The Golden Age of QE and The Fiat Endgame...

By: Clive Maund

Tuesday, February 3, 2015

Originally published January 29th, 2015.

As you are doubtless aware we are living in a new paradigm - the age of global QE has arrived.

Amongst the major power blocs it started with the US, spread to Japan, which adopted it with a particular gusto, after suffering from deflation for decades, and just has been taken up by Europe in a big way, after waiting for half its young people in many constituent countries to become unemployed due to the ravages of deflation. Smaller countries will have to join in or their currencies will soar and they will become uncompetitive.

It is vital to understand that, having become a universal policy, QE is here to stay - this is a genie that can't be put back into the bottle. The reason is that any attempt to reverse course and rein it in would quickly lead to soaring interest rates because of immense debt levels, a global market crash and a liquidity crisis, in other words a deflationary implosion. Another important to note is that in this "Golden Age of Fiat" where money does not have to be backed by anything and where our masters are accountable to no-one, they can indulge in as much QE as they like.

QE has a number of huge advantages for the ruling elites. First of all it allows them to remain in power indefinitely, because credit crises and the social strife that follows can be avoided by the simple expedient of printing ever more money - the European elites were slow to grasp this point, but judging from the magnitude of their just announced QE, they definitely understand this now. As we know, one of the maxims of the elites is to "privatize profits and socialize losses" - put crudely and simply, when they make money they keep it all to themselves, but when they goof up and lose money, they will push the bill onto the general population, the middle and lower classes - a brazen and glaring example of this being when the "too big to fail" banks and other big institutions in the US got society at large to bail them out at the height of the financial crisis via TARP, the Troubled Asset Relief Program, which of course was not put to a vote.

QE is just another enormous scam, a principal objective of which is to socialize bank and government debt by inflating it onto the masses. They print money (QE), hand as much of it as they please to their crony pals in banks and other powerful elite controlled institutions, and then the increase in money supply reduces the relative magnitude of government debt, since while the debt is nominally the same, there is much more money in existence to service it or pay it off. The public then picks up the tab in the form of inflation as the increased money supply drives up prices.

The reason for the bizarre mismatch where stockmarkets have been continually rising but commodity prices have been falling is due to the fact that the elites are awash with cash to play the markets, while the average poor schmuck on the street is getting poorer and aggregate demand is diminishing as a result, reducing the demand for raw materials. One would think that this must eventually impact stock prices as overall sales fall and profits drop, but in the crazy world in which we now live, we have to factor in the elites with their huge bags of free cash that they have to invest in something, which includes the big banks of course. Their cash mountains resulting from QE could overwhelm old fashioned considerations like corporate profitability and drive stock prices higher regardless. This can be a difficult concept for older investors, who grew up in an age of relative fiscal propriety, to grasp.

A crucial point to understand is that the world is now actually run by and for the benefit of the big banks, who are a "de facto" World Government. Governments and politicians universally do what these banks require of them, or they suddenly find themselves sidelined or usurped - or worse. The banks have encouraged everyone and everything to get into as much debt as possible to maximize profits - they spirit money into existence and then turn round and lend it out at comparatively vast rates of interest. They are using to QE to clamp interest rates at 0 (for them), so that they can maximize the differential with the rates they charge, resulting in, needless to say, huge profits for doing very little, and, as mentioned above they use the zero rates to stop their massive debts from compounding and use the QE to inflate them away at public expense.

The above is not abstract theorizing - it is necessary that we understand what the game really is in order that we have a greater chance of being on the right side of the trade. If we really are in the new age of global QE, then we are living in a very different investment landscape to what would otherwise be the case, with the Masters of the System now able to adjust the faucets to decide how deep recessions will be, and even whether there is a recession or not - and don't forget a recession to them is when the value of their investments falls, not when the guy on the street is broke or unemployed. This is why we have the situation where big Western stockmarkets like the FTSE in the UK or the S&P500 in the US are near to all-time highs, while the average middle class person is struggling.

Comprehending that we are in a new age of global QE, where they can print up as much money as they like at any time, changes the way one looks at markets. This gives the elites the power to manipulate markets on a grand, unprecedented scale.

A dramatic example of such gargantuan manipulation may be about to play out in the London stockmarkets. The normal interpretation of the giant pattern forming in the UK FTSE index which we looked at not long ago, using traditional Technical Analysis, is that a huge Triple Top is completing, but the government may be able to avert this outcome by simply doing QE on a sufficient scale to head this off and force an upside breakout. All they have to do is keep pumping money at a sufficient rate and make sure it reaches those whose task it is to keep the market levitated. This is the "new paradigm" that we wrote of near the start - never before have governments had such power to control markets. If they succeed in breaking the FTSE out the top of its gigantic Triple Top, where there is huge resistance, this index will soar. If it starts to descend from this Triple Top, things could get ugly in a hurry.

FTSE Monthly Chart

The markets' reaction to the Fed yesterday was negative, as we can see on the 6-month chart for the S&P500 index below...

S&P500 6-Month Chart

If the FTSE does break out upside from its Triple Top, then US and other markets should soar too.

The US should remain "leader of the pack" for various reasons. The obvious one is that its currency, the dollar, is the global reserve currency. The next is that it is "smelling of roses" right now because it is not doing QE, while other centers of economic power are, although the fact is that the Fed still has a huge tub of money from the last big QE to goose the markets. Still another one is that the US is geographically homogeneous and distant from world trouble spots, unlike Europe which is composed of potentially warring tribes. So while there might be some nasty shakeouts in the US markets over the short to medium-term, as might be occasioned by a disappointing earnings season, there should be plenty of cash sloshing about to drive them back up again. All this is a reason why we are looking at things like airline stocks, which stand to benefit also from the drop in the oil price.

The other side of this manipulation coin is that they also have to power to beat down things they don't like, such as gold and silver, by endless waves of naked shorting - but this will only work until the gap between the physical and paper price becomes untenably large. Given the rampant global QE now underway and the resulting destruction of currencies, and the fact that most of the available physical gold in the world has already been bought up by Asian countries, most notably China, their power to beat down the paper price of gold looks spent, and it is starting to rise again, after the onslaught of the past 3 years.

The end result of relentless global QE would be a hyperinflationary depression, where prices rise strongly because of the endless increase in money but get people get poorer as wages fail to keep pace. When you mention hyperinflation people think of it as prices rising by thousands of percent per year, like in the Weimar Republic in Germany or Zimbabwe at its worst, but it doesn't have to be anywhere near that bad to be hyperinflation - if prices only rise by 60% per year, most citizens would be ruined within 2 years. That could easily happen if this QE gets out of hand.

When we consider the outlook for gold and the impact on the gold price of all this relentless global QE, any fool can see that if you continually increase the money supply, the cost of something finite like gold is going to rise - and possibly rocket, especially as a lot of the physical supply of gold has already been soaked up by more shrewd players like China. This means that the jokers on the Comex with all their naked shorting are going to be way out on a limb, when the price gap between paper and physical gold yawns to untenable and unsustainable levels - it is already big.

So even though the blizzard of unbacked money created by the ongoing global QE can be expected to drive the prices of many investments like stocks higher and higher, gold (and silver) are not going to be left out for much longer. They are already starting to come to life. Older investors will recall that gold's gigantic bullmarket of the 1970's was punctuated by a big 2-year correction in the middle of it that corresponds to the big 3-year correction that we have just witnessed, before it took off higher again into a massive ramp and a spectacular blowoff top, which is what we should see repeated again, only this time round, given the unprecedented excesses that now exist, it is likely to be orders of magnitude larger.

Gold 1970-2005 Chart

The biggest danger to the system that could yet - and at any time- cause markets to crash would be a widespread failure of confidence in the banks and the system. So far investors don't seem to care about banks and governments destroying their children's future with their reckless QE programs, but should that change and investors "get cold feet" things could get nasty in a hurry. We are going to need to keep our wits about us.

Portfolio Strategies 2015: Investing in an Age of Divergence

By John Mauldin

Feb 02, 2015

With all the negative news out of Europe, how do you find a positive story? Is there a way to structure a portfolio that gives you permission to be more aggressive when there are danger signs all around? Everyone is worried about being blindsided by a significant downdraft in the markets when maybe we should be thinking about making sure we don’t miss a bull market somewhere. These and several dozen other topics were on the table when the Mauldin Economics writing team gathered here in Dallas for 3½ days of intensive talk, interviews, and planning. Today we’ll go over a few of the highlights of this last week, and I’ll share a few reasons to be optimistic about 2015.

2015 Strategic Investment Conference

But first, we are finally ready to take reservations for our 2015 Strategic Investment Conference, which will be in San Diego, California, April 29 through May 2. (Note that this year the conference is open to everyone and not just to accredited investors, which makes me very happy.) While I am still finalizing the last few speakers with my conference cohosts, Altegris Investments, we’ve already secured an outstanding lineup. The plan is for my old friend David Rosenberg to once again take the position of leadoff hitter. The last few years he has come up with surprises to share with the audience, and I suspect he will do the same this year. Then, I’m excited that we have been able to persuade Peter Briger, the head of $66 billion+ Fortress Investment Group, one of the largest private-credit groups in the world. In 2014, Fortress Investment Group was named "Hedge Fund Manager of the Year" by Institutional Investor and "Management Firm of the Year" by HFMWeek. Briger knows as much about credit around the world as anyone I know.

Longtime readers and conference attendees know how powerful Dr. Lacy Hunt’s presentations are. Then, I’ve persuaded Grant Williams and his partner in Real Vision TV, Raoul Pal, to join us. Raoul is not a household name to most investors, unless you are an elite hedge fund (and can afford his work), and then you know that he is an absolute treasure trove of ideas and insights. If you are looking for an edge, Raoul is at the very tip. Paul McCulley, now back with PIMCO, will be returning for his 12th year. David Harding, who runs $25 billion Winton Capital Management, which trades on over 100 global futures markets, will tell us about the state of the commodity markets. My good friend Louis Gave will drop in from Hong Kong to help round out the first day. Louis never fails to come up with a few ideas that run against mainstream thinking. I can’t get enough of Louis.

The next day my fishing buddy Jim Bianco, one of the world’s best bond and market analysts, will join us. I have long wanted to have him at my conference. I get the benefit of his thinking every summer, and I’m excited to be able to share it with you. Larry Meyer, former Fed governor currently running the prestigious firm Macroeconomic Advisers, will be there to tell us when the Fed will actually raise rates. He is a true central bank insider and will be flying in from a just-concluded Fed meeting. He is the go-to guy on Fed policy and thinking for some of the world’s greatest and largest investors. Then the intrepid and never-shy-with-his-opinion Jeff Gundlach, maybe the hottest bond manager in the country, will regale us with his insights. Is anybody more on top of his game than Jeff has been lately?

They will be followed by Stephanie Pomboy, whom I have wanted to have at the conference for years. She is one of the truly elite macroeconomic analysts, known primarily in the institutional and hedge fund world, and over the last few years her insights have been a regular feature in Barron’s. My friend Ian Bremmer, the brilliant geopolitical analyst and founder of Eurasia Group, who is consistently one of the conference favorites (and whose latest book we will try to have for you if it is off the press in time), will join, us followed by David Zervos of Jefferies, former Fed economist and fearless prognosticator, who has an enviable track record since he joined Jefferies five years ago. He is currently quite bullish on Europe (for some of the same reasons I outline below).

The next day we will have Michael Pettis flying in from China to give us his views on how Asia rebalances and China manages its transition. Michael has been one of the most consistently on-target analysts on China and is wired into the thought leaders in the country. And what fun would the conference be without Kyle Bass of Hayman Advisors offering us his latest ideas? We are finalizing agreements with another four to five equally well-known speakers, which will include a few surprises, as well as rounding out the panels. I will share those names with you as we nail them down.

Since the first year of the Strategic Investment Conference, my one rule has been to create a conference that I want to attend. Unlike many conferences, there are no sponsors who pay to speak. Normal conferences have a few headliners to attract a crowd and then a lot of fill-ins. Everyone at my conference is an A-list speaker I want to hear, who would headline anywhere else. And because all the speakers know the quality of the lineup, they bring their A games.

Attendees routinely tell me that this is the best conference anywhere every year. And most of the speakers hang around to hear what is being said, which means you get to meet them at breaks and dinners. Plus, this year I am arranging for quite a number of writers and analysts to show up just to be there to talk with you. And I must say that the best part of the conference is mingling with fellow attendees. You will make new friends and be able to share ideas with other investors just like yourself. I really hope you can make it.

Registration is simple. Use this link: While the conference is not cheap, the largest cost is your time, and I try to make it worth every minute. There are also two private breakfasts where hedge funds will be presenting. Altegris will contact you to let you know the details.

And now let’s think about investing in an age of divergence.

Don’t Miss the Melt-Up

Jared Dillian (who writes the free Mauldin Economics letter The 10th Man and is the editor of Bull’s Eye Investing) really got me thinking this week as he argued that most people try to hedge for the downside, buying puts and other hedges to make sure they don’t lose money in a market meltdown.

But as he showed us, it is actually far cheaper to buy long-term out-of-the-money calls to make sure that you catch a “melt-up.” If you had bought long-term calls in 2010 on the possibility that the market would double, you would be up a lot more than 100%. For whatever reason, the cost of betting on a bull market is much lower than trying to protect from a bear market. You have to work a little bit more to find these plays and to make sure you get the right price. Getting my 10-year options on the yen took a little time, but they are starting to pay off. For whatever reason, the cost premium relative to the strike price and recent movement in the yen-dollar cross is actually cheaper than it was when I bought a year ago. I have no idea why that would be, but markets can get to be strangely priced. (And yes, I am tempted to add to my position because of that price structure, even though I have a reasonable position already.)

Jawad Mian argued that Europe is going to be the place to be over the next year. Long-term readers can guess that I was quite skeptical of that view, as I see nothing but problems in Europe; but as the days went on I began to see the trading wisdom in his thinking, especially relative to the US.

First off, the US market is simply looking “toppy” to me. That doesn’t mean there is a crash or a bear market in the future (although that is a real possibility), but the outsized returns of the last four or five years are unlikely to be repeated. Will Denyer and Tan Kai Xian of Gavekal have made the case that it no longer makes sense to overweight US equities, which had been the firm’s position for many years:

Our issue is that three key drivers of US equity outperformance are going into reverse:

1) In recent years the Federal Reserve was the most aggressive liquidity provider in the world — this is no longer the case. In fact, the Fed is making moves toward tightening, while everyone else is easing.

2) In recent years the US benefitted from an extraordinarily competitive currency — this is no longer the case. In a very short period, the US dollar has gone from being significantly undervalued against almost all currencies, to being fairly valued against most, to now being overvalued against the likes of the euro and the yen.

3) In recent years US equities were attractively priced — this is no longer the case. On a number of measures the market is stretched.

Even though the Federal Reserve rate hike has probably been pushed off into the third quarter, it will soon be priced into the market. Fed rate hikes usually lead to price-to-earnings (P/E) compression, whether or not there are strong earnings. But since almost half of S&P 500 earnings come from outside the US, a strong dollar is going to weigh heavily on those earnings. Procter & Gamble has said currency costs will reduce their earnings by $1.4 billion after-tax this year. They are not alone.

Further, more than half of S&P 500 companies have P/Es over 20; and, to put it bluntly, bull markets do not begin from valuations at this level. The Russell small-company index is down for the last year, quarter, month, week, and day. Small companies in general are in a bear market (though numerous small companies, typically ones that are tech-focused in some way, are having a banner year).

So, where do you go if you are taking money off the table from the US? Counterintuitively, the coming Greek crisis suggests that we might want to look to Europe. To understand why, let’s review what’s going on in Greece.

The Euro-Positive Greek Crisis?

As we read the headlines, it would appear that Europe is heading for a major confrontation over Greece. The Germans and other Europeans have made it very clear that there will be no haircut on Greece’s debt. Tsipras and his left-leaning coalition party, Syriza, were elected on the basis that there would have to be major haircuts in the Greek debt, as well as relief from the austerity requirements imposed by the Troika (the ECB, IMF, and European Commission) in the wake of the last Greek bailout.

Within a few weeks, Greece will need significant loans to make its debt payments and to pay its bills. The requirement for getting those loans is that Greece must adhere to the regime that was agreed to by the previous government. Tsipras and company have made it quite clear that they do not intend to do so. If they don’t, it is highly unlikely that they will get the Emergency Lending Assistance (ELA) from the European Central Bank that would be needed to bail out their banks. Money appears to be leaving Greece, and deposits are at their lowest levels since 2012.

A Greek exit from the Eurozone has the potential to precipitate a crisis. An excessively permissive compromise by the Eurozone might also create a crisis. Deutsche Bank gives us the following chart (hat tip to my friend Barry Ritholtz at The Big Picture):

Everybody, and I mean everybody (not just the Germans), recognizes that Greece cannot actually pay its debts. A 175% debt-to-GDP ratio is simply unsustainable at an interest rate of 4%, let alone at the level to which rates have risen to in the last few months. While Greece is running a primary surplus, which means they are taking in more revenue than they’re spending (if you don’t count interest and loan repayment costs), they are nowhere close to actually covering the interest-rate expenses they are accumulating. They are digging themselves an ever-deeper hole, and the austerity measures are keeping the country mired in a state of depression.

However, if Europe does the seemingly humane thing and forgives the bulk of the debt, then parties on both the far left and the far right throughout Europe may demand the same deal that Greece gets. You can almost guarantee that far-left coalitions in Italy and Spain and the far-right party in France would come to power as a result. That would eventually blow up the Eurozone and potentially even the European Union — not exactly what European leaders want.

This is not a situation that is going to fester for a long time, as the clock is ticking and debt payments will have to be made in the very near future. So what will happen? I think it might help us to look at who actually owns that Greek debt.

There are restrictions on what the ECB and the IMF can do in regards to debt relief, and private investors are not going to be thrilled with any solution that does not fulfill the terms of their bonds. Coming up with a compromise is going to be very complex.

That said, my sources tell me that a tentative deal has already been reached that will look like the balanced compromise scenario in the chart above. Tsipras, so I am led to believe, has tentatively agreed to a deal by which the bulk of Greek debt will be extended to 40 or 50 years at 0% interest, or something in that range. That is not the debt forgiveness that he promised his followers, but it is the next best thing.

The Greeks are a classic case of dysfunctionality. They want to eat their cake and have it, too. They want their debt to go away, but they want to stay in the Eurozone.
And while the compromise outlined above does not make the debt go away, it does stop the immediate pain. As part of that compromise, it appears that some of the austerity controls will be relaxed, allowing Tsipras to fulfill some of his promises. His challenge will then be to convince his followers that he got them a good deal and that debt forbearance is almost as good as debt forgiveness. It should be an easy sell to a sophisticated electorate, but it is not altogether clear that the Greeks are that economically sophisticated, and it may be that they are just generally pissed at the Germans and ready to duke it out.

Along with ECB’s quantitative easing, debt extension will push down Greek interest rates and help defuse the simmering crisis that is Europe. The ECB’s QE is going to delay the crisis that I believe is eventually going to come to Europe, for at least a few years. It doesn’t address north-south imbalances or the lack of reform or significant entitlement program cost increases; it doesn’t deal with the real problem of the French budget and debt; and it glosses over the 135% debt-to-GDP ratio that Italy has already run up and that seems to be rising. It does, however, postpone the immediate crisis for maybe two years.

European stocks are a much more attractive buy than US stocks on a valuation basis. The euro should continue to fall, so if one were to purchase specific European companies (rather than general indexes) on a currency-hedge basis, there is a real opportunity for outperformance. This is almost exactly the same proposition I’ve been arguing for in Japan for several years, and one that has been working.

And if discussions break down and we get the dreaded Grexit (which is still a possibility if you listen to the rhetoric of the new finance minister), then we get chaos for a while, but Europe might be better off and a far more stable place, which is also positive. So, either way, MAJOR European problems are postponed, and everyone will revert to happy talk and markets should rise.

Some final thoughts on Greece. Syriza comprises an amalgam of parties stretching the spectrum from center left to insanely left. They have never been in power, and they have no clue as to what running a country actually requires. Greece is essentially starting a rookie quarterback in their equivalent of the Super Bowl. Sometimes that turns out well, but I wouldn’t bet on it. Recent statements and actions by various new ministers in Greece are not encouraging. They look like the Keystone Cops of governing.

If Tsipras and Syriza use this opportunity to clean out some of the corruption that is endemic in Greece, and do so without replacing it with any of their own, that would be positive. However, Syriza gave the far-right-wing separatist party (their majority coalition partner) the position of minister of defense, whereupon the appointee demanded and won the right to execute defense purchasing contracts with just one signature – his. Which could be a step back to corruption as usual in Greece. If the corruption is not dealt with, things are not likely to improve. Syriza still has to govern, though, making the trains run, making sure healthcare is available, etc. The jury is out, and it would not surprise me if voters get frustrated in less than a year and we see Greek elections again.

Finally, as my friend Mish Shedlock points out, even if Greece is able to take its primary surplus and apply it to the debt, it will take multiple generations to get the debt under control, even at zero interest. A debt-to-GDP level of 175% is just a monster number in a country where government spending is already a major part of GDP.

My central case is that the Eurozone will create the compromise for Greece outlined above and that when the next European crisis hits, probably triggered by France, Europe will either have to create a true fiscal union and mutualize the debt of all countries or break up the Eurozone. Since an increasingly large portion of Europeans (especially younger voters, who are becoming the majority as time goes by) want to keep the European Union, and since we are talking a political decision and not an economic decision, I think they will end up neutralizing Greece’s debt. Then the debt problem then simply goes away. Voilà! Problem solved. Opa!

Getting Permission to Take Risks in Your Portfolio

We were doing a roundtable interview with all of the team (much of which will be on video in a few weeks), and the issue of portfolio design came up. Worth Wray noted that if you have a properly constructed core portfolio to anchor your investments, then it gives you permission to seek “alpha” and select macro-type plays. Tony Sagami chimed in that he has always argued for that approach: investors should have a “core and explore” structure in their investment portfolios.

There are a growing number of academic studies which point out that growth in the portfolio of an average investor is highly correlated with overall global growth. That suggests that a portfolio structured to take advantage of global growth is appropriate for most investors.

I am in wholehearted agreement, but I want to make it clear that a core portfolio is not a buy-and-hold portfolio in today’s environment. A buy-and-hold portfolio is an invitation to volatility and disappointment. The wide variety of investment offerings, especially in the $2 trillion ETF world (which will grow to $5 trillion within a few years), allows you to create a global core portfolio with a basket of low-cost ETFs. If you then allow each ETF to determine its own entry and exit points, you can potentially reduce your overall portfolio volatility and have the potential to increase your returns over those you would see with a buy-and-hold structure.

Then, with your core taken care of, you can explore the potential of a falling yen and euro, buy potentially rising European stocks, make a commodity play when appropriate, and acquire a few strategic alternative funds to round out your portfolio. Depending on your net worth, you can take advantage of private equity and special offerings. Real estate and income plays may also help round out your investments. Because your core portfolio is the anchor, you now have permission to place small bets on a number of strategic ideas that you feel have potential, while at the same time maintaining risk-management discipline with regard to the “explore” portion of your investments.

There are multiple firms and advisors that attempt to do something like this today, some more successfully than others. Within a few months, I will be announcing what I think is a new and better-integrated approach to structuring a core portfolio. We have been working on this for some time, and I believe it is now ready for prime time.
We’re going to share our approach with you, and perhaps it will inspire your own ideas, or you can join us in what we’re doing. This is not to say I am not still a fan of carefully selected alternative investments, but I have come to realize that a new and different approach to total portfolio investing is now possible with the latest technology and offerings. We are hopeful that this new tool will help brokers and advisors around the world design portfolios for their clients in a more strategic way, as well as keep fees and extra costs down. Stay tuned.
And on that note, I’m going to run to the gym and get on the bike and see if I can work off ahead of time a few of the calories that I know are going to be coming my way. I hope you have a great week.

Your seeing chili, barbecue, and guacamole in my very near future analyst,
John Mauldin
John Mauldin

01/30/2015 08:31 PM

Merkel's Unintended Creation

Could Tsipras' Win Upset Balance of Power in Europe?


Photo Gallery: Provocation in Athens                      

Greek election victor Alexis Tsipras wants an entirely different Europe from the one envisioned by Angela Merkel. His success is likely to stoke anger over Germany's EU dominance. Leaders in France and Italy are also hoping for an end to austerity.

Alexis Tsipras couldn't have picked a more symbolic place to show his voters that he is a prime minister like no other Greece has seen before -- -- and that he is truly serious about standing up to the Germans.

On Monday, right after he was sworn in, he was chauffeured in his sedan to the Kesariani rifle range, a memorial to Greek resistance fighters that is revered in the country as the "altar of peace."

It was here, on the outskirts of Athens, that German occupying troops shot a total of some 600 resistance fighters -- some just before the end of the war, on May 1, 1944 -- along with roughly 200 communists from the Haidari concentration camp. The youngest victim was only 14 years old.

As Tsipras stepped out of his car and made his way through the park to the memorial stone, several hundred people crowded around him. People reached out to touch, congratulate, hug and kiss him.

The few bodyguards surrounding the politician barely shielded him from the crowd. Alexis Tsipras, 40, the youngest prime minister in Greek history, also intends to be its most unusual leader -- a man of the people who is determined to fundamentally change his country.

As he laid flowers at the foot of the austere memorial, his fans applauded. And they chanted: "Resistance is the path that the nations must take!" "The German occupation is finally over," said a delighted pensioner. Afterwards, Tsipras stood front of the memorial for a minute of silence.

It was a gesture of resistance -- and one that contained a barely concealed message. His remembrance of the suffering under the German occupation was coupled with the accusation that the Germans were subjugating Greece once again.

Tsipras never tires of saying that he wants to "give the Greeks back their dignity." And dignity is an important word for those who seek to understand what has happened in Greece. If so many Greeks didn't feel humiliated by their own corrupt political class, by their dwindling prosperity -- but also by the Germans and the other Europeans -- Tsipras would have never been elected.

A Career Spawned By the Euro Crisis

Tsipras is a man whose career was spawned by the euro crisis. The currency that was designed to unite Europe has effectively divided its people. In an economic community in which some feel that they have been hoodwinked and others feel oppressed, Tsipras' fans revere him as a rebel.

Many Greeks see him as a man who has what it takes to free them from oppression. At the same time, many Germans see him as a terrifying extremist. They view Tsipras as Europe's nightmare. Tsipras is the anti-Merkel, and he never would have achieved this kind of political success were it not for the German chancellor.

And now these individuals constitute the two antipodes in a Europe in which there is a growing lack of mutual understanding.

How could it come to this point? Right from the start, the euro was more than just a currency.

It was a pledge to heal the rifts created by war and blind nationalism in Europe. When then-German Chancellor Helmut Kohl signed the Maastricht Treaty on Feb. 7, 1992, he hoped that the common currency would irreversibly unite the Continent.

Now, the euro appears to be stirring up the very antagonistic sentiments that it was supposed to eliminate. In Greece the crisis has brought a government to power that features an entirely new mixture of left-wing radicals and right-wing populists, whose only common ground is the joint struggle against Merkel's austerity dictate.

But Tsipras is also Merkel's unintended creation. His rise to power cannot be explained without a deep understanding of the frustration that Europe's policy of austerity has sparked. This may seem irrational. After all, it was the Greeks who amassed such huge debts that their country could no longer bear the burden in April 2010. But by morphing Merkel into an austerity dominatrix, Tsipras has created an artificial figure upon whom he can project all of the Greeks' negative feelings.

Opposite Poles

Europe is gazing with a mixture of fascination and horror at the new strongman in Athens. Is the EU dealing with a loose cannon who is driving his country over the precipice? Amid the euphoria of his victory, will he truly seek to make good on his campaign promises?

The current rhetoric reflects just how far apart Europeans have drifted. When Merkel and Tsipras speak of solidarity, they mean two different things. The word "austerity," which half of Europe employs as a synonym for Merkel's allegedly callous savings measures, is not used by the chancellor herself. She prefers to speak of structural reforms.

The two politicians, Merkel and Tsipras, form opposite poles within the EU. Not surprisingly, few in Europe are willing to publicly side with the new prime minister in Athens. His tone is too shrill and his coalition partners are too unsavory. Panos Kammenos, a right-wing politician who is the new defense minister, made headlines when he recently claimed that Jews in Greece pay no taxes.

Secretly, though, many politicians in Europe hope that the shock of the elections in Greece will upset the balance of power. Ever since he took office in May 2012, French President François Hollande has been pushing for a more relaxed approach to the debt limit. He is supported not only by Italian Prime Minister Matteo Renzi, but also by EU Commission President Jean Claude Juncker.

But the conflict also has to do with hurt feelings, which makes it all the more complicated. In the days of the deutsche mark, Germany's cherished erstwhile currency, Northern Europeans gazed somewhat disparagingly to the South, where the Italian lira and the Greek drachma steadily declined in value.

For their part, the Italians and the Greeks made jokes about the Germans and their obsessive deutsche mark fetishism. Now that they are all united with the same currency, everyone is complaining. The Germans feel as if they have been coerced into spoon-feeding the spendthrifts in Greece, while the Greeks feel like a colony in Merkel's austerity empire. Each side has grown accustomed to sketching the other as a caricature.

'We Are Not Planning a Clash'

For a while, it looked as if the euro crisis had been resolved. It had virtually disappeared from the headlines for over two years. But now, with Tsipras' election, it has returned to the political agenda with a radical twist. The uproar goes well beyond the austerity measures that the Greek leader intends to roll back. With the selection of his coalition partner, Tsipras has charted a course that fundamentally calls into question whether he shares the values of the European Union. He has broken with European political norms.

"We are not planning a clash that would be equally catastrophic for both sides," Tsipras said during his first cabinet meeting on Wednesday, "but we will not pursue the disastrous policy of submission."

Last week, his government startled the rest of the EU with its Russia-friendly stance. Skeptics wonder, though, whether Tsipras really hopes to enhance his image -- and return the Greeks' sense of dignity -- by siding with Russia.

There is nothing new about the leftist Syriza party's close ties to Russia. It has a great deal to do with the traditional friendly contacts between Greece and Russia. Here, too, Merkel is his antipode. Her top priority is to convince the 28 EU states to close ranks against Russia. It is virtually her only trump in her struggle with Putin.

Tsipras and his Syriza party largely owe their political victory to the aftermath of the austerity measures that Greece has been forced to implement in recent years: a 30 percent drop in income, unemployment officially running at 26 percent, and 51 percent among 15 to 25-year-olds, long lines at soup kitchens, closed stores in posh neighborhoods and a shockingly large number of panhandlers on the streets.

Tsipras's predecessors failed to implement many of the structural reforms that were designed to stimulate growth and create jobs. With a mixture of both approaches, other countries that were plunged into debt after 2010 managed to take a turn for the better. Ireland, Portugal and Spain had to accept rescue funds, but have managed to put the crisis behind them. Meanwhile Greece has lagged further and further behind the rest of Europe.

Tsipras also won the election because he pledged to make a break with the nepotism of the old political system under the established political parties, Pasok and Nea Dimokratia (ND). Tsipras' victory was also based on his portrayal of Merkel as the enemy during his election campaign.

A Manifestation of Resistance to Merkel

In short, Tsipras is the most extreme manifestation of the growing resistance in large parts of Europe to the German chancellor's austerity drive. He belongs to a movement that now extends from Southern Europe all the way to American universities. These opponents are united in the belief that Europe is on the wrong course. Belt-tightening during a recession does not lead to growth, they argue, but rather to endless stagnation. The longer Europe's economic slump continues, the more people join the burgeoning ranks of those who oppose the current approach. Indeed, it could be that Tsipras is more than just an unfortunate isolated episode, but rather a politician at the vanguard of a new generation of European populists who oppose mainstream politics -- and could use this approach to win further elections.

The Greek prime minister's success is also the story of the Europe's largely inept response to the populist forces in Greece. By the spring of 2012, it was clear that Tsipras would play a key role in his country's political future, as confirmed by all of the opinion polls. But when representatives of the troika -- comprising the EU, the International Monetary Fund (IMF) and the European Central Bank -- were asked during behind-the-scenes discussions whether they would also meet with Tsipras and include him in the process, they dismissed the idea out of hand.

IMF head Christine Lagarde even entered the fray as an election campaigner of sorts and openly expressed her confidence in the two big parties. Lagarde said that only the center-right ND or its socialist counterpart Pasok could guarantee that the country remained in the euro zone. But the more the Europeans attempted to brand Tsipras as an outcast, the greater his popularity grew in Greece.

Refusing to Look Reality in the Face

Tsipras is the product of the Greeks' unique ability to refuse to look reality in the face. The introduction of the euro gave the country an unprecedented level of prosperity. This was based primarily on loans that the Greeks could suddenly receive far more cheaply on the financial markets. Even in the aftermath of the crisis and record recession, Greece's industrial output remains at the same level as when it entered the euro zone. Blaming Merkel alone for the country's current debt crisis is, at the very least, a one-sided view of the situation.

But Tsipras likes to make things easy for himself. He had barely entered office before his government announced its intention to rehire the 9,500 civil servants who had been laid off as part of the cost-cutting measures undertaken in recent years. That includes security personnel at schools and the legendary cleaning ladies who, dressed in smocks and rubber gloves, threw their support behind Syriza's campaign in the weeks leading up to the vote.

Nobody knows quite how Tsipras intends to pay for it all. But for the moment, Syriza is basking in election glory. The "president," as Tsipras' supporters call him, has managed to unite the fractured left -- former communists, Greens, Trotskyists, Maoists, eco-socialists and diverse radicals.

Syriza is more than just a protest party. Because of the crisis, it has "become a big-tent party," says economist Jens Bastian, who spent two years with the European Commission's Task Force for Greece as a banking expert. In addition to its supporters in the leftist scene and protest voters, the party has been able to attract middle class voters and retirees as well.

'He Has Matured Politically'

That has much to do with Tsipras himself. He comes across neither as a fervent ideologue nor as an aggressive enfant terrible. "There is no reason not to like him when you meet him," says author Petros Tatsopoulos, who left Syriza early last year following controversial comments he made regarding the party's stance on terrorism. People in Berlin government circles likewise say that he has "charisma" and handles himself well in public. Tsipras holds a university degree in construction engineering and city planning, is the father of two children, and is partnered with an IT engineer named Peristera Baziana. But he keeps his private life largely to himself and there are very few pictures of Baziana. The couple didn't even appear together when Tsipras cast his ballot last Sunday.

But is Tsipras more than just a populist? Will he be able to guide Greece out of the crisis? "Tsipras has changed significantly," says Antonis Liakos, a 68-year-old professor of history and an expert on Greek political parties. "He has matured politically and become firm in his convictions." Furthermore, he adds, "he doesn't have any of the big families behind him," referring to the political dynasties that have run the country for decades.

Many, both within Greece and in Europe at large, are hopeful that Tsipras will end the corruption associated with the established parties in the country. "People have taken stock of what Samaras and Papandreou have achieved and have drawn a line," Bastian says.

A Troubling Coalition Partner

But then, Tsipras chose as his coalition partner the right-wing populist Independent Greeks (ANEL), whose leader Panos Kammenos spent decades profiting from the nepotism with the Nea Dimokratia party of outgoing Prime Minister Antonis Samaras. It was only when Kammenos began opposing policies imposed by the troika in 2012 that he was thrown out of Nea Dimokratia together with 20 others.

Since then, Kammenos has been railing nonstop against the EU and the German chancellor.

"Greece is an occupied country and the head of government gets his orders from Angela Merkel," he rants. He has compared the EU with a "Fourth Reich" that Germany allegedly aspires to and has said he will not approach Merkel "on my knees." Instead, he has demanded, as has Syriza, that Germany pay reparations stemming from the World War II occupation of the country, particularly for loans the Nazis forced Greece to pay.

Leaders within Syriza are aware that their political platform has little overlap with that of the right-wing populists. But like Syriza, ANEL is also seen in Greece as being opposed to the political system that has ruled until now. The two also focus on the same enemy: Angela Merkel.

Among the paradoxes of the euro crisis is the fact that Merkel, who triggers such passionate emotion in Greece, employs a governing style that is largely free of emotion. In contrast to Tsipras, she seems a model of sobriety. When speaking to small groups about the euro crisis, she tends to focus on unit labor costs, interest rates and debt levels: She is implacably matter-of-fact. Her closest Europe advisor once sketched her crisis logic on a piece of paper. The drawing made clear that, because the problems which led to crisis originated from individual countries, they must be solved there too -- by way of austerity and reforms.

To be sure, she has not shied away from dramatic statements. "If the euro fails, then Europe will fail as well," she said in a speech to German parliament on May 19, 2010. In a smaller group, she also once said that Germany had to remain committed to Europe and the euro because of the two world wars for which it is responsible. That is why she decided in the summer of 2012 to keep Greece in the euro zone.

Time Is Short

Now, two-and-a-half years later, many parts of the Continent are in much better shape and the euro would likely be able to withstand a Greek insolvency without serious upheaval. That, though, is what makes Tsipras so aggressive. His shrill tone is in part intended to distract from the fact that he has become a predictable variable in Merkel's broader recovery equation -- even if she has not yet met him personally.

Until shortly before the election, Merkel believed that Samaras would be succeed in getting re-elected. That is why she agreed to his December request to extend the current aid program by just two months instead of by six or nine months. That, as has now become apparent, was a mistake. Now, time is short, with the program expiring at the end of February.

Merkel knows Tsipras primarily from the almost daily reports compiled by the German ambassador in Athens and sent to Berlin. They describe Tsipras as a clever, good looking champion of the people who is particularly attractive to female voters. "Sexy Alexi" is one of his nicknames in Greece.

Jörg Asmussen is one of those in the Merkel administration who knows Tsipras personally. Until the fall of 2013, Asmussen was a member of the European Central Bank Executive Board and was responsible for international and European relations. Currently, he is state secretary in the Labor Ministry, but he continues to informally use the communication channels he established while at the ECB, though he doesn't currently have an official government mandate.

One important contact person in Athens is Bank of Greece Governor Yannis Stournaras, who served as the country's finance minister until early last summer. Both the ECB and the European Commission are depending on him to make clear to the new government just how precarious the country's position is and what the consequences would be were Athens to terminate the EU aid program.

Thus far, Merkel has followed a clear path when it comes to saving the common currency: solidarity in exchange for solidarity. And one certainly can't accuse the chancellor of being overly parsimonious: Germany now guarantees some €100 billion in loans to euro-zone crisis countries.

Were Tsipras to be successful with his demands for a debt cut, Germany could lose billions.
For the time being, of course, Tsipras isn't likely to represent much of a danger to Merkel because he is asking for too much. France and Italy are likewise uninterested in granting Greece a debt haircut.

United Front

Plus, there are plenty of countries now in the euro zone that have gone through tough cost-cutting programs, such as Spain, Portugal and Ireland. The governments of these countries do not see why Tsipras should be granted an exception just because he screams the loudest. At a meeting of euro-zone finance ministers on Monday, the front against Tsipras was unified to the point that German Finance Minister Wolfgang Schäuble could remain in the background.

Indeed, conservative Germany politicians have long since begun to speak openly about the possibility of a "Grexit," as the country's departure from the euro zone is often called. "The effects of the country's exit would likely be less problematic for the euro than a softening of the criteria for everyone," says Bavarian Finance Minister Markus Söder, a member of the Christian Social Union, the sister party to Merkel's Christian Democrats. Germany's commissioner in Brussels, Günther Oettinger, also now believes that a Grexit is possible. "Of course we are looking at worst-case scenarios," he says. "But nobody is actively seeking Greece's departure from the euro zone."

In the Berlin Chancellery, anxiety is at a minimum. "The Greeks now have to tell us what exactly they want," said one Chancellery source. The source added that they are open to a conversation about interest rates on the €240 billion aid package already paid out and on the amount of time allotted to Athens to repay the loans.

'Exit By Accident'?

A different scenario is causing the chancellor more acute concerns. Tsipras has proven himself as a demagogue, but he has little practical political experience -- to the point that Merkel's team is worried that he could inadvertently maneuver Greece out of the euro zone. In Berlin, such a scenario is referred to as "exit by accident."

It is already clear that Greece would be unable to meet its liquidity needs on the open market. "Greece would not yet be able to establish complete and regular access to international capital markets at acceptable conditions," reads an internal assessment compiled by the German Finance Ministry. "The country continues to be sensitive to changing market conditions and investor moods."

Yet the EU aid program expires on Feb. 28, with just €1.8 billion left to be paid out. Tsipras himself would have to apply for an extension, which would be humiliation following the campaign he just ran. Should he not do so, however, the country would be faced with a disorderly insolvency.

Furthermore, partner countries would be unable to give him more money from the emergency backstop fund because without a formal request for aid, his departure would be seen as being unilateral. Not long later, Tsipras would run out of money and be unable to pay pensions or civil servant salaries. He would also be unable to service the €20 billion in debt that Greece currently has with the ECB, meaning the European Central Bank would be forced to stop lending Athens money. The Grexit would be complete.

A Game of Chicken

Merkel doesn't want things to get that far. She's prepared to grant the Greeks a further aid program, even if it requires approval from the Bundestag. However, the €10 billion that was being considered only weeks ago will not suffice. Berlin government experts believe Greece will require up to €20 billion considering that tax revenues are plummeting and privatizations haven't happened. The money would have to come from ESM -- no one else would be prepared to lend the country money. The precondition for the new aid is that Tsipras must accept the reform requirements and subject the country to the supervision of the hated troika. That, though, seems unlikely. On Friday, new Greek Finance Minister Gianis Varoufakis said Athens would no longer work with the troika. The game of chicken has begun.

"The last two weeks weren't good ones for us," concedes one high-ranking government official in Berlin. An inexperienced but very self-confident anti-Merkel government is now steering the ship in Greece. The European Central Bank made the decision to purchase over a trillion euros in government bonds and other assets in the euro zone against Germany's will. And now, EU Commission President Jean-Claude Juncker, with the help of France and Italy, is seeking to loosen the euro Stability and Growth Pact. "Could it be that we're losing control right now?" asks one senior government official.

Perhaps. The Syriza election victory sends a message to the rest of Europe. It arouses hope in movements with similar political platforms in many European countries, including the Front National in France or Podemos in Spain.

In Portugal, the leftists parties -- the Socialist PS, the communist PC and the Marxist Bloco de Esquerda BE -- all celebrated Syriza's election victory. Many there hope it will alter the discourse in Europe and that proposals for a debt conference for the Southern European countries and for reconstruction plans for those countries hit worst by the debt crisis will be debated in Brussels.

At the same time, Tsipras' success could also strengthen the European leaders who hope to change current EU policies, even if they aren't interested in fulfilling Syriza's demands for a debt cut.

Leading the pack are French President Hollande and Italian Prime Minister Renzi. Indeed, during Hollande's 2011 campaign, he at times sounded a lot like Tsipras. He said he wanted to "reorient Europe" and to liberate the people of Europe from "austerity".

A Conflict Between Two Mentalities

The dispute between Berlin and Paris was of a fundamental nature -- a conflict between two mentalities, but also between two schools of economic thought. Whereas the Germans were of the opinion that the supply side had to be strengthened and conditions for investment improved through reforms, the French called for buttressing the demand side. In times of recession, the French argued, the state must invest.

Although the Germans called it savings, a term with positive connotations, across the rest of Europe, many considered it to be the specter of "austerity," a cold-blooded, anti-growth policy.

"The Body Economic: Why Austerity Kills," a book by Oxford Professor David Stuckler, has become a kind of bible for opponents of austerity. It's a brand of thinking that really hasn't taken hold in Germany, even though it is dominating the public debate in large swaths of Europe. It also shows the just how far apart the Europeans really are from each other, despite being linked by a common currency.

Hollande and Renzi have been seeking for some time now to change the current policies, and recently they have also enjoyed support from Commission President Juncker and ECB head Mario Draghi.

They note that there has been little economic recovery in the euro zone since the crisis in 2009 and are calling for policies modelled after those of the United States, which is now experiencing strong growth following the financial crisis. When Juncker decides this spring how he intends to address France's budget deficit, that shift in political course could become visible.

Merkel's critics in Paris and Rome argue that the lesson from the Greek election is that you can't force austerity in the name of an overarching aim onto the people of a democratic country -- at least not in the long run. Senior politicians in France and Italy fear that they too could be driven out of office by protest parties in the same way that an entire generation of Greek politicians has been pushed aside.

Since it began its term, Hollande's government hasn't committed to any significant savings or undergone massive reforms. Yet that hasn't stopped representatives of the left-wing of the Socialist Party from constantly complaining about the "austerity" Berlin has imposed on Paris. The left-wing populist Front de gauche (Left Front) party alliance and especially Marine Le Pen's Front National are singing the same hymn. In contrast to Syriza, her party wants to abolish the euro in order to end "the submission" of France.

The Hour of the Anti-Establishment

Indeed, this is fast becoming the hour of the anti-establishment forces. The fact that all centrist parties in Europe have thrown their support behind policies that, in large part, have been prescribed by Angela Merkel and her allies, has led to the formation of new parties on the margins.

Often, it's very difficult to categorize these parties according to the classical political labels of liberal or conservative. The Front National, for example, pursues anti-foreigner policies, but its economic policies are inspired by the radical left. In Europe today, the political fault lines no longer run between left and right. They run between mainstream and the anti-establishment. In many countries this translates to people being either for or against Angela Merkel.

In Berlin, politicians are fond of citing Spain, with its conservative government, as a positive example. After tough reforms, the economy there is growing once again. Last year the it grew by 1.4 percent and this year the forecast is for 2 percent growth. Wages have increased, albeit slightly, and the Spanish are now buying more. The unemployment rate is dropping, but it is still at around 24 percent, and per capita income is still far below the pre-crisis level in 2007.

These are all reasons that Mariano Rajoy's governing People's Party could still face defeat in parliamentary elections this fall.

It's likely that the Spanish protest party Podemos ("We can") will repeat Syriza's success in parliamentary elections. "Hope is coming, fear is fleeing. Syriza, Podemos, we will win," party boss Pablo Iglesias said this week. "Tick tock, tick tock," he went on, the clock is ticking for the ruling People's Party and the Socialists. The political science professor founded Podemos just under a year ago. In the latest survey taken at the beginning of January by Spanish pollster Metroscopia, the party landed in first place, with 28 percent.

But it is precisely movements like Podemos that may keep Angela Merkel from making too many concessions to Greece. The worry is that, were she to do so, it might signal to voters in Southern Europe that parties with extreme demands can ultimately prevail.

Fundamental Conflicts Unresolved

In that vein, Tsipras' victory sheds light on some of the euro zone's fundamental problems. Since the outbreak of the crisis, EU leaders have agreed at countless summits to one new construct or bailout package after another. These policies were agreed to in painfully small steps, but they still held the euro together despite all claims of its imminent death.

But the conflict between Northern Europeans and Southern Europeans hasn't been resolved. The problem is that the euro is still based on two myths: The Germans were promised they were getting an even mightier version of the stalwart deutsche mark; many Southern Europeans believed they were getting a one-way ticket to prosperity.

For the euro to succeed, both sides need to take a step back. Germany must accept that membership in the currency union also comes with the responsibility for the economic situation in the entire euro zone. And France, Italy and Greece must recognize that sustainable growth is only achievable through reforms and not with constant new borrowing.

There aren't many possibilities when it comes to the euro's future.

  • The first possibility is that the Germans succeed against all resistance in preserving a euro that is a faithful copy of the deutsche mark. The truth is that it's already too late for that. Since 2010, the ECB has had little resemblance more to the Bundesbank and, after this month's decision to purchase trillions in government bonds, it no longer bears any.

  • The second possibility would be a nightmare for the Germans. The euro would become a weak currency that continues to devalue and whose member states shirk their responsibility to reform and instead finance their economic growth with debts for which, as a last resort, Germany would serve as a guarantor. No German government would go along with that -- nor would the Federal Constitutional Court, and especially not voters. It would likely spell the end of the euro.

  • The third possibility is that of a compromise. The result could be a euro zone in which, in normal times, countries aren't free to borrow as they please, but in which debt rules wouldn't be applied as strictly as Germany would like to see during times of recession. But it would be one in which all the member states pressed ahead with reforms in order to be competitive. Then the euro would be neither German, French nor even Greek. It would be something new -- a compromise that all could identify with.

The question now is whether Tsipras even wants to belong to it or whether, with his shrill demands, he has already pushed Greece out of the club.

Last Thursday, he met in Athens with Martin Schulz, the president of the European Parliament. Behind closed doors, Schulz gained the impression that Tsipras is slowly starting to comprehend how perilously close Greece has come to a euro-zone exit. The new Greek leader made no mention of debt reduction. But Shulz also found himself confronted by a European leader who views himself as being at the helm of a broader movement against Merkel's austerity policies. "It will spread across the entire Continent," Tsipras said.

By Nikolaus Blome, Manfred Ertel, Julia Amalia Heyer, Horand Knaup, Walter Mayr, Peter Müller, René Pfister, Christian Reiermann, Mathieu von Rohr and Helene Zuber

Greece's rock-star finance minister Yanis Varoufakis defies ECB's drachma threats

'I will tell Mr Schäuble that we may be a Left-wing riff-raff but he can count on our Syriza movement to clear away Greece’s cartels and oligarchies,' says Yanis Varoufakis

By Ambrose Evans-Pritchard

7:48PM GMT 03 Feb 2015

Alexis Tsipras, Yanis Varoufakis
Yanis Varoufakis (right), Greece's finance minister, with Prime Minister Alexis Tsipras  Photo: AP
Greece’s finance minister has denounced eurozone threats to cut off funding for Greek banks later this month as political intimidation, warning in fiery language that his country’s democratic revolution will not be crushed into submission.  

Yanis Varoufakis, the emerging rock-star of Europe’s anti-austerity uprising, said the European Central Bank is straying into murky waters by openly stating that it may cease to act as lender-of-last resort for the Greek financial system.
“These threats are perfectly illegitimate. They are trying to asphyxiate us with arbitrary deadlines,” he told The Telegraph during a lightning tour of EU capitals to drum up support.

A string of ECB officials have said in recent days that the institution would no longer accept Greek debt as collateral in exchange for loans after February 28, if Greece refuses to cooperate with the EU-IMF troika and walks away from its bail-out deal.
The move would cut off up to €54bn of liquidity currently keeping Greek lenders afloat.

Syriza's leaders are fully aware that this would trigger a banking collapse, full-blown default and ejection from the euro within days. Greek officials grumble that the ECB is acting as a political enforcer without treaty authority. Frankfurt has full discretion over how it sets its own collateral rules and can change them at any time regardless of what the rating agencies say.

The Athens stock market has shrugged off the dispute for now. The ASE index jumped 11pc on Tuesday on hopes that a €345bn "masterplan" for Greek debt unveiled by Mr Varoufakis in London will finesse the neuralgic issue of a debt writedown and avert a showdown, even though EMU creditors remain deeply sceptical. Bank stocks surged 17pc, while Greece’s 10-year bond yields plummeted by 137 points to 9.26pc.
Mr Varoufakis is braced for an arid meeting on Thursday with his German counterpart and long-time nemesis Wolfgang Schäuble, a man he once accused – borrowing from Tacitus - of reducing Europe to a desert and calling it peace.
“I will try to be as charming as I can in Berlin. I will tell Mr Schäuble that we may be a Left-wing riff-raff but he can count on our Syriza movement to clear away Greece’s cartels and oligarchies, and push through the deep reforms of the Greek state that governments before us refused to do,” he said.

“But I will also tell him that we are going to end the debt-deflation spiral and do what should have been done five years ago. That is not negotiable. We have a democratic mandate to challenge the whole philosophy of austerity,” he said.
Mr Varoufakis said he had asked Brussels for an increase in the troika's €15bn limit on issuance of short-term bills by the Greek treasury, money desperately needed to plug a critical funding gap over coming months. He denied reports of a €10bn plea. “We need the fiscal space until June to hammer out a plan,” he said.
The decision would require the political assent of all three members of the EU-IMF troika, including the ECB. He will discuss the details with the ECB’s Mario Draghi in Frankfurt on Wednesday.
The flamboyant finance minister, surviving on adrenaline as he darts from one EU power centre to another, is an ardent pro-European but has no illusions about the bare-knuckled nature of the struggle over Greece. “We have been warned that there are certain members of the Eurogroup who want to shoot us down. But we also have support. It is evenly balanced,” he said.
“The French are very keen for us to find our feet. They are deeply uneasy about what is happening in Europe and they will not be silent observers if we are choked, strangled and snuffed out, for they fear the ground will start to crumble under their own feet,” he said.
Jean-Claude Junker, the European Commission’s chief, held out an olive branch of sorts, admitting that the troika policies imposed on Greece had been too harsh. “We have to correct past errors. What we should not do is simply replace them with the exact opposite. That will drives us into the wall," he said.
Mr Varoufakis was coy about his talks with George Osborne on Monday, except to say that the Chancellor appeared to be on the “same page” on elements of Greece’s new debt plan.
The proposals offer a bond swap to ease the debt burden – 177pc of GDP - without demanding an explicit writedown of Greece’s foreign loans. This allows both sides to save face. The aim is to slash Greece’s primary budget surplus from the troika target of 4.5pc of GDP to around 1.5pc to pay for welfare pledges and boost investment. “This gives us a reasonable buffer. The old target is ludicrous,” Mr Varoufakis said.
Loans from the EU bailout machinery would be replaced by GDP-linked bonds, akin to Keynes’s "Bisque Bonds" in the 1930s. Money owed to the ECB would convert into “perpetual bonds”.
“Everybody knows we are insolvent. What is the point of us borrowing another €7bn to pay back the ECB - which bought the bonds from north European banks to help them, not Greece – when the ECB is in the process of creating €1 trillion of new money? It is clearly absurd.”

“So why don’t we just park the bonds on the books of the ECB. What I am not going to do is borrow yet more money from my colleagues in Italy, France or Slovakia, or wherever,” he said.
Germany is convinced that EMU strategy is starting to bear fruit at long last - a view dismissed as wishful thinking by many economists around the world - and that concessions to Greece will set off a clamour for similar treatment from others, leading to a breakdown of discipline across southern Europe.
Yet Syriza does not view Germany as an implacable opponent. Chancellor Angela Merkel has shown herself to be the ultimate defender of Europe’s post-war order and unity, all too aware of her country’s special duty of care. Other creditor states in the North have less compunction, while conservative leaders in Spain and Portugal reportedly wish to see Syriza crushed in order to fight off anti-austerity populists in their own countries.
Mr Varoufakis was an economics lecturer before being catapulted into the limelight as crusader against the “monumental folly” of Europe's deflation policies. An orthodox Keynesian – unlike neo-Marxists in the Left Platform of Syriza's broad church – he has taught at the universities of Essex, Glasgow, Cambridge, Sydney and Texas.
His latest works are “Europe after the Minotaur” and a “Modest Proposal”, a play on Swift. They are acclaimed blueprints for an EMU-wide reflation drive and a lasting peace to end Europe’s debt wars.

They propose a mechanism to recycle the capital surpluses from the creditor states to the deficit states in a stable fashion to prevent the EMU economy as a whole becoming trapped in a self-feeding cycle of contraction. The arguments would be recognisable instantly to Keynes, who grappled with the same issues in the inter-war years when the Gold Standard went awry.
Mr Varoufakis is a fan of "game theory", a branch of economics epitomised by the Nash Equilibrium - the optimal outcome when each side knows what the other wants. But the current stand-off over Greece defies even the intricate formulae of Nobel theorist John Nash.
“Game theory only works if the players are rational. I am not sure that is the case in Europe.

Even Nash would be at a loss here,” he said.

Op-Ed Contributor

A Deal Europe Can’t Refuse


FEB. 3, 2015

Greece’s leftist party, Syriza, swept into power on Jan. 26, buoyed by fiery rhetoric from its leader, Alexis Tsipras, who promised to renegotiate the terms of Greece’s 2010-12 debt bailouts. Those deals with creditors saved Greece from default and free fall during the global economic crisis, but left the country crushed under huge loan obligations and committed to wrenching cuts in public spending.
Over the past four years, the austerity bailout has been terrible for Greece: shrinking gross domestic product by almost 20 percent, trapping more than a quarter of the population in unemployment and pushing debt as a share of G.D.P. to 175 percent (from a pre-crisis level of 109 percent).
Greece’s new prime minister now appears to be on a collision course with the European Central Bank, the European Commission and the International Monetary Fund — the troika, as it’s commonly called, that together holds roughly 80 percent of Greek sovereign debt. If Mr. Tsipras and the troika can’t reach a deal, Greece could default or lose access to the bank liquidity currently greasing its economy.
This could in turn precipitate a rapid exit from the eurozone and the certainty of even worse suffering for Greek citizens, not to mention contagious instability across the European Union, especially in heavily indebted Italy and Spain.
There is an alternative — a way for Mario Draghi, the head of the E.C.B., and Christine Lagarde, the I.M.F. chief, to save the Greek economy from its tailspin, stabilize the eurozone and lay the foundations for inclusive growth across the region. The E.C.B. and I.M.F. should swap the Greek debt they hold, about 52 billion euros (or $59 billion), for interest-free debt that will come due only once Greece’s economy gets back on track.
These so-called zero coupon bonds would have the same face value as current Greek debt — thus nominally protecting the principal originally lent by creditors — but would not impose interest payments on Greece as it struggles to recover. More important, debt repayment obligations should not kick in until Greece’s economy shows signs of life. Reasonable targets would be a return to healthy growth, the unemployment rate falling to below 12 percent, and a reduction of the now crushing debt-to-G.D.P. ratio to a sustainable 40 percent (which is closer to European norms).
The E.C.B. should also buy the debt currently held by France, Germany and other major European Union creditors, so that Greece can get the same deal across the board. A debt swap would dovetail with the E.C.B.’s quantitative easing program, which plans to buy bonds across Europe to put more money into circulation and jump-start the stagnant economy.
The troika also needs to compromise on the fiscal terms of the Greek bailout program. Some of the loan conditions imposed, like major improvements in tax revenue collection to close loopholes and combat corruption, are tough medicine but good for Greece in the long term.
While creditors should stick to their guns on these kinds of structural reforms, the slash-and-burn approach to public spending must end. Greece is now experiencing a tragedy of blighted lives, with joblessness, poverty and hunger worse today than at any time since the 1930s.
A key to economic growth is investment, especially investment in health and education. Austerity measures that cut basic social safety nets not only cause widespread deprivation, but they also destroy any chance for economic growth.
Another linchpin of economic recovery is consumer demand: When wages plummet and unemployment skyrockets, economies go into a death spiral of shrinking demand. A key lesson from the ’30s was that striving to balance the government’s books on the back of job cuts only prolongs a depression.
Like Germany after World War I, Greece has been choked by its obligations to foreign creditors. Children go hungry so that banks can tell their investors they’ve refused to take a haircut. It’s no wonder that Greek citizens have finally risen up in fury, saying enough is enough.
Under the current austerity measures and repayment obligations, Greece will never be able to get its economy back on its feet. But if Mr. Draghi and Ms. Lagarde show leadership and meet Mr. Tsipras halfway, a win-win-win is possible. Reasonable repayment terms for Greece, pegged to a real recovery, would end the human misery and spur economic growth — with long-run benefits that would spill across the eurozone.