What was it all for? The latest Greek Bailout-PSI in the Morning After’s cold light

So, Greece defaulted. In the beginning, May 2010 to be precise, Europe and the IMF put up the largest loan in history supposedly to avert any kind of debt restructuring.  Then, when by the summer of 2011 it had become clear that debt restructuring was unavoidable, Europe embarked on ten months of navel gazing and a series of odd negotiations in order to effect the type of debt restructuring that would not, we were told, trigger CDS contracts. This week the default occurred and the CDS contracts were triggered. In terms of the troika’s own criteria, this was a spectacular failure to meet both targets.

But was there a silver lining, as the powers-that-be say there is? Did Greece’s debt enter a sustainable path, even if belatedly? Again the answer is a definite No! Exhibit A is, of course, the fact that the new English Law bonds issued by the Greek state (to be swapped for the distressed older Greek Law government bonds) are trading at prices which shriek: “Fresh default coming soon!” Could this be another instant when markets are wrong? So, let’s look more closely under the bonnet of the new Bailout-PSI combination.

Why a Fresh Default/Haircut is inevitable

The success or failure of a haircut depends not on its extent but on the viability of the debt that remains. When Greek and European politicians celebrate the fact that almost €100 billion have been shaved off Greece’s public debt, they state a useful fact but use it as a smokescreen that veils the numbers that count the most.

Suppose I owe a bank €100 thousand and the following agreement is struck: The bank will write off €53 thousand and will receive from me, in return, €15 thousand up front plus, say, 32 interest bearing IOUs of €1000 face value each and long maturity (assume also that the interest rate on these IOSs is around 4%). Has my debt been rendered serviceable? It depends. First, it matters that, since I do not have it, I must borrow the €15 thousand cash that I have promised my bankers. Who from? My metaphor is strained here. One could say, from ‘family’ (although families come in different guises, not excluding the Sicilian type). Secondly, as part of this deal, I must borrow immediately (or find it in the not distant future through liquidating whatever assets I have) another €30 thousand to put in a trust fund that will be used as collateral in case my IOUs bounce in the future (or in case I fail to meet my interest rate payments). Thirdly, for this deal to go through, I must bind myself to a behavioural code (also known as austerity) that most analysts believe will further shrink my already diminishing income flow over the next few years.

For these three reasons it is clear that it will take a miracle for my post-haircut debt to be, and to be seen to be, viable. Thus, it is no wonder that markets are pricing in a fresh Greek bankruptcy, by not wanting to touch the new Greek bonds, while northern politicians are refraining from any real commitment to keeping the Greek state/economy afloat. In summary, our brand new Bailout-PSI deal reinforces the climate which ensures that no self-interested investor will invest in the Greek economy as long as a freshly forged Damocles sword is hanging over the country.  And in a never ending circle of negative expectations, this climate and prospect makes the above mentioned sword heavier and its fall upon our heads surer.

What was the point?

Two years, two Bailouts, and €240 billion of official loans later (the purpose of which was to prop up a once €250 billion economy whose debt had risen, unsustainably after the Credit Crunch, to €290 billion), what has the result been? Nothing to write home about: a shrinking economy (whose collective income will soon dip below €200 billion) and a still unsustainable debt that will, only by some miracle, fall to below… 130% of GDP in eight years. This is the stuff of fabulous failure. Not so, however, if you look at things from the perspective of bankers, hedge funds and assorted members of the global and european financial sector.

The greatest achievement of the Bailouts was to buy the financial sector two long years during which to unload their Greek bonds onto the official sector. Henceforth it is the official sector, alongside the crushed Greek people, that will bear the costs of a forthcoming Default 2.0. Of course, given what has been going on on both sides of the Atlantic since the Fall of 2008, it is not unknown for taxpayers (for this is who ‘hide’ behind the so-called official sector) to bear the brunt of a financial disaster. Indeed, Europe’s taxpayers have been shouldering the costs of the Crisis since even before it erupted (toward the end of 2007, that is). We are (wrongly) almost conditioned to accept that the costs of finance’s folly will be born by voiceless taxpayers. Be that as it may, there is another real issue, one that concerns the efficiency, or otherwise, of the way public monies were used to prop up the financial sector.

Could it have been done otherwise?

Of course it could. Back in November 2010, Stuart Holland and I put forward the first, tentative version of our Modest Proposal. In it we had, at those early stages of the euro crisis, noted that:

“Europe desperately needs a two-pronged plan for tackling at once the deficit states’ debt and the banks’ problematic assets. Until this is done, markets will continue to speculate on which will be the next domino pieces to fall and thus the crisis will be reproducing itself.”

Instead of the combination of Bailouts with Austerity that would, in our eyes, inevitably lead to wholesale haircuts that affect all creditors indiscriminately, we proposed the following:

“The two-pronged attack at the current crisis can take a very simple form: A politically mediated Tripartite Negotiation between the following participants:

  1. Representatives of all high deficit countries that will, potentially, require assistance during the next five years (e.g. not only Greece and Ireland but also Spain, Ireland, Italy).
  2. The heads of the ECB and the eurozone, who will effectively be representing, as is their wont, the interests of the more dominant, low deficit, countries (e.g. Germany, Austria, Finland, Holland).
  3. Representatives of all the main European banks holding the majority of the high deficit countries’ bonds 

THE TRIPARTITE NEGOTIATION

 By bringing these three sides to the same table, it will become possible to tackle the problem in its entirety; to avoid squeezing it in the domain of public debt only to see it balloon in the banking sector; or vice versa. Here is an example of a possible Grand Agreement that the Tripartite  Negotiation  might bring about:

  1. European banks agree to limit their demands over the debt of the high deficit countries (i.e. to restructure the debt of Greece, Ireland etc.)
  2. High deficit countries agree to implement reforms that reduce waste, corruption and parts of their deficit whose reduction will have limited impact on poverty, social cohesion and long term productivity growth (e.g. defence procurement, tax breaks for wealthier citizens, subsidies on environmentally damaging agriculture)
  3. The Eurozone-ECB undertakes to come to the assistance of European financial institutions that are stressed by (1) above and, crucially, to utilise the European Investment Bank (EIB) to increase productive investment throughout the continent, but more so in its recession-hit regions.

A POSSIBLE GRAND AGREEMENT

Note how such an agreement would reduce the total amount of debt and would instil confidence in the banks. Currently, under the Greek rescue plan and the EFSF, deficit countries borrow at high interest rates (5% plus) to pay existing bank debts to banks. That money is itself borrowed by the rest of the eurozone at various interest rates (depending on each country’s credit worthiness). Meanwhile, the banks (who are already borrowing at less than 1% from the ECB) have no confidence that the deficit countries will manage to continue meeting their payments beyond 2012. Thus they hoard funds and refuse to lend to businesses at decent rates. This merry-go-round reinforces the crisis and, in fact, increases the overall burden of debt. The Agreement above would both:

  • deflate the gross debt [by combining: (a) a partial, multilaterally negotiated,  haircut that is born only by banks which are already being drip-fed by the ECB, with (b) increased liquidity into the banks by the ECB at interest rates of 1% or less] and
  • make banks more confident and thus more willing to lend [by removing the prospect of a series of much worse, and totally unilateral, haircuts on the bonds that they hold after 2012-3].

Imagine if by the end of 2010 Europe had followed our advice. If, in other words, it had adopted the logic of a quid-pro-quo; i.e. of targeted write downs of all stressed peripheral bonds (i.e. not just Greece’s) held by stressed european banks (which were, after all, just as responsible as the profligate governments for the debt build-up) in exchange for liquidity and capital. That would mean that, on the one hand,  pension funds, private bond holders and the official sector (plus assorted innocent parties) would not be caught in the crossfire of the current, unending ‘voluntary’ haircuts (that began in Greece but will surely spread to Portugal and elsewhere). It would also mean that the ECB would not have to accept every scrap of paper picked up by bankers on the street as eligible collateral for ECB loans.

Europe’s spectacular, but highly motivated, failure

Were there good alternatives that would have avoided indiscriminate haircuts, the highly dubious LTROs, and the extension of the Crisis into the indefinite future? Of course there were. One such idea was presented above: that of a grand negotiation between the stressed banks, the official sector and the stressed states, that would lead to selective (rather than indiscriminate) haircuts in exchange for liquidity and capital injections (and which have not affected other parties who are not seeking official financing).

Alas, instead of such a rational approach what we ended up with was a fallacy in search of a rationale; a complete separation of the process of providing liquidity and capital to the banks from that of writing down debt; a negotiation leading to an utterly unsustainable wholesale haircut for one country alone. The official sector is thus now exposed to half a trillion euros of loans to the european periphery, it has to keep printing mountains of new money that it channels, without rhyme or reason, to the banks (thus pushing them further into zombie territory) and, to boot, none of that has managed to make any appreciable dent into the vicious cycle that is deepening Europe’s fault lines.

A spectacular failure indeed. Yet not an unmotivated one. Europe’s banks have managed to unload their Greek bonds over a period of two years while, at the same time, receiving mountains of cash from the ECB to mop up any remaining losses. Greece’s bankers are to receive €25 billion (and counting) of EFSF-sourced capital without having to forfeit an iota of voting power to the official sector (for at least three years). Even hedge funds have not suffered, indeed some will end up with significant gains: the new bonds issued by the Greek state, despite being stressed, will compensate them for the low, low prices they bought the old bonds at and, in addition, will be able to claim CDS proceeds plus several cases of full payment of the old bonds (as a result of skilful strategic holdouts).

In the cold light of the Morning After, Europe looks sad, rueful, dejected. The citizens of the surplus countries feel shortchanged, their deficit country brethren crushed under the weight of hopeless austerity, the winds of recession blowing a cold chill across the continent. Meanwhile the financial sector can enjoy its new delivery of fools’ gold. Why fools’? Because every smart parasite ought to know that, if it overdoes it, its own demise will follow the death of an overcompliant host.

38 thoughts on “What was it all for? The latest Greek Bailout-PSI in the Morning After’s cold light

    • Thanks, Dean – two excellent videos. I hope you’re right about Hollande meaning business.

    • Of course the Euro i finished. All Fiat currency will collapse sooner or later. All currency unions collapse rather sooner han later….

    • Bill Mitchell has very good ideas but sometimes he is very hard-headed.For example while his ideas over Monetary Sovereignty are correct (or at least i agree with them),a month ago he proposed that Greece should abandon the euro and switch back to drachma and problem would be solved immediately.Oh he is hardheaded.

    • Too lengthy, and not structured enough. He repeats himself countless times. Would prolly be better if he had spend more time shortening it. Winston Chruchill’s once famously said something like “gentlemen, pls excuse my lengthy speech, I didn’t have the time to shorten it.”

      Anyway, of course it’s a point that Germany failed in reaching its own deficit reduction goal. That’s embarassing. However, it’s still true that our deficit actually has been reduced /even though not as much as predicted) and that we’re below the EU average and waay below the overspending of the GIPSI’s. And it’s also a fact that we don’t have any trouble getting cheap credits from the bond market because the investors have confidence in the reason of our fiscal policies. If the struggling EU nations could say the same, there wouldn’t be any problem right now.

      So, yeah, Germany ain’t perfect, either. Big deal.

    • what we can say is that we have a record for reducing the deficit…nobody has ever managed to reduce his deficit so much and so quick…and considering that if the recession wasnt so big the actual deficit to gdp ratio would be way smaller….but we are “lazy anarchists who dont implement the reforms”.
      Weird you dont mention anything about what he says about Germany violating the criteria from 01 to 05….

    • Well, Crossover, nobody, except the Irish who tried to lift too much when they bailed their fonancial sector out, has gone so fast so deep into deficit, either. There’s really no reason to congratulate the Greek government yet. And I’m especially disappointed about Papandreou. Now it shows his government did almost nothing to react to the crisis in 2008 and 2009. Asleep at the wheel. I like some of those guy’s ideas, but he was a horrible crisis manager.

      Germany got into trouble because of the bursting of the dotcom bubble but worked its way up again to less than 3% deficit, with determined reforms and without any foreign help. That’s quite a difference. You folks, on the other hand, have a lot of support, but protest all reforms. It’s totally ok to have a different opinion, but where are your constructive proposals? Only shouting no without providing better plans is no way to get out of this crisis!

    • @Gray
      You are saying that the Irish got so fast deep into big deficit while im saying Greece made deep cuts that have never been experienced before.I dont see the relation between the 2.

      “Germany got into trouble because of the bursting of the dotcom bubble but worked its way up again to less than 3% deficit, with determined reforms and without any foreign help”
      Germany and France were the 1st to violate the criteria (which in my opinion shouldnt even exist) and nobody sunctioned them…you keep forgetting this…
      As for proposals,i already asked your opinion about Proff.Varoufakis’ Modest Proposal but got no answer.
      I personally agree with this.Although i believe that any kind of “reform” that keep the governments being revenue constrained might create problems (and the modest proposal is following that logic),i believe its the best proposal ive seen that doesnt require a real change of direction for the currency union in terms of treaty changes etc which makes it eassier to be accepted some time by the hardheaded ones.

    • Crossover, actually that graph doesn’t show the Greece is a world leader at reforms at all! That’s a severe misreading by you. Check the title, it clearly says it’s about the CHANGE in responsiveness, not about the absolute height. The high number for Greece can easily be explained by the almost total lack of reforms in 2009 and the passing of a large number of bills in 2010. That’s where the big change shown in the graph comes from, but that doesn’t say at all that these reforms are successfully implemented, too.

      When it comes to successful reforms, Greece’s standing is much lower. Your claim that “nobody has ever managed to reduce his deficit so much and so quick” is totally unproven and doesn’t make sense in light of the real numbers. Quite to the contrary, when you look at the deficit as a share of GDP (necessary to compare nations of different sizes) Greece has a very bad record, with only Ireland being worse in 2010, when they bailed out the banks. And GDP growth, or rather shrinking, is the 2nd worst in the Eurozone, too (with the Irish being worst, but they at least have a good excuse). No, sorry, but there’s really nothing about the Greek crisis management so far that is worth of praise.

      As for Prof Varoufakis’ proposal, it’s yet another “inflation for the rescue” plan that would hurt all lower and medium income households in the 340 million strong Eurozone just to make life easier for the Greeks. Sorry, but imho that’s absolutely nuts. If Greece wants to improve its financial situation through inflation, it should leave the Eurozone and print new Drachmes, like that nation did in the past when its inflation went above 20%. That’s the reasonable way of doing this, not to put the whole Eurozone under the pain of inflation for the benefit of just one nation!

    • “Quite to the contrary, when you look at the deficit as a share of GDP (necessary to compare nations of different sizes) Greece has a very bad record, with only Ireland being worse in 2010, when they bailed out the banks. And GDP growth, or rather shrinking, is the 2nd worst in the Eurozone, too (with the Irish being worst, but they at least have a good excuse). ”
      First of all Greek gdp cumulative (negative) growth is worse than Ireland’s during the period 08-11..see here: http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&plugin=1&language=en&pcode=tsieb020

      You say that Greece is not doing good in terms of deficit/gdp while ignoring the huge cut in absolute numbers which is what matters for the people.After all the cuts are the cause of the gdp shrinking..the positive loop feedback is obvious except for you.I would bring the sectoral balance argument again but you probably believe there is a hidden hand draining money from the economy (other than the cuts) that is causing the gdp to shrink,so never mind.This recession is one of the worst ever especially for a country not at war,were the cuts bigger as you wish and the gdp shrinkage would have been bigger aswell.
      Its stupid to claim the cuts are not big or not enough based on deficit/gdp.A country could keep spending the same amount every year and it would look to you as if it was making cuts if the gdp was growing….

      As for modest proposal being inflationary….i can only ask you to explain why would you believe such a thing.

      “As for Prof Varoufakis’ proposal, it’s yet another “inflation for the rescue” plan that would hurt all lower and medium income households in the 340 million strong Eurozone just to make life easier for the Greeks.”
      Lets pretend for the sake of the conversation that it is indeed inflationary.My answer is “Ok….forget it ….lets keep hurting them by reducing demand as you propose”…..

    • “The high number for Greece can easily be explained by the almost total lack of reforms in 2009 and the passing of a large number of bills in 2010. ”
      Unfortunately the chart includes the whole 08-11 period.It doesnt matter if reforms are spread equally during the period or if more reforms were implemented in one year compared to another.
      As for bad implementetion…the more gdp falls the more you can be happy reforms are being implemented…unless you know of any major reforms that are targeting our gdp growth and we are not bothering implementing them…

    • “After all the cuts are the cause of the gdp shrinking.”
      This seems to be in conflict with your arguing about government surplus vs. private spending in the other thread! Under your logic (which I don’t endorse, of course), government deficits should increase private spending, or not? Maybe it would be a good idea if you would round up all the different points you make (mayn of which seem to be contradictionary) in a central argument. Really, what exactly is your point, what is your rescue plan? Something like the ECB printing lotsa new Euros so that Greece can lower taxes (sounds like Samaras to me)?

      But back to the effects of the cuts on the GDP. Let’s remember that Portugal and Spain acted on the very same Troika guidelines. Imho the fact that there GDP didn’t shrink us much, but rather stagnated after the initial impact of 2009, shows that Greek crisis management has been worst.

      “Ok….forget it ….lets keep hurting them by reducing demand as you propose”
      Well, my answer rather is, “get the hell out of the Eurozone, you can’t get the money needed for kickstarting the economy there and you’re not likely to meet the fiscal standards for a very long time if you keep the Euro. Lots of EU countries have their own currencies, there’s nothing wrong with reintroducing the Drachme (or create a new currency that doesn’t resemble the old one) in order to get through the dire straits now.”

    • “This seems to be in conflict with your arguing about government surplus vs. private spending in the other thread! Under your logic (which I don’t endorse, of course), government deficits should increase private spending, or not?”
      Government deficit equals by definition to private sector balance plus current account balance (you can also consider the domestic private sector and the foreign sector as one).That is simply what im saying.When there is a current account deficit,an equal government deficit keeps the economy at the same level.A larger deficit,grows the economy since it increases private sector balance.A smaller deficit shrinks the economy since the current account deficit drives money out of the economy.Obviously any surplus simply shrinks the economy.
      In contrast,when an economy has a current account surplus,an equal government surplus keeps the economy at the same level,a larger surplus shrinks the economy since it not only drains the excess money from the current account but it also drains some money from the private sector balance and a smaller surplus.Ofcourse a government deficit grows the economy even more.

      This is even more clear in this graph:

      Its is pretty obvious that any sectoral surplus has another sectoral deficit mirroring it.
      You mentioned the Clinton surpluses in the other post.You see how the private sector turned to a deficit at that point.

      If you can relate all this with Greece it becomes pretty obvious whats the cause of the recession.Current account deficit (which gratefully has started to shrink) plus a decrease in gvt deficit = more money exiting the economy.

      “But back to the effects of the cuts on the GDP. Let’s remember that Portugal and Spain acted on the very same Troika guidelines. Imho the fact that their GDP didn’t shrink us much, but rather stagnated after the initial impact of 2009, shows that Greek crisis management has been worst.”
      They started a little later than us so any effects will show up with some lag compared to where Greece is at.To tell you the truth,every time i read news about Portugal,i say “been there done that”.I dont have a deep view of what has been asked to them..but if its the same then they will face the same things more or less…Btw Spain just a week (or two) ago declared it is going to miss its target for this year’s deficit.

      “get the hell out of the Eurozone, you can’t get the money needed for kickstarting the economy there and you’re not likely to meet the fiscal standards for a very long time if you keep the Euro. Lots of EU countries have their own currencies, there’s nothing wrong with reintroducing the Drachme (or create a new currency that doesn’t resemble the old one) in order to get through the dire straits now.”
      I agree.Lots of EU countries have their own currencies.The problem is that they always had, unlike Greece.Im not convinced that the gains will be more than the losses.

      As to whether i have my own rescue plan, well any rescue plan i would design,would have a main idea revolving around the way the euro is designed.If it was up to me i would redesign it or at least have the eu decide what kind of a monetary system does it want.If it wants a modern fiat currency then it should treat the euro as one.If it wants to treat the euro as a fixed-exchange rate system it should still make changes mostly by creating a transfer of payments system.You obviously wonder what about Greece.Greece has its own problems (like everybody else) but i consider them irrelevant to the crisis (this doesnt mean i dont want them solved).You obviously disagree here but even if i accept all the accusations about Greece (corruption,lazy workers etc etc) i dont see how would their absence solve the trade imbalances (in my opinion the root of the trouble),which is an EU problem (actually its a global problem),not a Greek one.

      With that said,id bet my hand that our politicians either because they are puppets or because they are idiots would never follow such a direction.Thus,as ive already told you i believe that the modest proposal has more chances of being accepted at some point,primarily because it both tries to stay on the directions drawn by the current treaties and offers a solution for the problem i consider to be the cause of the crisis,the trade imbalances.

    • *just a correction
      i missed a phrase. “a smaller surplus grows the economy.”

    • Crossover, we seem to be in a kind of hen and egg argument here: “When there is a current account deficit,an equal government deficit keeps the economy at the same level.” Well, and when there is a government deficit while the economy stagnates, there will be a current account deficit! You seem to argue as if the trade inbalance simply happened and that the government had to go into debt in order to save the economy from shrinking, Sorry, but imho this distorts what really happened. As I see it, the Greek governments of the past wanted to hand out goodies which exceeded the capabilities of their economic and fiscal system and did this with borrowed money. This created the current accound deficit, because not nearly enough of that money inflow went into investments (for several reasons, all of which show up in Greece’s lack of competiveness) and went into consumption of imported goods. Afaik there’s studies that show that the size of Greece’s domestic market has been inflated in comparison with other nations because of the government continously pushing borrowed money into it. Of course, while this situation existed for a long time, the day of reckoning had to come one day. This simply wasn’t long term sustainable, and it made the whole system very vulnerable in a crisis which would let the source of the money dry up. Which is exactly what happened.

      Now, of course I know that hindsight is 20/20 and monday morning quarterbacking is easy. Sure there should have been more attention to Greece’s fiscal downward slope before the sh** hit the fan. This Eurozone failure has to lead to advanced supervision and the implementation of early warning and correction mechanisms. And any discussion about this has to be based on an honest and serious evaluation of the reasons leading to the bond debt crisis. That so many Greek folks, out of an understandable but still misguided patriotism, deny any wrongdoing of their nation isn’t helpful in this debate.

      Well, as for the rescue plans, of course it should include a migration path towards an improved Eurozone system of checks and balances, I agree on that. But I’m really torn if Greece can be kept within the Euro and if that would be the best way out of the mess for that nation. Greece’s myriad of problems coming from a delay of necessary reforms for decades can’t be solved in the short and probably not even in the medium run. So, that would require artificial life support from other Euro nations and it’s simply illlusional to believe this could be anything other than austere. It will never be enough to fuel growth. At the same time, The Eurozone HAS to get the other struggling nations out of their mess, too, and it HAS to be asked if it wouldn’t be better to “invest” the scarce money into Portugal, Spain and Ireland, where it would have a much more positive effect. Let’s not forget, if you try to defend too much you end up defending nothing! Greece is the main source of bad news about the Eurozone now, it demands the highest rate of attention from the other governments, and it also sucks up the most money. At one point, the Eurozone simply has to say “sry, but this becomes too costly for us.”

      Now, while no member nation has left the Euro yet, there always has to be a first time. But countless nations have exchanged their currency for another one, usually with positive effects, so this isn’t really a totally new situation. The major downside I see in this for Greece is that its government may revert to the same old unwise behaviour of stopping all reforms and presenting election gifts to the population once again, with freshly printed Drachme’s. That’s a possible problem that should be dealt with on the EU level. On the upside, the exchange rate adjustment would help to increase Greece’s competiveness and the domestic market would be strengthened when imports become more expensive. And that would be very helpful now. All in all, I can’t help but believing a divorce, by mutual agreement, would be the best for both sides in this case.

    • Oh, one more point: “You obviously disagree here but even if i accept all the accusations about Greece (corruption,lazy workers etc etc) i dont see how would their absence solve the trade imbalances (in my opinion the root of the trouble),which is an EU problem (actually its a global problem),not a Greek one.”

      Come on, Crossover, you’re too knowledgeable and smart to really believe that a trade imbalance magically builds up out of thin air! Of course, the myriad of problems handicapping the Greek economy, among them not lazy workers but certainly inefficiency, lack of productivity, and problematic labor relations, all contribute to the dangerously low competiveness (one rank BELOW Lebanon, imagine that) and had a major role in the trade inbalance! The Greek governments tried to “keep up with the Joneses”, the increasing standard of living in the EU, but they did almost nothing to enable the economy to deliver the necessary growth on its own. Too much depended on EU subsidies and borrowed money. This couldn’t work out in the long run.

    • “Well, and when there is a government deficit while the economy stagnates, there will be a current account deficit!”
      Yes thats a logical observation when looking at the identity without taking into account the differences between the sectors…even though they always net to zero.But after all a government deficit doesnt by definition go to the external sector.Greece (and most countries also) had deficits before the euro while the current account deficit was way smaller due to floating rates etc.After adopting the euro several import products became cheaper and thus more attractive to domestic consumers.Obviously its the private sector that created the deficit.
      After all my main point is that if Greece needed deficits before…it makes no sense to reduce them now (and i believe the same thing for any country going through recession).You cant have all 3 variables of the equation shrinking and accuse bad implementation for the shrinking.Thats insane.

      “You seem to argue as if the trade inbalance simply happened and that the government had to go into debt in order to save the economy from shrinking, Sorry, but imho this distorts what really happened. As I see it, the Greek governments of the past wanted to hand out goodies which exceeded the capabilities of their economic and fiscal system and did this with borrowed money”
      Well if you check how the current account deficit started to grow right after the adoption of the euro,you will too see that the imblanace simply happened.You speak as if only Greece had a trade deficit while if theres one thing that all of the PISFIG share in common is their trade deficits and they all started to grow after the euro adoption!

      “This simply wasn’t long term sustainable, and it made the whole system very vulnerable in a crisis which would let the source of the money dry up. Which is exactly what happened.”
      No trade deficits are long term sustainable.It could have been the private sector that got into debt in order to sustain this deficit and the outcome would have been the same.You could argue that all the trade deficit countries should stop importing but this also means no trade surpluses for the others.Germany would have barely grown if it wasnt for the others to import and im not implying anything by that.Its pretty plain and simple.
      We can also agree that the Greek public sector could have done a way better job in order to promote investment over consumption.But seriously,this doesnt change the trade imbalance problem a bit.If Greece exported more than it did,another country would export less than it did and import more than it did.In aggregate,if all the trade deficit countries produced more,then the trade surplus countries would produce less.This only means that,if it wasnt Greece it would have been someone else because the problem would still exist.
      I keep saying that the eurozone as a whole cannot be a big Germany for the simple reason that there are not enough buyers in the world that would be able to absorb this excess production.Furthermore forcing all the deficit countries to become more competitive by slashing costs,is simply a race to the bottom,that in the end hurts the simple citizens and only creates profits for few.You could may aswell see it as a currency war between countries that keep devaluing their currencies against each other.It makes no sense.It would make a lot more sense to decrease demand in one side (deficit countries) while increasing demand to the other side (surplus countries).

      “The major downside I see in this for Greece is that its government may revert to the same old unwise behaviour of stopping all reforms and presenting election gifts to the population once again, with freshly printed Drachme’s. That’s a possible problem that should be dealt with on the EU level. On the upside, the exchange rate adjustment would help to increase Greece’s competiveness and the domestic market would be strengthened when imports become more expensive. And that would be very helpful now. All in all, I can’t help but believing a divorce, by mutual agreement, would be the best for both sides in this case.”
      Im with prof. Varoufakis in this one.This would create a 2 tier economy.The few living the good life with their euros and the rest with a currency that nobody would like to hold.This situation would create a euro black market and ofcourse if we live the euro while it exists, our debt would be still denominated in euros.Issuing your own currency does no good if you have foreign denominated debt.The idea of leaving the euro would be more attractive if there would be a way to swap the debt into domestic currency.But i dont see it happening,especially after the new bonds are based in British Law.
      Nevertheless i agree that a return to drachma would favor bad governments to retain their power,along with the rich elite,if measures are not taken in a European level.

    • “After all my main point is that if Greece needed deficits before…it makes no sense to reduce them now (and i believe the same thing for any country going through recession).”
      That#s based on the idea that the other Eurozone members are under an obligation to subsidize this sad state of affairs. Not so! Germany won’t support any program that won’t lead to a SUSTAINABLE economy. Get used to that or look for other creditors.

      “You speak as if only Greece had a trade deficit while if theres one thing that all of the PISFIG share in common is their trade deficits and they all started to grow after the euro adoption!”
      Wrong. Check that data again. Ireland didn’t have a deficit, and the others didn’t fare as badly as Greece, neither.

      “Its is pretty obvious that any sectoral surplus has another sectoral deficit mirroring it.”
      Sure. If you divide 100% up, every growth has to be matched by a decrease. But no sector can realistically grwo forever (that’s only a mathematical possibility, with eternally shrinking increases), so up and down movements happen all the time and aren’t critical per se. And that way of presenting the data doesn’t show the increase of the GDP, so it has to used with care. However, I don’t see how this graph supports your point about the allegedly negative effects of the budget surplus. Imho this shows that the deficit reduction led to a decrease of the capital account until ’96, and then the dotcom bubble increased that money flow again. During all that time, goverment spending staganted as a share of GDP. What’s allegedly problematic about this, where’s that “crowding out” effect???

      Next, the Eurozone can be a big Germany, economically (nobody talks about you eating more Wurst or something), no problem. If other nations caught up with us this would reduce the German CA surplus and result in a more even balance for other nations. A Germany with less exports and more imports would still be Germany, that wouldn’t be a big change. Probably the Eurozone trade balance with the rest of the world would improve, too, which would give us all a very helpful “nest egg” in case imported resources, like oil or rare earths, become more expensive. What’s not to like?

      “This would create a 2 tier economy.The few living the good life with their euros and the rest with a currency that nobody would like to hold.”
      This totally depends on how successful this independent currency will be. Or do you want to tell the UK, the Swiss or the Danish they are “second tier” economies? Hehehe! No, seriously – sure, the new Drachme most probably won’t be as popular as the Swiss Franc, but that’s just a sideeffect, and not an important one, imho. Let’s not forget that a) the EU constitution doesn’t say anywhere that a nation has a right to be an Eurozone member, and b) Greece simply doesn’t fulfill the necessary criteria now to swim with the others. But the nation has the chance to improve, the potential is there, it’s only trapped in a maze of problems now, so she may rejoin the Euro in ten years or so. But right now the unified Eurozone central bank policies can’t work for Greece and only represent yet another handicap for recovery. Imho that’s increasingly clear, from the experiences of the last two years. It doesn’t help to pretend that everybody is in the same tier when that’s simply not the economical reality. Wishful thinking ain’t no Ersatz for realistical policies. sorry.

  1. Yanis, how is your French? Hollande is declared certain to win the election next month and has declared he wants a “reset” on the Troika’s ‘deal’. It occurs to me that your modest proposal is exactly what he needs if he is serious about reset for ‘growth’. Of course, he is probably NOT serious, only pretending in order to improve his chances of winning the election. Still… Hollande might be looking for you by May! He has been very vague about exactly the terms he wants to “renegotiate” for “growth” – he will need some help from someone who actually has a plan.

    • True. And Francois means business.

      1. There is not going to be anymore of Hollanderkel.
      2. Merkel will understand immediately who her new boss is.

    • Sorry, David:

      I forgot to attach the video for you. As far as I am concerned a former country called Germany is no more. From this point on I will refer of Germany as the “new addition of Frankreich” or “Frankreich’s natural expansion territory” (you let me know which you prefer :-))

    • this German MEP Schatzi-whatever is such a looser.

      He just lost his PhD, because they found out that he copied….

  2. It is time that we leave behind the alleged “good intentions”..Some people, on the basis of this course were bound to make a lot of money. Some others could subdue a whole modern nation to save money they would normally pay to keep a social state running anywhere else in Europe.Track down the interested parties and you will get the answer why all this was allowed to happen and who and why was sabotaging your rational solutions that I insisted from the beginning they knew theywere right but nobody’s interest was in a solution.Do you think e.g. they would lend us now some money by which we could blitz the secondary market and buy the new and old remaining bonds at market prices?Of course such solutions will not be allowed to take place.They free the country which has to be milked for all the oil and gas we will grant them soon through the trigger of some other hidden paragraph somewhere in the bail-out Mnimonia agreement.Sorry to have turned 99% towards conspiracy but if you throw me a logical 1% lifeline I promise to grab it and come back to “sanity”.

    • Just a note.By the time we get money to buy the bonds in the secondary market their price will tend to go back to around 100% of par…thats the reason our interest rates skyrocketed anyway..there isnt a bond buyer of last resort…

  3. Actually is far worse than you think and it is totally absurd.

    Say I approach you and I offer you a 100 euro gift in exchange for you paying me 205 euros for the privilege. And oh, BTW, here is how you are gonna pay me:

    50 euros + 25 euros = 75 euros will come out of your bank and pension.
    130 euros of a new loans to cover the various financial holes I have caused you due to the sudden withdrawal on your bank account.

    Don’t look at me like this stupid. I said: I will give you a 100 euro bill if you give me 205 euros instead.

    Why you ask? Answer: a pronounced financial illiteracy a la Germania Horribilis.

    This is the PSI for you. A solution absolutely rejected for all of Europe but insisted by Frau Ignoramus in the case of Greece. A Greece that had to default last Friday because among other pearls of wisdom, Germany refused to release financial aid – long ago agreed upon at an EZ level- until it pushed Greece further into default and added another pile of debt to ensure total bankruptcy this time.

    This is the solution of Satan for Greece, so that some geriatric pensioners of the Rhine Valley are satisfied for their new title as the Scrooges of Europe.

  4. Pingback: “La Grecia è salva” – Le ultime parole famose di Massimo Giannini « Verso un Mondo Nuovo

  5. I like your analysis and it really makes sense. I wouldn’t believe it if you were not so correct at the previous bailouts/agreements concerning Greece and what followed them. You had predicted and analysed well the former situations so you get much extra points that this current analysis is also correct.

    Thank you for sharing your thoughts. You make me more knowledgeable and I feel like my eyes and mind open-up a little more when I read your articles. Please Keep Up at the same pace and spirit.

    Regards
    A Greek Citizen (C.A.)

  6. I agree with everything that is said here, but…

    Could someone perhaps refer me to a website or any other source of information where there is a listing of projects/ideas which Greece is eager to implement but can’t because lack of funding?

    What I do know is that the EU Task Force has been at work since last September to help Greece to get all the requirements fulfilled so that Greece can get over 10 BN EUR in new EU funding which is waiting to be disbursed. I have not read anywhere that there is great excitement in Greece that the EU Task Force would assist Greece in that (normally, the countries themselves need to do all that work). Instead, I have heard comments like they are a new kind of “Besatzungsmacht”. This week, the EU Task Force will make an update report. That will be interesting.

    I also know that the German Economy Minister visited Greece with a 70-person delegation about 6 months ago. They claim that they wanted to explore investment opportunities and got no reaction from the Greek side. The Greek side claims they only wanted to collect past-due receivables. Bottom-line: nothing came off it.

    Some time last year, McKinsey came up with a 500-page proposal how Greece could create 500.000 new jobs and 50 BN EUR new GDP over the next 10 years. I am not aware that anyone really paid attention to it.

    Roland Berger proposed the EURECA-project. I can see why the Greek side would not get excited about a privatization project like that but at least it should have been explored and discussed, instead of being totally ignored.

    To be sure, I may be totally unfair here because it is possible that a lot of good things are under way except that one doesn’t know about them. This is why I would appreciated hearing about them.

    • I think you are perfectly correct, Klaus. The Greek political parties are far too concerned with their own (miserable) future to bother with such mundane things as economic investment and development. They always were like this, of course, unless embezzlement was part of the deal.

      As far as I know (and as a former labour market economist I try to follow these things), there is nothing under way for job creation. This is the black hole called Greece that has been dug by an unholy alliance of Greek political mafia and the northern European countries obsessing over their banks. Essentially, there is nobody representing the Greek people: there is no semblance of democracy, despite the moronic utterances of the sycophants collected in the Greek government. There is also no semblance of economic recovery — again, despite the malakies emanating from the mouths of some German and Greek politicians.

    • “In summary, our brand new Bailout-PSI deal reinforces the climate which ensures that no self-interested investor will invest in the Greek economy as long as a freshly forged Damocles sword is hanging over the country.”

      I think Professor Varoufakis answered your question in his post. As for the other various proposals, I am skeptical as to how both sides can benefit from these. Before the first bailout was “handed out” to Greece, Merkozy were selling their arms to our government…

    • pro tip:

      when ur living during the “last days of Rome”, one doesnt invest even if “some1″ offers to cover 50% of the investment.

    • To Emigrant

      As justified as the ideas of “Marshall Plan” or “EIB investment offensive” are, I am not sure that they are the best approaches. Sure, if you can get a few very welcome large infrastructure projects and if they are selected well, they might even create domestic jobs and some domestic value generation but the risk with government-channeled funds is always that much of it ends up in private accounts.

      The EIB doesn’t really touch anything less than 5 MEUR and they start getting interested when it gets to 2-digit MEUR amounts. Greece, at least to me, is a classic market for mid-size companies: companies which employ about 5-250 people where an investment of about 5 MEUR is closer to the maximum than to the minimum.

      If and when Greece gets these types of companies mushrooming (particularly with foreign investment), then one would know that Greece is on a solid recovery track.

      The question is, of course, what these companies should do/produce when demand is low. My pet subject is always “initially import substitution of consumption products” because that could be started literally overnight. Medium-term I can only say: when I read the overview of the McKinsey Report with over 100 projects in about 6-7 different industries and 500.000 new jobs within 10 years, my gut reaction was “geez, Greece is a country of unlimited opportunities!”

      Simply to cry “Marshall Plan” is not sufficient, in my opinion. What worked for Germany (et.al.) and Germans (et.al.) after WWII may not work for Greece and Greeks today. The Greek economy will be on a forward track if and when mid-size foreign investors start making mid-size investments in Greece voluntarily (because Greece has built up a reputation of being THE place to do business in), and many of them. With such investors, one not only gets new funding but, above all, a know-how transfer (above all as regards corporate culture).

      The challenge for Greek leadership is to figure out how such investors can be attracted!

  7. I would really like to see a total failure ofr this “bailout”. I would love to see the EU-idiots have to admit that their political solutions are uselss and that the market will always win.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s