background of this conflict is as follows: the US (which exerts substantial influence on the IMF) is “pro Keynesian” while Germany is “pro austerity”. The two different viewpoints are summarized in two articles in the New York Times: one by Wolfgang Schäuble, and a riposte to it by Paul Krugman.

The slowdown in the European economy is obviously affecting the US economy as well; hence the US interest is clearly justified. The USA has been nudging Europe to engage in some good-old Keynesian deficit-spending. Obviously, the deficit spending does not need to happen in Germany, whose economy is doing very well, thank you. It needs to happen in places like Greece, but then the question arises, how could this deficit be financed? Well, the markets are certainly not willing to finance Greece, so that leaves few people in the room able to do this. Rich Germany obviously comes to mind, but then this is a major no-no for German voters and politicians. (West) Germany engaged in the mother of all expansionary policies (and fiscal transfers) at the time of reunification with East Germany, when it set a 1:1 conversion rate of the East German mark into the DEM, while the exchange rate applicable for East German exports had been at 1 to 4.3. Rightly or wrongly, it is widely accepted in Germany that the dismal performance of Germany during the rest of nineties is due to those very policies— justifiable perhaps at the time by a duty of solidarity. Quite understandably, the German public doesn’t feel such a strong duty of solidarity vis-à-vis Greece. Any German politician suggesting a large-scale fiscal transfer to Greece would be skewered. Any haircut on Greek official-sector debt would be seen as (and be) just that: a fiscal transfer to Greece.

One last background note: the German public seems convinced that Germany has already paid its dues when it comes to Greece. This is only partially true: the restructuring of Greek debt was at its heart an effort to convert private unsustainable debt into official unsustainable debt –saving major European banks in the process (including Deutsche Bank, which managed to stay afloat by engineering achieving a risk-weight asset density of 14% in 2008).

Now on to a few somewhat overlooked facts relating the Greek crisis, which should raise an eyebrow—or a few million:

i.    What’s being put to the Yes or No vote on Sunday is two documents: the first one is entitled "Reforms For The Completion Of The Current Program And Beyond" and essentially contains the “sacrifices” which are requested of the Greek side.  The second one is called "Preliminary Debt Sustainability Analysis". But hold on a second: this is just math, projections on the servicing of Greece’s debt based on certain assumptions relating to economic and fiscal performance. Why on earth would one put a spreadsheet on a referendum?

The plot thickens if one actually bothers to read the document. It is not even conclusive: under the first two scenarios (“full implementation of program reforms” and “partial reform compliance”) Greek debt is deemed to be sustainable.  As to the third scenario, which “reflects the IMF’s baseline” “significant reprofiling of the stock of debt and concessional lending terms would improve sustainability. Reprofiling of payment flows does not imply nominal haircut or budgetary costs for creditors. This would also entail further NPV gains for Greece, and strengthen the sustainability of the Greek public debt in the long-run”.

Things get even more bizarre, as the document states that “[f]urther work is under way to reconcile the scenarios”.  This work was obviously never completed, as the IMF came out a few days later with its own version of the debt sustainability analysis, which carries a date of 26 June (just a day later from the date of the draft Greeks are asked to vote on) but was only published on 2 July. In no uncertain terms, it labels Greek debt unsustainable, and considers it can become sustainable if the grace period on existing EU loans is extended to 20 years and the amortization period to 40 years—assuming of course Greece runs primary surpluses of 3.5% of GDP, has real GDP growth of 1½% in steady state, and achieves privatization proceeds of about €½ billion annually. However “[a] lower medium-term primary surplus of 2½% of GDP and lower real GDP growth of 1% per year would [also] require […] a significant haircut of debt, for instance, full write-off of the stock outstanding in the GLF facility (€53.1 billion)”. Let’s translate that: the GLF facility consists of the bilateral loans to Greece. Under this not-too-unlikely turn-of-events, Germany would need to kiss its entire direct exposure to Greece goodbye—the dreaded “fiscal transfer” we spoke about earlier.

Now back to the referendum: Greeks are asked to accept-or-reject an analysis which is inconclusive, work-in-progress, while the IMF flatly rejects as well. Funny, no?

ii.    Now let’s go back to the first document—the one containing the creditors’ demands. But hasn’t Tsipras conceded on most of these demands already, by sending the letter to the troika which was immediately leaked to the FT? Hasn’t Juncker claimed that “[w]e were so close, in fact, we were so close that it was just €60 million that we were arguing over?” Hasn’t Varoufakis said that ”the only remaining difference between us and our creditors is  debt sustainability”? Let’s get this right then: Greeks are going to the polls over sixty million and a document which is inconclusive and which needs “[f]urther work [currently] under way to reconcile the scenarios”. What on earth? Couldn’t they have done this work before asking people to vote on it? Quite irresponsible, isn’t it? Surely the bank closure must have cost more than sixty million?

iii.    Which brings us to the bank closures. If one looks at the ELA procedures, as published by the ECB, ELA is extended to “solvent financial institution, or group of solvent financial institutions, that is facing temporary liquidity problems, without such operation being part of the single monetary policy. Responsibility for the provision of ELA lies with the National Central Banks concerned” which can happily go on extending ELA unless “the Governing Council of the ECB [with a majority of two-thirds of the votes cast] considers that these operations interfere with the objectives and tasks of the Eurosystem”.

But didn’t Draghi say as recently as 15 April that “[w]e approved ELA and we'll continue to do so, extend the liquidity to the Greek banks while they are solvent and they have adequate collateral”. Didn’t he say on 5 March that “the ECB is a rules-based institution […] and […] the decision about determining an ELA, are all the outcome of rules, not our political decisions. ELA is a decision of the National Central Bank of Greece, to which the Governing Council may decide to object with a very special and demanding majority requirement, if certain conditions are not in place. One condition is that ELA can be given to solvent banks with adequate collateral. The Greek banks at the present time are solvent. Their capital levels are well above the minimum requirements, and that’s positive news. [T]oday, the Greek banking system is solvent”. Let’s look at his response on 3 June, when asked “Mr. President, maybe you could elaborate again on your decision not to tighten the haircut rules for collateral used by Greek banks. The situation, the financial situation in Greece has deteriorated considerably since December when you took a lighter stance on this issue. So the whole thing looks like you're -- you said you are a rules-based institution and it looks like you're making political considerations; not willing to interfere in the ongoing political process. How would you comment on that?”

What Draghi said was: “I would comment that it's not true. Simply said, we are not either interfering or in any way taking a stance with respect to the current negotiations. We are a rules-based institution. But you have to understand that there are two different sets of rules: one is for collateral posted against monetary policy instruments, and the other one is the collateral posted against ELA”.

Granted, Draghi also said “We do assess how the developments in the markets affect the quality of our collateral, namely the quality of the Greek government bonds that have been posted as collateral. So were the conditions to change, we would certainly go through a series of things. Yes, we would have to revisit our previous decisions”. 

Reality is, there are no rules for ELA collateral policy, as a report requested by the European Parliament's Committee on Economic and Monetary Affairs flatly states—and the ECB has played fast-and-loose with this non-existent rulebook in the past. There is a difference now, however: as of November 2014, the ECB (through the SSM) is also the regulator of most major European banks.

Let’s get real now—Greek banks had total assets of €391bn as at May 2015. One would think these assets should be enough to support €89bn+€6bn=€95bn of ELA. If these €391bn are not worth even €96bn, then Greek banks, with liabilities of around €322bn, should probably be just a tiny bit insolvent, no?

Are Greek banks insolvent then? The institution which determines this is the Single Supervisory Mechanism (SSM) and the SSM is part of the ECB. Let’s then look at the response of the head of the SSM, Danièle Nouy, when asked as recently as 7 June whether “she may perhaps have slight doubts about [her] earlier statement that Greek banks were absolutely solvent and liquid”:

“No, I don’t: these banks continue to be solvent and liquid. The Greek supervisors have done good work over the past years in order to recapitalise and restructure the financial sector. That was also visible in the outcome of our stress test. The Greek institutions have experienced difficult phases in the past. But they have never before been so well prepared for them”.  If her views had changed in less than three weeks, wouldn’t she have said  something about this—if only to the banks themselves, which would then have to disclose it? Wouldn’t she have asked Greek banks for a capital increase perhaps? After all, the exposure of Greek banks to the Greek sovereign stands at under 6% of total assets—and this exposure also includes T-bills and loans.

Could it be then, that the €89bn of Greek ELA already extended did not “interfere with the objectives and tasks of the Eurosystem”, but the extra €6bn requested on Sunday would?

Didn’t Draghi say four times in his press-conference of 5 March that the ECB is a “rules-based institution”? Didn’t he repeat that twice in his 3 June press conference? Wouldn’t they feel the need to spell out to us which rule forced them to send millions of Greeks to queue in front of ATMs?

And if Draghi is a stooge of Angela Merkel (admittedly, not highly likely, but humour me for a second) who decided to do “whatever it takes” to make sure those Greeks take heed, what was the response of the Greek side? Did Greece ask for (and publicize) the rationale of the ECB Governing Council decision? Did we find out what the vote tally was? All that Greece needed to get the extra ELA was eight votes, including the Greek and the Cypriot ones. How many votes did Greece get? Wouldn’t that be of interest, so that we can see who our allies are, in this hour of need? And why hasn’t Varoufakis followed through on what he said on 29 June: “The Greek government will make use of all our legal rights. We are taking advice and will certainly consider an injunction at the European Court of Justice”. Oh well, probably not on the top of his list; he may have been busy giving an interview to his friend Phillip Adams on (Australian) ABC News.

iv.    In the midst of all this, Tsipras requested a third bailout for Greece from the ESM—a granting of which would exclude the IMF from the financing of Greece.  Slightly odd timing, as Peter Spiegel notes: “Eurozone finance ministers have already rejected a request for an extension, and Donald Tusk, the European Council president, [the day before] rejected it a second time. It is highly unlikely finance ministers, who are to hold a conference call again Tuesday night, will agree to this now”. Why on earth would one send out this letter—ahead of a referendum and in full knowledge of the fact that it has zero chances of being entertained?

v.    The last curious fact is that Greek TV broadcasters have so far not ordered any public opinion polls on the referendum.  This is quite astounding, as on general elections we have at least a couple of polls published a day.

All these somewhat bizarre events may be due to the incompetence of Messrs. Tsipras, Varoufakis and Co. They may just be savages, or may simply be hostage to Syriza’s leftist factions (none of which, by the way, threated to unseat the government in April, when it awarded a $500m contract to Lockheed for the upgrade of five P-3B Orion planes from the 1960s—at a time when, according to Syriza at least, Greece was going through a humanitarian crisis). Under this scenario, Tsipras & Co. will have fooled such ivory-tower academics, like Nobel laureates Paul Krugman and Joseph Stiglitz, but not the likes of Adonis Georgiadis or Kyriacos Mitsotakis (you won’t get this unless you’re Greek).

Or something else may be going on…

Let’s just look at the most likely-turn-of-events from this point on, and see if we can make sense of the curiosities just enumerated.

Greek voters, fearing that banks may not reopen in the event of a No vote (and not knowing whether the Yes vote leads by a safe margin) are highly likely to turn out in droves for Yes.

Varoufakis has already said  that “[i]f [the people] say Yes, we will do whatever it takes to make sure that this agreement is signed exactly as the troika […] is demanding of us”. The head of the Greek negotiating team , Euclid Tsakalotos, has said: “We see the referendum as part of the negotiation process, not in lieu of it”. Monday, therefore, Tsipras is likely to pay a visit to Ms. Merkel, with the results of the referendum at hand.  He will tell Ms. Merkel, all your requests have been granted, now show us the money—save Greece. Now, Ms. Merkel will have no option but to oblige—how on earth can one say no to a nation which has overwhelmingly accepted everything requested of it?

However, Ms. Merkel has repeatedly insisted that there is no deal without the IMF. She always wanted this, as she is afraid that a political decision at EU-level may force Germany to provide financing on concessionary terms to Greece and other potential laggards. But, horror-of-horrors, the IMF in so many words asks for the dreaded haircut. Can you kick out of the Eurozone (assuming, for a moment, this can happen) a country which has just yielded to all your demands? Can you accept a haircut, thus setting a precedent that, whenever a Eurozone country can’t service its debt, Germany will pay up? Ms. Merkel would be cornered, no?

Under this scenario, Tsipras would be likely to get his debt relief. He would be a hero in Greece, as he would have confronted Germany and won. Other laggards, such as the Italians, wouldn’t be too displeased, either: a precedent will have been set, whereby if a Eurozone member screws up, the Germans pay up (would you believe? Mario Draghi happens to be an Italian!). 

Let us also give short shrift to the unlikely outcome of a No vote, assuming for a moment that Tsipras were in cahoots with the IMF (and the US) to box in Germany. All that Greece would need is a €1.5bn loan from a friend (the US perhaps?) to make good on the IMF. The IMF could provide the entire €52bn that Greece needs over the medium term. Add that to the €32bn already lent by the IMF (and a bit more to support the banks, if needed) and now the IMF’s exposure to Greece becomes eminently serviceable—or “sustainable”, as they say. Why? Because the IMF has super-senior status, which means it gets repaid before anyone else—including the European bilateral loans of around €53bn, the €142bn lent by the EFSF, the €27bn in bonds held by the ECB and the €39bn in private debt. In other words, Germany would risk seeing its entire exposure to Greece subordinated to that of the IMF, with little leverage in case Greece does not pay up. Talking about being caught between a rock and a hard place…

In other words, Varoufakis may not be widely off the mark, when saying that there is “100% chance of success”—whether Greeks vote yes or no. Tsipras, when saying that Merkel and Gabriel are “uneasy and confused”, may have a point, too.

If anyone cares about what I am voting for: I am going to drive my kids to my mother in northern Greece, so no time for that. I wouldn’t bother to vote even if the referendum was on whether to exit the euro or not.

Neither Greece’s ailment, nor its cure, is its currency, be it the euro or the drachma, or its pensions—whether too low or too high. Greece’s cancer is the purely domestic cleptocracy which has been sucking the country dry for at least thirty-five years (that’s as far back as I can remember, older people may argue this may have been going on for much longer).

You think I’m exaggerating? Let’s look at a couple of interesting statistics, then. According to the UN comtrade database, supplies of bunker fuel to ships in Greece went from $25m in 2008 to $1.72bn in 2014. Exports of fuel to Turkey went from $204m in 2007 to $3.2bn in 2014. Exports of fuel to FYR of Macedonia in the same timeframe went from $72m to $614m (for comparison purposes, Greece’s GDP in 2014 was $238bn).  Either Greek refineries got very efficient during the crisis, or other refineries in the region got very inefficient. Or it could be that the cleptocrats, hit by the crisis in their other half-way legit businesses, had to supplement their income with other, far more lucrative ventures.

Well, according to the New York Times “Organized crime […]dominates the black market for oil in Greece; perhaps three billion euros (about $3.8 billion) a year of contraband fuel courses through the country. Shipping is Greece’s premier industry, and the price of shipping fuel is set by law at one-third the price of fuel for cars and homes. So traffickers turn shipping fuel into more expensive home and automobile fuel. It is estimated that 20 percent of the gasoline sold in Greece is from the black market. The trafficking not only results in higher prices but also deprives the government of desperately needed revenue”.

According to the FT “George Papandreou, the former socialist premier who resigned in 2011, also claimed he was brought down by oligarchs after a finance ministry campaign to tackle widespread fuel smuggling revealed a Balkanwide scam that cost Greece €3bn a year in lost taxes”.

Its’ not as if these smugglers are thousands. They’re a handful of people, whom practically every Greek knows by name. Unlike Escobar, they are not in hiding. They’re feted by the press as “successful businessmen” and are being sat next to prime ministers.

There are similar tales to be told in natural gas, energy and practically every sector that has to do with the state.

If that’s not fixed, irrespective of whether the currency of Greece is the euro, the drachma or the rupiah, there can be no end to Greece’s plight. Is Tsipras likely to fix that? I’ll give you a hint: most Greek oligarchs voiced their support for Tsipras ahead of the general election in January. Before him, they of course supported his predecessor.

What I think, is that Greeks should be united in their fight for the rule of law and against the cleptocracy, and not divided over a referendum on an absurd question. That division, however, serves the cleptocrats well—they can go about their usual ways unnoticed. Whoever said “divide and rule” knew what they were talking about.

One week ago, we first explained that as the Cyprus bail-in "blueprint" scenario unfolds, the one final, and most important, remaining variable in the ongoing Greek drama, soon to devolve to tragedy, is how big the ECB's ELA haircuts would be in the case of a No vote, which would be the first catalyst of a depositor haircut.

Then, overnight, in a report since denied by both the Greek finance ministry and by the European Banking Authority Plan, the pro-Europe FT did yet another hit piece on Greece desperate to push those Greek voters on the fence ahead of tomorrow's referendum to vote "Yes" (just think of the lost advertising revenue if say Deutsche Bank were to go under).

Greek banks are preparing contingency plans for a possible “bail-in” of depositors amid fears the country is heading for financial collapse, bankers and businesspeople with knowledge of the measures said on Friday.

 

The plans, which call for a “haircut” of at least 30 per cent on deposits above €8,000, sketch out an increasingly likely scenario for at least one bank, the sources said.

Ignoring whether the FT is now merely a venue used by conflicted parties to publish pro-Europe, anti-Syriza hit piecestthat benefit "bankers and businesspeople with knowledge of the measures" and are promptly refuted, the article does bring up a relevant point: if the ECB does escalate the ELA collateral haircuts, something we analyzed in our own piece last week, what kind of haircut scenarios are possible, and will "insured" deposits under €100,000 be indeed made whole, or will the bail-in affect, as the FT suggested, everyone with over €8,000 in savings?

Regarding the first part of the question, what are the possible scenarios, JPM had this to say yesterday when evaluating the history of bail-ins in Europe in recent years:

If the deterioration in asset quality means there is no sufficient collateral to cover ELA claims, either the ECB (via its ELA residual claim) or domestic depositors will have to suffer a loss. Our understanding is that there are no clear rules on whether this ELA residual claim will be ranked above depositors or not. In fact EU policymakers adopted different and inconsistent approaches in the past when faced with bank insolvencies:

1. In the case of Cypriot banks, depositors were hit while senior bond holders were spared, so seniority was not respected. ELA claims were also protected.
2. Deposits of foreign branches were protected in the case of Cyprus while deposits of domestic branches were hit. This is the opposite of what happened to Iceland.
3. In the case of Ireland, which also had a big banking system relative to the size of its economy, only sub debt holders, accounting for a very small portion of total creditors, were hit. No depositors were hit, in either domestic or foreign branches.
4. In the case of SNS, sub debt holders were wiped out and reports suggest that the Dutch government came close to imposing losses on senior bond holders and was only prevented from doing so because of unsecured intergroup loans between SNS bank and Reaal insurance that would be subjected to the same losses as senior bond holders.

In other words, Europe will do what it always does: make it up as it goes alone. However, one notable difference between Cyprus and Greece is that the former held the deposits of a number of wealthy Russian oligarchs, which skewed the deposit distribution a la the 80/20 rule, and permitted smaller depositors to be saved while the Russians took the bulk of the hits (an outcome which according to some led to the suicide of Russian billionaire in exile, Boris Berezovsky).

Unlike Cyprus, Greece does not have the luxury of several massive depositors. In fact, according to JPM, the distribution of deposits appears to be relatively flat. JPM continues:

... under a stress scenario of prolonged impasse, Greek depositors will be likely hit while ELA claims are protected. There is currently €120bn of deposits with Greek banks. A haircut increase on ELA collateral assets from our currently estimated level of 43% to 60%, for example, would require a €26bn deposit haircut or 20% of outstanding bank deposits assuming for simplicity no available buffer from shareholders or bond holders.A bigger increase in the collateral haircut, for example to 75%, would require a €50bn deposit haircut or 40% of outstanding bank deposits.

Whereas we disagree with JPM's calculation due to our baseline assumption that the current haircut level is more in the 48% region, we do agree with the directionality.  As a reminder, this was our own math as laid out last week:

But what does this mean for ordinary Greeks, those who have negligible amounts still held by Greek banks despite our recurring pleas to withdraw their funds ahead of just this eventuality? Sadly, nothing good. Here is JPM's conclusion:

Could deposits below €100k be protected as it happened in Cyprus? The answer depends on the total amount of deposits above €100k. If there are enough of these large deposits above €100k, then most likely any required deposit haircut will be inflicted on these depositors only. There are no recent data on how big this universe of large deposits is. The most recent data from the European Commission suggest that at the end of 2012, covered (i.e. those below €100k) represented 75% of eligible Greek deposits. We suspect this number is now significantly higher leaving little room for depositors with less than €100k to be spared. And the reserves that the Greek state has to back its bank deposit guarantee are miniscule, likely not more than a couple of billions euros.

Which means that unlike Cyprus, which was mostly a targeted punitive bail-in aimed almost entirely at Russian oligarchs, should the ECB indeed enact ELA haircuts which it may have to do as soon as Monday in the case of a No vote, it will be the ordinary Greeks who will see their already meager savings get haircut even more, anywhere between 30%, potentially up to 100% if the ECB were to announce the entire ELA no longer legal, pulls all funding and locks up Greek bank collateral.

Will the ECB do that? We don't know, however Varoufakis' gambit is simple: should the ECB engage the full Greek haircut it will incite an immediate panic and risks a run on other peripheral banks and the true spread of Greek contagion to Italy, Spain, Portugal and all other economically crushed countries where an anti-austerity politician is a frontrunner for the next leadership position. Such as France.

The Varoufakis gambit - with some last minute assistance by the IMF - succeeded and in a landslide vote, the Greeks said "No" to a deal (that was no longer on the table). What happens next? Here is Deutsche Bank's "map for the post referendum" which presents the four possible outcome.

In this document DB, which is one of the banks that may stand to lose the most from any major stresses to Europe's precarious status quo as a result of its tens of trillions of notional derivatives, lays out the possible post-referendum scenarios.

Here is how the German megabank sees the possible outcomes of what is shaping up to be a "No" vote:

• N1 – Soft deal: The most unlikely scenario is that the euro-area partners offer a much softer programme to Greece.
• N2 – Default-and-stay: Moderately less unlikely is a scenario where Greece defaults but stays in the euro thanks to a direct recapitalisation of Greek banks by the euro-area partners, with the Greek government using only domestic resources for the country’s fiscal needs.
• N3 – New deal: The third scenario is one in which the rising economic and political cost of a closed banking system results in the Syriza government being replaced by a new government of national unity and a new deal with creditors being reached.
• N4 – Grexit: In our view, Grexit and Scenario N3 are the most likely – with about equal probabilities. That said, we see the probability of Grexit increasing the larger is the margin of victory of the NO vote. Even with a NO vote, the cumulative probability of the first three scenarios still exceeds that of Grexit.

And the details:

NO, Scenario #N1. Soft deal

This, in our view, is by far the least likely outcome, as it would generate significant moral hazard issues, which in the longer term could be as damaging as an exit. If Europe were to offer significant concessions to Greece following a no vote, it would de facto incentivize other borrowing countries to call domestic referenda to improve the terms of their rescue packages. This would be unsustainable in the long-run as (a) it would create obvious political issues in creditor countries, (b) it would not deal with the structural adjustments and political integration which are necessary for the longer term viability of the euro area.

NO, Scenario #N2. Default-and-stay

A direct recapitalization of the Greek banks is more likely, we think, than a very soft programme, but would be a challenge for Greece and, above all, euro-area partners to accept.

From the European perspective, it could be the start of a new round of financial commitments, all the more so unless there is a strong, credible agreement on structural reform to boost growth and protect Europe’s capital investment. After a default, getting the necessary consensus for such a bank-based deal will be difficult. Indeed, a public default would likely lead to a cascade of private defaults — starting with corporates.

The most serious flaw with this scenario is the moral hazard it creates. If Europe facilitates this default-and-stay option in Greece, it opens the door across the periphery to similar demands. If it is easy to renege on debts but have Europe preserve your banking system and access to the single currency, others will want the same. It will promote instability.

It is not only a question of ex-post moral hazard either. There are general elections in Spain at the end of the year and in Ireland by April 2016. How could the governments of these countries explain to their electorates that they should help to shoulder the direct recap of Greek banks after their own public debt ballooned because of the recap of domestic banks?

From Greece’s perspective, the cost of direct recapitalization in terms of deposit bail-in and general economic conditionality (see Box 1) means this scenario is not a shoe-in either.

It is also a scenario that needs time, measured in months, to come to technical fruition. In the meantime, the economic and political cost of a closed banking system will be mounting. There is a considerable probability if Greece and Europe go down this route that it merges into Scenario N3.

An additional consideration is that the HFSF is a guarantor to the EFSF. In the event of a Greek default, the EFSF may have a direct claim on the HFSF shares in the Greek banks. If Europe becomes the beneficial owner of the Greek banking system, the argument for direct recapitalization could grow. This does not diminish the technical and political complexity of direct recapitalization.

NO Scenario, #N3. New deal

Whether the ECB withdraws ELA — and when — is almost beside the point. The liquidity in the Greece economy is seriously impaired and as each week passes the economic, social and ultimately political cost of the crisis will rise exponentially. The tourist season may be compromised. We cannot judge Greece’s capacity for this. There may be new negotiations after a NO vote, but the chances of a soft programme (Scenario 1) or direct bank recapitalization (Scenario 2) are, in our view, very low. In the meantime the domestic political cost of a closed banking system will rise.

At some point, the rising economic and political cost of a closed banking system could cause the Syriza government to fall. A national unity government could emerge and new negotiations could take place around a deal with the international creditors.

How quickly such a scenario plays out depends on the economic and political cost. By that time, after the economic shock of failing talks and default, the scale of debt relief required to return Greece to sustainability will be even larger. If the EU wants to retain Greece in the single currency, more debt relief might be the price to pay.

Such an agreement would have to be based on a more balanced programme, probably along the lines outlined by the IMF in their latest debt sustainability report. There would need to be much more emphasis on structural reforms in exchange for a less growth-unfriendly fiscal consolidation and a commitment on a gradual debt relief based on implementation milestones . There needs to be a sequence that creates the incentives to improve the ability of the Greek economy to pass and implement the structural reforms that would allow the country to stands on its own leg within the monetary union.

A risk under this scenario is political deadlock could result if the Syriza government resigns but parliament is incapable of forming a new, stable government capable of striking a deal with the international creditors. The parliamentary arithmetic says that about 45 Syriza MPs – about one third of the parliamentary party – would have to join forces with the MPs of New Democracy, PASOK and River to gain a majority in parliament. Syriza retains strong support in opinion polls. Combining forces with the opposition could erode support and push voters further into the political extremes.

If a government cannot be found, the next step would be early elections. Note that there would be legal and financial challenges to new elections. According to the Greek constitution, the incumbent government cannot call elections within 12 months of the previous election. The government would first have to resign, followed by renewed attempts by the President of the Republic at forming a government. The constitution calls for three rounds of at most 3-day negotiations with the next three largest parties in parliament before an early election can be called.

NO Scenario, #N4. Grexit

A resounding NO would embolden PM Tsipras to ask for a complete overhaul of the programme. Actually, from his perspective it would make a much softer deal for Greece a necessity. But as we wrote in Scenario N1, an excessive compromise might be as damaging to medium-term euro area stability as Grexit, if not more damaging.

There is no formal mechanism in the EU Treaty that allows a member state to be expelled. That does not mean exit is impossible. First, Greece can take a unilateral decision to change its national currency back to the Drachma. Greece has this right under international public law (“Lex Monetae”). Second, exit could be agreed by mutual agreement. There is a view that Article 352 of the Lisbon Treaty might provide a basis for such an approach. It requires the unanimous agreement of the European Council, i.e. all EU countries in the EU including Greece.

Even though there is no legal mechanism that allows a member state to be expelled, there is a practical mechanism to trigger exit, namely the withdrawal of ELA. Withdrawing ELA would force the Bank of Greece to call in the emergency lending. The banking system does not have the capital for allow this and the government guarantee for ELA triggers a general default. The Greek banks would not regain access to ECB funding until they have been resolved and recapitalized, a lengthy and costly process.

The Syriza government claims it has no intention of leaving the euro area and that it would fight attempts to force it out through the European courts. This leaves economic circumstance to determine the point at which Greece feels it has no choice but to leave the euro area.

What differentiates the Scenario N4 (Grexit) from Scenario N3 (new deal) is that the Syriza government survives and takes the decision to exit. After a NO vote, these are the two most likely scenarios, in our opinion. They have a broadly similar probability, but we see the probability of Scenario 4 (Grexit) rising the larger the margin of victory for the NO campaign.

It is important to note that leaving the euro area and leaving the EU are two separate questions. If Grexit occurs, Greece would leave the euro area but not the EU. There is no argument being made for Greece to leave the EU. Staying within the EU limits the geopolitical ramifications of the Greek crisis.

Sequencing of events after a NO vote

Given the limited contagion in other peripheral markets and the rising domestic pressures in Greece, it is probably in Europe’s interest to wait. The exposure to Greece is no longer growing now that the ELA is capped. Contagion has been contained and the ECB has the ability to intervene more forcefully if necessary. Therefore, there is little cost in waiting for now.

On the other hand, precipitating an exit by e.g. suspending ELA, would lead to a crystallization of the losses on the existing official sector exposure to Greece, the introduction of potentially more challenging contagion risks and initiating a process that will be difficult to reverse. Conversely, given the trust lost over the last six months, Europe is unlikely to find it attractive to loosen its terms without a more credible commitment from the Greek side (or a change in government), as discussed in Scenario N1.

Given the above, it would be rational for Europe to wait for the political process in Greece to play out, even in the case of a NO vote. It would neither trigger a formal exit, nor offer more lenient terms until one of the following three outcomes realizes.
First, in the most optimistic scenario, there is a credible change in position from the Greek government. This would then enable Europe to restart more constructive negotiations along the “new deal” scenario.

Second, Greece itself gets closer to considering an exit. At that point, Europe may consider other alternatives such as a managed default within the eurozone, which will require Europe to recapitalize and control the Greek banking system which could lead to either “exit” or “default-and-stay” scenarios.

Third, there is an event that makes it institutionally very difficult for Europe to avoid exit. For instance, if the ECB decides that it is unable to maintain ELA following a default on the Greek bonds it owns, and Europe is not willing to recapitalize Greek banks, which would lead to the “exit” Scenario.

Note that it is not necessarily the case that ELA is suspended as soon as Greece fails to pay the ECB on 20 July – indeed, the ECB left the ELA volumes unchanged on 1 July despite the ‘default’ on the IMF. The rules of ELA are not published. It might also be the case that there is a 30-day grace period on the ECB held bonds. If so, the ECB could avail of the grace period before taking action on collateral (or suspending ELA). The counterargument will be that by permitting ongoing ELA the ECB will probably be in breach of the monetary financing prohibition in the EU Treaty.

Today, Greeks sent a resounding message to Brussels, Frankfurt, and Berlin that they are not willing to acquiesce to further humiliation at the hands of creditors and that, even if it means braving the economic abyss in the short-term, the country is determined to salvage a better tomorrow from what, after today's referendum, are the smoldering ashes of Greece's second bailout program.

Now, a stunned sellside — which had, over the past three months, very carefully tweaked their base cases to reflect the growing risk of Grexit — is scrambling to explain to nervous clients what happens next.

Having heard from JPM earlier, we bring you the latest from Barclays, Deutsche Bank, and RBC.

* * *

From Barclays:

A “no” vote means EMU exit, most likely

We argue that an EMU exit would become the more likely scenario, even if Greece remaining in the euro area cannot be ruled out. Agreeing on a programme with the current Greek government would be extremely difficult for EA leaders, given the Greek rejection of the last deal offered. EA leaders accepting all Greek proposals would be a difficult sell at home, especially at the Bundestag or in Spain ahead of the general elections.

How will the crisis play out? The bank liquidity crisis is likely to turn into a solvency crisis once the ECB shuts down ELA, probably no later than 20 July (when a EUR4.2bn payment to the ECB becomes due). Fiscal problems would become more acute; the government may be forced to issue IOUs, which effectively become a parallel currency to the euro. A new currency by the central bank of Greece is likely to eventually become necessary to inject both liquidity and recapitalise banks. At this stage, we would expect IOUs to be converted into the new Greek drachma (NGD).

The NGD would likely depreciate significantly and hence many local companies (clearly those in the non-tradable sector) and households would need to default on their foreign currency debt, now including euro-denominated liabilities. Many of the domestic contracts that are now denominated in euros would also become unviable and need to be restructured. Non-performing loans would surge because of: 1) the negative balance sheet effects for firms and households; and 2) the local currency needed to pay euro debts would increase with the devaluation, exceeding the increase in local currency revenue. Likewise, the government would also be forced to default on its euro-denominated liabilities.

Redenomination away from the euro would also cause massive transfers between agents, adding to the above-mentioned transfers between debtors and creditors. A majority of households with local accounts and savings will suffer substantial losses while cash rich agents with accounts abroad will be the big winners and could take advantage of the chaos to seize capital and production capacities. Given the weak state of the government, these redistributions would likely benefit the already oversized unofficial sector.

In short, the existing contracting framework and financial infrastructure would be broken and need to be rebuilt. Inflationary finance would likely be used, to some extent at least, to replace the official finance that now supports Greece. Politically difficult fiscal and structural reforms would still be required to make the country more competitive, and promote economic growth.

* * *

From RBC:

In a normal referendum the next steps would be binary––something happens or it doesn’t. But this is no ordinary referendum.

We argued last week that the next steps for a ‘no’ or a ‘yes’ vote look superficially similar. The government and creditors will have to start negotiations on a third programme (since the second one expired on Tuesday). Both sides indicated they were willing to do so even in the event of a ‘no’.

What happens on Monday?

Various European-level meetings are expected to take place. These include a EuroWorking Group meeting (i.e. top-level officials from euro area finance ministries). This may then be followed by a eurogroup teleconference (i.e. finance ministers-level) to take stock of the situation. At the Leaders’ level, German Chancellor Merkel will meet French President Hollande for a bilateral in Paris, with both calling for a European Council summit to follow on Tuesday. Separate from the political proceedings, the ECB’s Governing Council is also expected to meet to discuss Emergency Liquidity Assistance (ELA) for the Greek banking sector, though this meeting has not yet been confirmed.

The first thing to watch is how Syriza responds

On Thursday, Greek Prime Minister Tsipras claimed in the event of a ‘no’ outcome, he would be in Brussels within 48 hours signing a deal. In practice that is almost impossible––any new deal will need a lot of technical work so at best is a few weeks away. But in the first 48 hours there should be some sign of what willingness there is to compromise on both sides. If Tsipras takes a defiant tone (citing the democratic choice of the Greek people) we expect Europeans leaders to respond that they are also democratically elected (as they did after the January election). In that case we would expect the market reaction to worsen.

The second thing to watch is how the ECB responds

The Governing Council is expected to meet on Monday to take stock of the situation. A Greek government spokesperson revealed that the Central Bank of Greece would submit a request to the ECB for a further increase to the ELA facility limit, which currently stands at €89.4bn. This follows from various press reports, including Bloomberg, indicating that Greek banks were struggling to cope with deposit withdrawals even with the capital controls already in place. Note that prior to the weekend, the head of Greece’s banking association, Louka Katseli, said that ‘liquidity is assured until Monday, thereafter it will depend on the ECB decision.” She added that the liquidity cushion banks currently had stood at about EUR 1bn.

We nevertheless consider there to be limited prospect of further extension to ELA at this stage, with the risks instead skewed towards the Governing Council restricting access to the facility, including by increasing collateral requirements further. An increase to the ELA limit was not a ‘given’ even if the referendum had yielded a ‘yes’ outcome, and as such a ‘no’ vote makes that decision even more difficult, in our view. Recall that ELA lending requires banks to post “adequate collateral”, and may only be provided to “illiquid but solvent” institutions. In the current environment, whether such conditions are satisfied is predicated in part on a judgment about the likelihood of a new financial assistance programme being agreed for the Greek sovereign.

Does this mean euro exit?

A ‘no’ outcome certainly increases the risk. This is particularly the case if the Greek government believes that it will have substantially more bargaining power with the institutions and brings more ‘red lines’ to the negotiating table. Much will depend on the tenor of discussions when they begin next week.

*  *  *

From Deutsche Bank

There are three near-term implications of the results.

First, the vote marks a big political victory for PM Tsipras. Today's vote will allow the PM to maintain the political initiative within Greece, re-enforcing his leadership within the party as well as the government. It will be perceived by the government as a strong backing around its tough negotiating strategy.

Second, the poll masks a deeply divided electoral body. The win to the "no" vote was decisive. But opinion polls over the last few days have continued to show an overwhelming support for euro membership. How this can be reconciled with the "no" vote and rising economic costs remains to be seen in coming days. Either way, the referendum process itself and the outcome has increased polarization in Greece. Political tension both within parliament and in potential political demonstrations will be ongoing and unpredictable.

Third, the referendum result now requires Europe to more formally adopt a position on Greece, particularly given the size of the "no". The European message on whether rejection is equivalent to Eurozone exit has not been consistent, with both Merkel and Schauble in particular not adopting this interpretation. A more clear reaction from Eurozone members should now be expected.

Next steps

In coming hours, the focus will shift back to the European response.

Most imminently, Greek bank ELA liquidity is likely to be fully exhausted over the next few days, leading to an exhaustion of ATM cash reserves as well as an inability to finance imported goods via outgoing payments. The hit to the economy will be big. The Bank of Greece is holding a conference call with the Greek banks this evening to discuss the liquidity situation.

The ECB is scheduled to meet tomorrow morning to decide on ELA policy. An outright suspension would effectively put the banking system into immediate resolution and would be a step closer to Eurozone exit. All outstanding Greek bank ELA liquidity (and hence deposits) would become immediately due and payable to the Bank of Greece. The maintenance of ELA at the existing level is the most likely outcome, at least until the European political reaction has materialized. This will in any case materially increase the pressure on the economy in coming days.

On the political front, focus will now shift to whether the damaged relationship between Greece and Europe's creditors can be repaired and the immediate prospect of a resumption in negotiations. PM Tsipras last week officially applied for a 3rd ESM program, but the application was rejected pending the outcome of the referendum..

The risk is that relationships between Europe and Greece have been damaged to such an extent, that additional conditions are set before negotiations around an ESM program can be initiated. The overall ESM process will in any case take time. An ESM program requires prior ECB/IMF assessment of financing needs/debt sustainability as well as Bundestag parliamentary approval before talks around a staff-level agreement can begin.

In the meantime, political developments within Greece will be just as important. The PM's commitment to re-start negotiations will be tested tonight and tomorrow morning..

The opposition, in the meantime, has been weakened. Influential New Democracy party member Bakoyiannis is reported this evening to have asked for former PM Samaras' resignation to allow the party to re-group. The prospect of ongoing and unpredictable shifts in politics cannot be ruled out over the course of the next few weeks given rising pressure on the economy.

It's shaping up to be a rough year for CEOs at Europe's most notorious rate rigging, scandal-laden investment banks.

Just three months after Brady Dougan left Credit Suisse and barely 30 days since Anshu Jain and Jürgen Fitschen tendered their resignations at Deutsche Bank, Barclays has shown CEO Antony Jenkins the door. 

The move comes as Chairman John McFarlane (who took over as Chairman in April) looks to restrucutre what he calls a "cumbersome bureauacracy." The bank did not mince words in its press release announcing the shakeup: 

"It became clear to all of us that a new set of skills were required for the period ahead. New leadership is required to accelerate the pace of execution going forward. Mr. McFarlane is ideally qualified in this respect.”

 

Here's WSJ with a look back at the outgoing Jenkins' stint at the helm:

1. Despite recent calls of dissatisfaction, the decision to name Mr. Jenkins as chief executive in August 2012 was broadly supported by analysts, and was described as “sensible”, “cool-headed” and “intelligent.” However, the honeymoon period was short-lived. One month later, Barclays was downgraded by Credit Suisse and J.P. Morgan over concerns about the profitability of its investment bank.
2. Mr. Jenkins was a Barclays man. He joined the bank as a graduate trainee in 1983. After a six-year spell at Citigroup, he returned in 2006 and by 2009 headed up its retail and business banking. This lack of investment banking acumen led some analysts to speculate that Mr. Jenkins might cut back the unit after its growth under Mr. Diamond. But this never really materialized. Despite some cut backs in fixed-income and commodities, Barclays remains one of the largest investment banks in Europe, despite underperforming its rivals in recent years. Mr. Jenkins defended the high-pay for the unit in 2014 after a poor year, stating that he had to avoid a “death spiral” of rainmakers leaving for rivals.
3. Mr. Jenkins didn’t waste time installing a number of projects aimed at moving Barclays away from the Libor-scandal that rocked the bank in 2012. First there was program dubbed “Transform”, aiming to “turnaround, return acceptable numbers, and sustain forward momentum”. Then there was Project Mango, a review of business practices in its investment bank. And then there was Project Electra, another review of the investment bank. During this, Barclays was dubbed itself a ‘go-to’ bank, with reviews into culture, pay, and performance reviews of managers.
4. On a long enough time frame, Mr. Jenkins seemed to be the right man for the job. Since he joined in August 2012, Barclays share price is up 52.68%, in comparison the FTSE 100 is up around 15%. On this basis – his reign has been success.  However, from August 2013 the share price has fallen 1.12%, compared with an increase of 2.5% for the FTSE 100. During this period Barclays has paid billion-dollar fines for forex rigging, Libor rigging, and failing to keep client assets segregated. It is still facing investigations from the Serious Fraud Office around its capital raising in 2008. While not related to Mr. Jenkins’ tenure, the fines have weighed down the bank’s share price.
5. But despite his rocky road, Mr. Jenkins is in good company, joining a group of blue-chip bank chief executives looking for new employment, including Anshu Jain, the former head of Deutsche Bank, and Peter Sands the former head of Standard Chartered. During Mr. Jenkins’s time as chief executive, he was paid a total of £10,011,000. He making money from his own exit: part of his pay, which continues until July 7 2016, is share-based. Shares are up more that 3% on news of his exit.

It's too bad, really. We're sure Jenkins was looking forward to a long and fruitful relationship with Richard Fisher, the former Dallas Fed chief Barclays hired last week as a "senior advisor."

*  *  *

Full statement from Barclays:

Antony Jenkins to leave Barclays; John McFarlane to become Executive Chairman

Barclays PLC and Barclays Bank PLC (Barclays) announce the departure of Antony Jenkins as Chief Executive and the appointment of John McFarlane as Executive Chairman pending the appointment of a new Chief Executive.  Subject to regulatory approval the change will come fully into effect on 17 July 2015 when John retires from FirstGroup.  A search for Mr Jenkins' successor is underway.  The interim results will be announced as planned on 29 July 2015. 

The Non-Executive Directors led by Sir Michael Rake, Deputy Chairman and Senior Independent Director,  concluded that new leadership is required to accelerate the pace of execution going forward and that John McFarlane is ideally qualified in this respect until a permanent successor is appointed.  This development does not signal any major change in strategy.

The Board recognises the contribution made by Antony Jenkins as Chief Executive over the past three years in incredibly difficult circumstances for the Group, and is extremely grateful to him in bringing the company to a much stronger position.  The situation he inherited would have challenged anyone facing the same issues.  This continued a period of achievement as head of Barclaycard and our Retail and Business Banking businesses.

Members of the Group Executive Committee will now report to Mr McFarlane, who will work particularly closely with Tushar Morzaria, Group Finance Director. 

Sir Michael Rake commented, "I reflected long and hard on the issue of Group leadership and discussed this with each of the Non-Executive Directors.  Notwithstanding Antony's significant achievements, it became clear to all of us that a new set of skills were required for the period ahead.  This does not take away from our appreciation of Antony's contribution at a critical time for the company."

Mr McFarlane said, "Whilst it is unfortunate that I have had little time to work with Antony, I respect and endorse the position of the Board in deciding that a change in leadership is required at this time.  I would add my personal thanks for everything that Antony has done for us.  He can be proud of his heritage, especially his excellent work on culture and values that we will continue.  I wish him well."

"Arriving at Barclays with a fresh perspective, it is evident that we have a standout brand with first-class retail, commercial and investment banking businesses.  Nevertheless, we are leaving value on the table and a new approach is required.  As a Group, if we aspire to bring shareholder returns forward, we need to be much more focused on what is attractive, what we are good at, and where we are good at it."

"We therefore need to improve revenue, costs and capital performance.  We also need to become more externally focused and deal with the internal bureaucracy by becoming leaner and more agile.  I have experienced good results in dealing with these matters elsewhere," he added.

Antony Jenkins said, "In the summer of 2012, I became Group Chief Executive at a particularly difficult time for Barclays.  It is easy to forget just how bad things were three years ago both for our industry and even more so for us.  I am very proud of the significant progress we have made since then.  Our capital position is much stronger, our business model is more balanced, we are much more disciplined on cost management, we have made good progress in rebuilding our reputation and we are seen as a leader in the application of technology to our business.  While the external environment has continued to be, and will remain, challenging the Group now has the resilience to overcome these challenges. 

"Most of all, I am proud that we have defined our culture through a common set of values for the Group and that the progress we have made and the tough decisions we have needed to take have all been achieved by applying these values and by focusing on the needs of all our stakeholders. 

"I want to thank the people of Barclays for their tireless efforts and support in achieving these results and for my own part I am looking forward to the professional opportunities that lie ahead."

*NYSE SUSPENDS TRADING IN ALL SECURITIES

(1 of 3) The issue we are experiencing is an internal technical issue and is not the result of a cyber breach.

— NYSE (@NYSE) July 8, 2015

* * *

The New York Times, citing floor trades, said new software to blame...

The market outage has stretched to two hours. Official say a cyber-attack is not to blame.

 

"Trader on the floor of the exchange in lower Manhattan, who spoke on the condition of anonymity, said that after the suspension began, traders were told that the problem was related to updated software that was rolled out before markets opened on Wednesday.

 

According to the trader, the exchange said that the new software caused problems soon after trading began on Wednesday and the exchange decided to shut down trading all together to fix the problem."

*  *  *

(1 of 2) We’re experiencing a technical issue that we’re working to resolve as quickly as possible.

— NYSE (@NYSE) July 8, 2015

(2 of 2) We're doing our utmost to produce a swift resolution & will be providing further updates as soon as we can.

— NYSE (@NYSE) July 8, 2015

11:32:57 - trades from NYSE drop sharply, sputter a few minutes, then nothing. Each dot a NYSE trade pic.twitter.com/QmJl8Y2b91

— Eric Scott Hunsader (@nanexllc) July 8, 2015

As Art Cashin noted - "it's been a bumpy day... with technical issues even before the open"

It started badly...

As this chart shows, the NYSE started out low at 9:30. At 10:45 things went down hill: pic.twitter.com/qLnk1TduDJ

— Eric Scott Hunsader (@nanexllc) July 8, 2015

And CNBC was stunned...

Rather hilariously, CNBC just could not comprehend this "broken market"... which happens multiple times a week...

• *NASDAQ HAS DECLARED SELF-HELP AGAINST THE NYSE AMEX
• *NASDAQ HAS DECLARED SELF-HELP AGAINST THE NYSE
• *NYSE EXPERIENCING `TECHNICAL ISSUE': SPOKESWOMAN
• *NYSE: ALL OPEN ORDERS WILL BE CANCELLED

And asked "what should the retail trader at home do?"

NYSE suspends all trading. .... And no one noticed

— Eddie Morra_ZH (@convert_trader) July 8, 2015

Prophetically, we wrote about precisely this one year ago when we documented the hilarious case of "social-network" stock CYNK.  This is what we said then:

For all the drama and comedy surrounding the epic idiocy in which a bunch of "investors" took the price of non-existent company CYNK from essentially zero to a market cap of over $5 billion in under a week, most people missed the key message here: the stock is a harbinger of what is happening to the entire market. Because while those defending what is clear irrational exuberance, scratch that, irrational idiocy are quick to point out that CYNK's epic surge took place on less than 0.1% of its outstanding shares, these are the same people to say precisely the opposite about the S&P 500. "Ignore the collapsing volumes sending the stock market to all time high - it's perfectly normal" is an often repeated refrain by the permabullish crowd. Just not when it involves case studies in market insanity like CYNK apparently.

 

Perhaps ironically, it was the concurrent most recent crisis in Europe, that involving Portugal's cryptic Espirito Santo group, whose top-most HoldCo is largely shrouded in secrecy yet which somehow is not a deterrent to the sellside community to issue one after another "all is clear; don't pull your deposits please" note, that confirmed not only that nobody has any idea what the real situation of European banks is, but how the entire capital market has now become nothing more than one glorified CYNK penny-stock turning into a mid-cap.

 

Deutsche Bank's Jim Reid explains: "Whatever one feels about financials and the wider financial system, credit markets did arguably get a small glimpse of what things will be like when this cycle does actually end as the structurally impaired liquidity that exists in credit caused a small amount of panic yesterday morning before markets recovered in the European afternoon session. Liquidity is really poor in credit these days which doesn't matter when markets are in buy only mode as they have been for many quarters now, but it does matter on the days when you get a negative story."

 

In other words, just like the CEO of CYNK who promptly "made" a few billion in paper profits, it feels great to "make" money on virtually no volume. The problem arises when one tries to cash out of paper and into all too real profits.

* * *

And this happened...

*  *  *

As Reuters reports,

The White House and the U.S. Treasury Department are monitoring the "ongoing issue" at the New York Stock Exchange and President Barack Obama has been briefed on the matter, a White House official said on Wednesday.

 

The NYSE Group, which includes the New York Stock Exchange, has suspended trading in all securities because of technical difficulties.

*  *  *

Which ironic because CNBC is discussing whether this is "a success or failure" and states that "if retail investors want low cost liquid trading then they have to learn to live with this."

Earlier this week in “Presenting China’s Plunge Protection Playbook,” we brought you the following annotated chart, which documents all of the steps Beijing has taken over the last two weeks in a frantic attempt to stabilize its equity markets which are in the midst of an epic meltdown catalyzed by an unwind of the margin mania that helped propel Chinese stocks into the stratosphere over the past 12 months. 

That chart was created just two days ago and indeed, China hasn’t let up on the plunge protection accelerator one bit since then.

On Wednesday for example, Beijing banned selling by major shareholders and corporate directors and when trading got off to yet another rocky start on Thursday (despite the fact that half the market isn’t even trading), the Politburo decided it was time to arrest the slide by literally “arresting” the slide. Here’s what happened overnight: 

[Ministry of Public Security in conjunction with the recent Commission investigation of malicious short stock and stock index clues ] correspondent was informed on the 9th morning , Vice Minister of Public Security Meng Qingfeng led to the Commission , in conjunction with the recent Commission investigation of malicious short stock and stock index clues show regulatory authorities to the operation of heavy combat illegal activities .

Or, in English:

Special workforce to be led by Vice Public Security Minister who vows to soon nail down those who manipulate Chinese stocks, index futures

— George Chen (@george_chen) July 9, 2015

And visually:

I didn't sell. I swear I didn't!!!! pic.twitter.com/jEi0hYrUkm

— Fed Porn (@FedPorn) July 9, 2015

Sending a thinly veiled threat to anyone evil enough to consider selling shares seems to have been fairly effective, as the SHCOMP had its best day since March of 2009 on Thursday, rising nearly 6%.

Be that as it may, this latest act of sheer desperation out of Beijing likely won’t stop the bleeding for long, and we suspect the selling may continue to mount over the short-term as the country’s millions of newly-minted and now completely disenchanted day traders look for any excuse to sell the rip, break even, and go back to “farmwork.”

In short, the plunge protection program is likely to prove just as ineffective in China as it did in the US after Black Thursday...

...meaning the stock market will cease to serve as a much needed distraction from the country’s decelerating economy and collapsing real estate bubble.

With all of the above in mind, consider the following from Deutsche Bank who is out with some “sweet and sour” lessons for China derived from the “one-man plunge protection team” which came to the rescue in the US after the ‘87 crash. 

*  *  *

From Deutsche Bank

The '87 US plunge protection team: sweet & sour lessons for China

Unlike 1987 when Greenspan was a one-man plunge protection team using rate cuts to support the market, China has fewer constraints to substantive direct price keeping operations, but there are strong arguments against actions going beyond smoothing activity.

The PBOC is struggling with ‘the holy trinity’ - maintaining a currency peg for stability, targeting interest rates and RRR directed at the real economy, providing equity support, and all this while attempting to liberalize interest rates and open the capital account. It’s a tall ask. Internationalization of the currency should be slowed. 

The sweet

1) The slide in Chinese equities has some characteristics of the US 1987 crash in so much as ’the October crash’ in 1987 unwound relatively short-term gains mostly established in the prior 10 months. As per Figure 1, the one-year prelude to the 1987 US crash showed a similar pattern to China equity gains, albeit Figure 2 also shows how China’s equity appreciation was much larger than the US gains that immediately preceded the 1987 crash. The important point is the equity surge was relatively shortlived, so there never was quite enough time for a feedback loop to develop from higher asset prices driving a stronger real economy driving the asset bubble ever higher. The real economy implications are not as acute when a short-lived bubble pops.

2) Remember the mythical ‘plunge protection team’. The market has consistently spoken about how the 1987 crash prompted the creation of a ‘crisis group’ of senior US officials that would draw up lines of support for the equity market if faced with a similar collapse in equity prices. For better and worse, China is much more willing and has fewer constraints on official intervention, and the role of the PBOC funding China’s Securities Finance Corp as a source of support notably for a small cap stocks, at a minimum has the prospect of smoothing any price decline.

1) The flip side of any official equity intervention, and as important the recent suspension of trading in some shares, is the obvious lack of transparency. This has resulted in good stocks/assets being sold to hedge illiquid asset exposure that itself destroys confidence even as it creates good value for select equities. China has the resources to support the equity market in the shortterm, but there are inherent problems in artificially supporting prices. It undermines the markets confidence that a base has been reached, and in the long-term further distorts the allocation of capital. These are arguments why plunge protection should be no more than a smoothing facility to encourage fair price discovery. 

2). The US substituted a late 1990s equity bubble with a housing bubble which did not end well. China’s experiment in substituting housing froth with equity froth, is plainly not succeeding. This all falls under the title: ‘troubles with policy traction’ that adds to China’s growth risks. 

3). Collateral damage. The problems of credit creation dominated by bank lending is compounded by the sizable part of lending that is backed by property and a much smaller but substantial amount of collateral comprised of ‘movable’ assets like equities, commodities, and receivables. There is then more scope for contagion to work across asset classes and intercede directly into the banking system via the impact on collateral. This space needs to be watched closely. 

4). ‘Proof’ that the PBOC is not omnipotent. Greenspan’s rate cuts immediately after the 1987 crash did seem to stabilize the situation. He was a one man plunge stabilization team, and this was in retrospect the early stages of the ‘Greenspan put’. Even this ‘put’ distortion was ultimately seen having huge costs. The PBOC is already much more stretched than the Fed ever was. They are struggling with ‘the holy trinity’ - maintaining a currency peg for stability, interest rates and RRR directed at the real economy, equity support, and all this while attempting to liberalize interest rates and open the capital account while maintaining fiscal discipline. It’s a tall ask. It would suggest that some objectives like the internationalization of the Rmb be deferred.

*  *  *

The question now is whether and to what extent the equity carnage spills over into the real economy.

While the contagion effect as transmitted through the country's banks (via collateral, willingness to lend, or otherwise) is no doubt worth "watching closely" (to use Deutsche's words), it's also worth noting that given the influx of retail money into the market this year, the crash could have a negative effect on everyday people's propensity to spend and just about the last thing the country needs is for a crisis of confidence to derail consumer spending just as Xi Jinping attempts to transition China away from a smokestack model and towards an economic future characterized by services and consumption.

Over the course of six painful months, negotiations between Athens and Brussels have produced innumerable "deadlines", "ultimatums", and "last chance" summits, none of which have produced a lasting deal or a Grexit. In fact, until the deposit outflows started to accelerate and Greek PM Alexis Tsipras took the dramatic step of putting creditors' proposal to a popular vote, many observers were beginning to lose interest, perhaps believing that the farce might just continue indefinitely. 

This Sunday however, is being billed as the day; the deadline to end all deadlines and the very last chance for Athens to remain in the EMU. Meanwhile, pressure on Tsipras — who, according to The Telegraph, likely thought he would be drinking beer with Varoufakis over quiet lunches by now — is building from both sides, with far-left Energy Minister Panagiotis Lafazanis swearing that the "referendum 'no' vote is not going to become a humiliating 'yes'", and Germany showing few signs of weakness. The intractable nature of the situation was brought into sharp relief earlier when MNI described Tsipras'"new" proposal which, by all appearances, looks as though it will be unacceptable to Germany and to the harlinders within Syriza.

In an effort to help cut through the confusion, we you bring you the following two graphics which shed some light on what lies ahead regardless of what transpires between now and Monday.

From Deutsche Bank:

From Bloomberg:

"We got a mandate to bring a better deal than the ultimatum that the Eurogroup gave us, but certainly not given a mandate to take Greece out of the eurozone,” Greek PM Alexis Tsipras reportedly told Syriza lawmakers on Friday, underscoring the fact that his government’s mandate is, for all intents and purposes, impossible to achieve. 

As detailed Thursday evening, the proposal (or, the “thorough piece of text” as Jeroen Dijsselbloem called it) submitted by Tsipras looks quite a bit like the proposal the Greek people rejected at Tsipras’ urging last Sunday. Here are the basics:

The broad strokes: a 3 year, €53.5 billion bailout program, including €35 billion of growth measures, lasting through June 30, 2018 requesting funds from the ESM, seeking to finally put the IMF off to the side. The program is heavy on revenue promises and lite on actual spending cuts. Greece hopes to achieve a 1% primary budget surplus in 2015, rising to 2%, 3%, and 3.5% by 2018, all of which are now impossible due to the total collapse of the economy in the past week. Among the tax reform will be a modest increase in corporate tax from 26% to 28%. The changes to the VAT system are as noted previously, keeping the VAT on hotels at 13% but raising it to 23% for restaurants; Greece also promises to eliminate discounts on islands, starting with the islands with higher incomes and which are the most popular tourist destinations. Create strong disincentives to early retirement, incur penalties for early withdrawals, make all supplementary pension funds financed by own contributions; and so on. Greece will seek to "gradually phase out the solidarity grant (EKAS) for all pensioners by end-December 2019" - who will be impacted and when: "the top 20% of beneficiaries in March 2016." In other words another 9 months of non real action. Greece will also "freeze monthly guaranteed contributory pension limits in nominal terms until 2021."

Reactions from Europe and from Syriza itself have been largely predictable. As mentioned above, Dijsselbloem is lukewarm, French President Francois Hollande called the proposal “serious and credible”, Italian PM Matteo Renzi is “more optimistic than [he] was in the past,” while Germany is, to use Bloomberg’s words“reserving judgement.” 

On person who is not “reserving judgement” however is Greek Energy Minister and far-left leader Panagiotis Lafazanis. “The proposals are not compatible with the Syriza programme," he told Reuters on Friday. On Thursday, in the course of detailing Greece’s€2 billion energy partnership with Russia, Lafazanis said the referendum “no vote “must not become a humiliating ‘yes’.” 

While the Eurogroup will convene on Saturday to consider whether to go ahead with the deal, the first hurdle is the Greek parliament where Tsipras is set to use what Deutsche Bank calls an “unusual political move” to give the proposal a better chance of passing next week. Here’s Deutsche Bank with more:

In the meantime, the Greek PM has initiated the domestic approval process as well. In an unusual political move, he has submitted a one-page legislative proposal requesting emergency parliamentary authorization to negotiate the final terms of the agreement. He has published the government's proposal at the same time, but is not calling for parliament to vote upon the actual measures. In principle such authority is not required. In practice, the strategy aims at consolidating the SYRIZA party's parliamentary base ahead of a likely vote to approve the measures next week. On the positive side, pre-emptive parliamentary support will make it more difficult for SYRIZA MPs to reject an agreement after it comes to parliament. On the negative side, the PM will also have an authority to reject an agreement if he so decides.

 

The opposition's stance to this strategy remains to be seen, but it will be the support of the government's parliamentary majority that will be the most important today. The PM will meet with SYRIZA parliamentarians at 6am London time. A full parliamentary vote will take place later in the evening. Approval will provide negotiating space to the PM, increasing credibility with the Europeans and the odds of passage in a subsequent parliamentary vote next week.

In other words, it appears as though Tsipras is looking to back the Syriza hardliners into a corner. The argument appears to go something like this: voting on the actual proposals would be largely pointless as Europe hasn’t approved them, so let’s vote on whether I have the authority to negotiate the measures, but if you say “yes” to that, and I agree to a deal this weekend, then I can then come back to you and say “well, you gave me the authority to negotiate and I decided to accept so now you pretty much have to approve this.” This strategy has the added benefit of allowing Tsipras to tell Europe that the Greek parliament voted “yes” even though in reality they did not vote on the actual deal. You have to love politics. 

As for “debt sustainability” (i.e. that small issue which the IMF brought up three days before the referendum and effectively won the vote for Tsipras and the “no” crowd), that will be considered later apparently. From Bloomberg: 

Debt sustainability is a central part of discussions in the Euro Working Group and the Eurogroup of euro-area finance ministers, EU official says.

 

Assessment of Greece’s financing requirements will also form part of analysis, official tells reporters in Brussels

 

First, prior actions will be discussed, then financing, then debt sustainability -- but they are all linked, official says.

They may be “all linked” but Germany still isn’t biting — or at least not on the idea of a “classic haircut.” Here’s the Irish Times:

The Greek government received a boost on Thursday, after European Council President Donald Tusk said that a “realistic proposal from Athens” should be matched by “realistic proposal from creditors on debt sustainability”.

 

His unexpected comments - the first from a senior EU figure - followed a phone conversation with Greek prime minister Alexis Tsipras.

 

Senior officials representing the 19 euro zone member states will consider Greece’s new reform plan on Friday, ahead of a scheduled eurogroup meeting of finance ministers in Brussels on Saturday.

 

Mr Tusk’s intervention follows renewed calls from IMF managing director Christine Lagarde on Wednesday that Greece’s debt burden should be addressed.

 

US treasury secretary Jack Lew also intervened to call for debt relief for Greece.

 

In a sign that Berlin could be open to the idea of debt relief, German finance minister Wolfgang Schauble said the issue could be discussed over the coming days, though he hinted that the impact of any measures would be minimal. “The room for manoeuvre through debt reprofiling or restructuring is very small,” he said.

 

German chancellor Angela Merkel also explicitly ruled out a debt writedown for Greece. “I have said that a classic haircut is out of the question for me and that hasn’t changed between today and yesterday,” she said, echoing comments she made on Tuesday in Brussels.

 

Speaking within hours of Mr Tusk’s comments, she said that Greece’s debt sustainability had already been addressed under previous bailouts.

So, just as we said: Germany and the US are now at odds over a Greek debt writedown.

Ultimately, Tspiras has submitted the same proposal that Greeks, at his behest, voted against last weekend. The PM will use a shrewd political maneuver to secure parliamentary support and new FinMin Euclid Tsakalotos will attempt to close the deal on Saturday. And although that would mean selling Greek "no" voters down the river, it's once again a nearly impossible choice because as Bloomberg reports, citing Dutch newspaper Het Financieele Dagblad, the ECB "will terminate emergency liquidity assistance (ELA) to Greece as of 6am on Monday morning if Greek reform proposals are deemed too light and if Greece is unwilling to cooperate with withdrawal from the euro zone."

Here's Commerzbank's Markus Koch summing things up: "The 'No' in the referendum appears to be turning into a 'Yes' from Tsipras."

Sorry Panagiotis Lafazanis. Maybe there's a cabinet position open in Moscow.

*  *  *

So much for "hope"...

...and so much for this as well...

While the Greek "compromise" deal may have averted an outright economic collapse in Greece in the short-term (although one would be hard pressed to describe the current situation on the ground as anything other than a depression) and may for the time being allow EU officials to cling to the notion that the euro is "indissoluble," the fraught negotiations that took place over the weekend in Brussels laid bare for all to see the unbridgeable gap between EMU nations. 

If there were any doubts about who runs the show, German FinMin Wolfgang Schaeuble erased them on Sunday by pushing through a term sheet that effectively strips Greece of its sovereignty on the way to seizing state assets and relegates its people to perpetual debt servitude. If this is the meaning of a currency "union", it’s not entirely clear why any state would want to be a part of it. 

With the birthplace of Western civilization now completely beholden to the politicians who control the purse strings, BofAML and Deutsche Bank are out with some brief, but poignant commentary on what the future holds for the currency bloc.

* *  *

From BofA

Temporary exit: think twice

Although the idea seems to have been dropped, the draft of conclusions the Eurogroup circulated to the Heads of State contained a temporary exit from the Euro as an alternative to a deal. Exit from the currency block is now officially something that can be used as a threat to those that don’t behave the German way. More importantly, it can be temporary which, in principle, would make it more feasible relative to a permanent one. This is a bad idea in our view. It would mean the return of convertibility risk to spreads in the medium run. If the idea of an exit was bad, a temporary one is even worse. The ECB would be there as first line against contagion in the short run. But we had argued in the medium run a move towards more integration would be needed. If we have learned something today is that there is little appetite for more integration. 

From Deutsche Bank

After a truly unprecedented 17-hour Euro leaders summit, a deal has been finally struck on Greece. The agreement sets the framework around which Greece can avoid an exit from the euro. The Greek government is required to deliver against an incredibly detailed set of conditionalities to receive aid, a signal of the significant lack of trust between the authorities and its creditors.

On the negative side execution risks remain high and the new agreement will further increase pressure on the economy as well as possibly leading to the creation of political parties more explicitly against euro membership in Greece in the future. The last six months' crisis has exposed weaknesses in the Eurozone's governance framework that will likely reverberate for months and years into the future.

Over the weekend, the entire world looked on in horror as Alexis Tsipras - who just days earlier secured a crucial referendum victory which by all accounts empowered him to ride into Brussels a conquering hero - was eviscerated by German FinMin Wolfgang Schaeuble and several like-minded EU finance ministers who smelled blood last Thursday after Greece submitted a proposal that betrayed the Greek PM’s lack of conviction.

As outlined exhaustively here over the past 24 hours, the new “deal” for Greece has implications far beyond the Aegean and may well mark the beginning of the end for the EMU experiment, for although the Greek drama highlights the need for a fiscal union to compliment the common currency, the "bargaining" stance adopted by Germany makes it far less likely that financially weaker states will be willing to turn over their fiscal affairs to Brussels. 

But leaving the bigger picture implications aside for now, the two most important short-term considerations for Greece are: 1) establishing political stability, and 2) stabilizing the banks.

Neither of these will be easy.

In fact, both could prove to be rather monumental tasks. With Tsipras facing a party revolt and the Greek banking sector facing outright insolvency, Deutsche Bank has more on politics and bank "normalization."

*  *  *

From Deutsche Bank

Next Greek steps

On the political side, statements from Greek PM Tsipras following the conclusion of the summit indicate a desire to take ownership of the "difficult" agreement, despite the large concessions made. We would consider this as significant, as the PM still commands a meaningful degree of influence in Greek public opinion as well as within the SYRIZA party itself. Following Saturday's authorization vote in the Greek parliament, at least 32 government MPs have indicated they would be unwilling to support an agreement, effectively leading to a loss in the government's parliamentary majority. The support of Independent Greek junior coalition member also remains to be seen following negative statements on a potential agreement from party leader Kammenos overnight, effectively leading to a potential loss of more than 40 MPs from the government coalition.

As such, we would consider a minority or national unity government as the most likely outcome following the Greek PM's return to Athens later today. A minority government would involve a major cabinet reshuffle by the Prime Minister with the departure of dissenting cabinet ministers (most notably energy minister Lafazanis) and the replacement by more politically-neutral members. Opposition support would remain at arm's length, to be provided by New Democracy, River and PASOK controlling more than 100 MPs. Combined with support from moderate SYRIZA MPs, this would generate a parliamentary majority of at least two-thirds. The alternative outcome would be a government of national unity with more active involvement by pro-European parliaments in the cabinet re-shuffle as well.

Whether Greek PM Tsipras would remain in his position under such a government remains to be seen, but party leader statements so far suggest that this may be acceptable. Either way, PM Tsipras will have to take decisions on how the SYRIZA party membership and parliamentary group is likely to change in coming days: press reports that he is likely to ask for dissenting MP resignations, to be replaced by more moderate MPs, inclusive of outspoken Speaker of the House Konstantopoulou who also expressed disagreement over the weekend. Whether dissenting SYRIZA MPs resign or form a new anti-euro parliamentary grouping remains to be seen. Either way, it is likely that the new government's mandate is implicitly or explicitly set to run until the signing of a new ESM agreement by September, to be followed by a new election. Greek politics are now likely to shift to more well-defined political narratives, ultimately distinguished by party positions on euro membership rather than austerity.

Bank normalization will take time

In terms of the Greek banking sector, immediate decisions will need to be taken given the exhaustion of the ECB ELA buffer. An immediate increase in the ELA cap would allow continued rationing of cash from ATMs in coming days. It is possible the ECB waits for such a decision on Wednesday, when the ESM negotiations formally re-open and there is a "credible perspective" for the conclusion of the review. (ZH: it does indeed appear the ECB is waiting until Wednesday at least). More broadly, the return to a more normally functioning banking system in Greece with fewer restraints on liquidity will likely depend on the timeframe of a new bank recapitalization program. The Euro leaders statement highlights that this will require a comprehensive recapitalization exercise following the transposition of the Bank Recovery and Resolution Directive in Greek legislation. At face value, this suggests that the possibility of depositor bail-in cannot be ruled out given the directive's provisions. In practice, it is unlikely that there are a significant number of deposits above the directive's 100k legally protected limit implying that this may be avoided. Still, bank recapitalization is unlikely to take place until after the summer. In the meantime, the ECB will require bank solvency assurances to maintain financing of the Greek banking system and continue to increase ELA, particularly given Greek bank's declining collateral availability, likely at around 5bn EUR under the current ELA haircut schedule. ECB financing in coming months will likely need a front-loaded disbursement of ESM guarantee funds in an escrow account or an alternative "bridge guarantee" financing method. Either way, it is unlikely that capital controls are lifted soon. 

*  *  *

As you can see, a government reshuffle (something we've predicted for months) is imminent although it is as yet entirely unclear what the political landscape will look like in six months and indeed it's not at all clear whether Tsipras will survive the melee.

As for the banks, well, they're essentially wandering aimlessly through a minefield. For those interested in a detailed account of the challenges that lie ahead for the Greek banking sector, see "Greek Banks Not Out Of The Woods, May Impose Tougher Capital Controls." The short version is simply this: Lacking sufficient collateral to keep the ELA game up for much longer, Greece's banks will need to be recapitalized in short order barring a dramatic decrease in ECB haircuts. Even in the most optimistic scenario, capital controls are likely here to stay for the foreseeable future. 

• Greek lawmakers split over bailout as vote looms (Reuters)
• Greek Bailout Rests on Asset Sale Plan That Already Failed (BBG)
• Greece Needs $25 Billion to Get Through August, Scicluna Says (BBG)
• Tsipras Enters Parliament Den to Sell Aid Deal to Greeks (BBG)
• Greece makes samurai bond repayment (FT)
• Iran, World Powers Have Reached Nuclear Agreement (BBG)
• Janet Yellen’s Fed Flounders in Political Arena (WSJ)
• CFO survey shows growing concern about earnings, revenue, hiring and CapEx (Yahoo)
• Obama Seeking Overhaul of U.S. Prison Sentences by End of Year (BBG)
• Einhorn was right: State-Owned Chinese Chip Maker Tsinghua Unigroup Makes $23 Billion Bid for Micron (WSJ)
• Xiaomi success inspires every man and his dog to make smartphones in China (Reuters)
• London Woos Oligarchs and Banks With Hub for Big-Money Lawsuits (BBG)
• Shale Gas Supply Held Hostage by Oil to Drop by Most in a Year (BBG)

Overnight Media Digest

WSJ

* The top diplomats from Iran, the U.S. and other world powers planned to sign off on a nuclear accord Tuesday and announce the deal, officials from both sides said. (http://on.wsj.com/1Ldm7Ld)

* In the race to hammer out a bailout for Greece, Europe's most important bilateral relationship - the one between Berlin and Paris - was put to its most serious test in years. (http://on.wsj.com/1CDhLLV)

* Almost 18 months after taking the helm at the central bank, Janet Yellen is struggling to manage a strained relationship with Congress. (http://on.wsj.com/1L3MvIY)

* Tsinghua Unigroup Ltd, China's largest chip design company, has prepared a $23 billion bid to buy U.S. memory chip maker Micron Technology Inc, people familiar with the matter said, in what could be the largest foreign takeover by a Chinese firm. (http://on.wsj.com/1eXWv8O)

* There's a new obsession taking hold in the world of fantasy sports online: daily games played for cash. The twist has touched off a wave of investments in startups that are reinventing the season-long online pastime. (http://on.wsj.com/1eXWv8O)

* New York City has agreed to pay the estate of Eric Garner $5.9 million to settle a lawsuit over his death after he was placed in a chokehold by a New York Police Department officer. (http://on.wsj.com/1dXxp9a)

FT

The Department of Financial Services, New York's banking regulator, requested Deutsche Bank AG provide details of a suspected bribe offered to a Deutsche employee in Moscow in December by a counterparty to resume trading of stocks that may have breached anti-money laundering rules. The regulator is investigating whether trades worth $6 billion made by the bank for Russian clients constituted money laundering.

Apple Pay will launch in the UK on Tuesday. The payment service has received support from big brands like Marks and Spencer, BP and others.

Energy trading house Gunvor has sold a controlling stake in its Ust-Luga oil products terminal to Russian businessman Andrei Bokarev, the Swiss-based company said on Monday.

Scottish National Party is all set to vote against relaxing the fox hunting ban in England this week. The party said on Monday that it would vote against a plan to relax the ban in the Commons on Wednesday.

NYT

* Roughly 350 creditors were told they would have to wait several weeks until a working group of Puerto Rico leaders formed recommendations for resolving the island's fiscal crisis. (http://nyti.ms/1MqAJpd)

* Despite the tentative bailout deal, the European Central Bank, which has been keeping Greek banks propped up for months with emergency loans, declined on Monday to provide additional cash. (http://nyti.ms/1MqCeDY)

* Over the last month, trillions of dollars of value were wiped from the Chinese domestic market as stocks plunged by more than a third. The Chinese government stepped in, issuing a series of increasingly aggressive moves to prop up the market. Hedge funds are now reassessing their positions and questioning the role of the government in China's stock market. (http://nyti.ms/1M7tF3Y)

* U.S. fantasy sports startup FanDuel plans to announce on Tuesday that it has raised $275 million in a new round of financing, bringing its total haul from investors to $363 million. (http://nyti.ms/1M7tKEB)

* Uber, the ride-hailing service, is now out of the running to acquire Here, the mapping division of Nokia Oyj, according to three people with knowledge of the talks. The company had submitted an offer for Here this year for as much as $3 billion. (http://nyti.ms/1M7uj1t)

* CrowdStrike, a security services provider focused on stopping attacks before they happen, announced on Monday that it had raised $100 million in a new round of financing. (http://nyti.ms/1M7un0Z)

Canada

THE GLOBE AND MAIL

** Canadian video streaming services continue to come untethered from traditional television as Bell Media said on Monday that starting next year, CraveTV would be offered directly to any Canadian with an Internet connection. (http://bit.ly/1CBzUtV)

** Swiss bank Syz & Co said it would buy Royal Bank of Canada's Swiss private bank, including 10 billion Swiss francs ($10.57 billion) under management, the latest move by a foreign bank to exit Switzerland. (http://bit.ly/1HsZIVx)

** The technology allowing consumers to make purchases using credit and debit cards stored on their smartphones is rolling out in Canada, but fewer than 25 percent of consumers can use it, according to a white paper released by the six largest banks in conjunction with the Canadian Bankers Association. (http://bit.ly/1HrI1rJ)

NATIONAL POST

** Royal Bank of Canada (RBC) has been asked by the Federal Reserve in Washington to address a claim the Canadian bank "collaborated" to extend credit to a customer of City National Corp, a Los Angeles-based private and commercial bank RBC is proposing to buy for $5.4 billion, before the acquisition was approved by regulators. (http://bit.ly/1HsYqK4)

** Toronto's City Council voted last week to crack down on Uber drivers, but that isn't stopping the ride service from expanding its offerings to include a new car-pooling option during the Pan American Games. UberPool will be available in Toronto until July 26, and Uber is offering it for free during Tuesday's morning and evening rush hour. (http://bit.ly/1HsYSIs)

** The pipeline unit of refiner Marathon Petroleum Corp plans to buy MarkWest Energy Partners LP for about $15.8 billion in stock and cash, the latest example of consolidation among companies that move and process fuel. (http://bit.ly/1HsZ36q)

Hong Kong

SOUTH CHINA MORNING POST

-- Chief Executive Leung Chun-ying, who sought a pivotal role for Hong Kong in the mainland's overseas economic expansion during his trip to the capital, said Beijjng was "very satisfied" with his performance. Summing up his two-day trip, Leung dropped a strong hint he would seek a second term. (bit.ly/1HEns8q)

-- Hong Kong's "silver economy" that taps elderly spending is worth HK$50 billion a year and growing but too few businesses are wooing this market, says Wilson Tong, director of Vertico Expo Services and organiser of the recently concluded Retiree and Senior Fair for the elderly. (bit.ly/1HZnKeD)

THE STANDARD

-- Young people have for a third consecutive year failed to be impressed by the Hong Kong government, a study by the Chinese University of Hong Kong backed by MTR Corp Ltd shows. Another key finding is that the quality of life for the young has fallen in the past 12 months. (bit.ly/1gxPxID)

-- Thirty-four children being educated at home are in line to be the subjects of orders issued by the Education Bureau to ensure they go to proper schools. According to the bureau, there are 34 current cases of home schooling in Hong Kong but none of them are in learning environments approved by education authorities. (bit.ly/1HqYoEU)

-- Sun Hung Kai Properties is aiming at double-digit revenue growth this year at its apm shopping center via expansion and attracting more foreign visitors despite fewer mainland arrivals. SHK Development (China) director Maureen Fung expects apm's revenue to grow 10-15 percent to HK$3.8 billion ($490 million) and visitor flow to rise 10 percent to 100 million. (bit.ly/1UW3dgn)

HONG KONG ECONOMIC JOURNAL

-- Film distributor China Star Cultural Media Group Ltd said it would sell 459.9 million new shares, or 10.93 percent of its enlarged share capital, to a subsidiary of CITIC Ltd for HK$629 million. CITIC will become the second largest shareholder of the company on completion of the deal.

-- Asian Citrus Holdings Ltd said Changjiang Tyling Management Co Ltd had completed the purchase of 14.34 percent of the company from Market Ahead Investments Ltd for HK$200 million, making it the single largest shareholder of the Hong Kong-listed fruit juice concentrates maker.

Britain

The Times

NINTENDO CHIEF SATORU IWATA DIES OF CANCER AT 55

Satoru Iwata, the popular and respected chief executive of the video game maker Nintendo, has died of cancer. He was 55. In a brief statement the Kyoto-based firm - the maker of Donkey Kong and Super Mario - said that Mr Iwata passed away on Saturday. (http://thetim.es/1gxIGyU)

RAPPER AND ENTREPRENEUR 50 CENT FILES FOR BANKRUPTCY

The rapper and entrepreneur 50 Cent, who released a book of advice on how to operate in the twenty-first century, today claimed that he doesn't have a dime to his name. (http://thetim.es/1O84QTF)

The Guardian

DAVID CAMERON TO FORCE COMPANIES TO DISCLOSE GENDER PAY GAPS

Large companies will finally be forced to disclose whether they are paying men more than women from next year, Prime Minister David Cameron will say on Tuesday. (http://bit.ly/1CAOBgK)

INTEREST RATES ON PERSONAL LOANS FALL TO LOWEST LEVELS ON RECORD

Interest rates on personal loans have dropped to the lowest levels on record in the latest evidence that the cost of borrowing is continuing to fall for consumers. While mortgage rates slumped to record levels in May when the Co-operative Bank launched a two-year rate at 1.09 pct, the Bank of England said rates on personal loans had also reached the lowest levels since records began 20 years ago. A 10,000 pound loan costs just above 4 pct. (http://bit.ly/1K4Hk8L)

The Telegraph

EU DEMANDS BRITAIN JOINS GREEK RESCUE FUND

Britain will be liable for close to 1 billion pounds of emergency loans to Greece, it can be revealed, after Jean-Claude Juncker tore up a "black and white" deal to protect UK taxpayers from Eurozone bailouts. (http://bit.ly/1LcgKfq)

BANK OF ENGLAND PLANS TO ACCEPT EQUITIES AS COLLATERAL FROM BANKS

Banks could be able to offer the Bank of England shares as collateral under a scheme being considered by officials, executive director Chris Salmon has revealed. (http://bit.ly/1TyxvEm)

Sky News

TUBE DRIVERS TO STAGE FRESH 24-HOUR STRIKE

London Underground drivers are to stage another 24-hour strike amid a dispute over the new all-night Tube service. The ASLEF union said the walkout would take place from 9.30pm on Wednesday, 5 August, threatening more severe disruption to journeys. (http://bit.ly/1LcKUix)

PENTAGON 'TO LIFT MILITARY TRANSGENDER BAN'

The Pentagon is finalising a plan to lift a ban on transgender individuals serving in the US military, according to a report. (http://bit.ly/1HqVi3O)

The Independent

APPLE PAY ABOUT TO LAUNCH IN THE UK

Apple Pay is about to go live in the UK, with shops' signs being updated for the launch and HSBC's official account apparently confirming the date. The company is gearing up to launch the new service on July 14, the leaks indicate. That fits with previous rumours, based on information shared by shops that were gearing up for the launch. (http://ind.pn/1Gh8DaQ)