#grexit

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The Greek right is back: greedier, uglier and more focused than ever. The incoming New Democracy government is determined to reclaim full control of the state on behalf of the most parasitic segment of Greece’s oligarchy and, of course, of our country’s ruthless creditors.

Kyriakos Mitsotakis, the new prime minister, is a scion of one of the dynasties responsible for Greece’s perpetual bankruptcy, corruption and subservience to the Atlanticist oligarchy-without-borders. Tellingly, he has surrounded himself with, on one side, apparatchiks connected to vulture funds and failed banks and, on the other, ultra-nationalist former fascists.

Together, Mr Mitsotakis’ motley reactionaries plan to unleash a fresh class war against a people who have already lost almost everything, against minorities, against our environment, against common decency.

How did this happen?

Greece’s financial crisis has come back to the boil as Athens draws up emergency plans to stabilize the banking system, raising concerns that the country may ultimately need a fourth EU rescue to escape its depression trap.

Global risk aversion and contagion from Italy’s parallel banking drama has lifted a lid on the festering legacy of bad debts, and exposed the implausible methods employed by Greek regulators and the EU-led troika to camouflage the problem.

Greek bank shares slumped a further 6pc on Tuesday after five days of falls. They are now down by 60pc since May, chiefly on fears of drastic state intervention to shore up thinning capital buffers. The Athens bourse has lost a third of its value this year.

The sell-off came as risk spreads on Italian 10-year bonds spiked to a four-year high of 335 basis points, entering the danger zone for Italian banks that collectively hold €380bn of the country’s sovereign debt.

Brussels is expected to launch its excessive deficit procedure against Italy on Wednesday for violation of the debt ceiling rules of the Fiscal Compact, doubling down on a fateful clash with the insurgent Lega-Five Star government in Rome.

This could lead to fines against a net contributor to the EU budget, an unenforceable sanction that risks a combustible political showdown. It almost certainly plays into the hands of Lega strongman Matteo Salvini, who aims to stoke up a pan-EU populist revolt before the European elections in May.

The EU is relying on the bond markets to ‘do the job’ of breaking political resistance in Italy. It is a high-stakes gamble that relies on a controlled banking crisis. This could easily slip out of control at a time when eurozone growth is already wilting and EMU money supply figures are flashing pre-recession warnings.

Greece’s fresh drama has crept up on markets almost unawares. Most investors thought the eight-year crisis had been put to rest with the end of the EU’s third rescue programme in August, even though the International Monetary Fund warned that Greece was still fundamentally insolvent without full debt relief. It said the country “could struggle to maintain market access over the long run”.

“Greece is very unstable and will be blown out of the water immediately if anything goes wrong in the global economy or if there a European recession” said Professor Costas Lapavitsas from London University (SOAS).

“The Greek banks are walking dead. Credit has been shrinking every single month and they are not providing the normal function of banks in an economy. They have been burning up their capital and there isn’t a penny for recapitalisation. When the real music starts this will become obvious,”he said.

Prof Lapavitsas said lenders had been allowed to discount the value of deferred tax credits for 20 years and deem this capital in a “smoke and mirrors” operation. They are now close to exhausting even this expedient. “It is not real capital. The Greek state is going to have to step in and provide cash,” he said.

In effect, the ‘bank sovereign doom loop’ that has so long bedevilled the eurozone is still working its curse. The Greek central bank is exploring a variety of options, including the creation of a bad bank or special purpose vehicle (SPIV) to soak up half the bad debts of the four systemic banks, Piraeus, Alpha, Eurobank and National Bank.

Non-performing loans are still €89bn. Bonds issued by the SPIV will in effect require a guarantee from the Greek state. “The whole thing is a con. It is unbelievable that they are doing this. The bottom line is that Greece should not be in the euro,” he said.

North European banks no longer have any significant exposure to Greece. In financial terms, the latest jitters are a local affair. But the political fall-out would be serious if it became clear that the EU authorities had yet again misjudged the gravity of the situation when it declared ‘mission accomplished’ amid much celebration earlier this year.

Critics say the northern creditor powers have refused to accept that austerity overkill from 2010 to 2018 has done so much damage to the Greek economy that nothing short of a massive debt-write off, backed by a New Deal investment blitz, can restore sustainable growth. There will be a political storm if events in Greece once again leave Europe having to pick between the twin poisons of Grexit and another rescue.

For now, investors are more worried about Italy. Andrea Enria, incoming head of the European Central Bank’s supervisory arm (SSM), warned that rising risk spreads are not just eroding the capital buffers of Italian banks but also making it harder for them to roll over their bonds.

Mr Enria said the eurozone banking union itself would “not survive the next crisis” if the region stumbles into a global downturn without first having cleaned up the balance sheets of lenders.

A senior strategist at one Italian bank said lenders have been able to cushion the impact on capital buffers by reshuffling their portfolio of bonds, reducing the share that is subject to mark-to-market rules. “We could live with spreads of 400 for a while,” he said.

The longer the spreads stay high, the more damage they do. Mortgage costs are rising. There is an incipient credit crunch. Big lenders have raised a mere €3.5bn in covered bonds since June and therefore have to curb lending to protect their CET1 core capital. “They are totally shut out of the market,” he said.

Much now depends of the next ECB meeting in December. If the governing council signals that it will roll over the ECB’s €800bn bank lending window (TLTRO) - at least partially - it will be a huge relief.

Athens