On the Brussels’ Agreement: Europe’s Reverse Alchemy in full throttle

The official unveiling of a systemic crisis

One knows that there is something rotten in the world economy when the fate of a Greek PM makes headlines all over the world and for a whole week. Greece is not, and ought not to be, that important. But Italy is. And so is, from a global perspective, Europe. For some time now, Europe has been hiding its ills behind its (Hellenic) little finger. At long last, the truth (which I have been at pains to shout from the rooftops for more than 18 months) is now out: This is a systemic crisis that threatens not only the euro but the world economy in its entirety.

While Greece is insignificant, the eurozone, lest we forget, is the globe’s largest economy; a block that accounts for China’s single largest slice of exports, for one fifth of America’s exports, for more than $120 billion of Latin America’s exports, not to mention up to half of emerging Africa’s money-spinning trade (from fresh fruit and flowers to minerals). A deep recession in Northern Europe (which will surely result from the euro’s demise) is, thus, bound to unleash deflationary winds that will destabilise an already imbalanced global economy.

It is for this reason that all eyes have been, of recent, on the 27th October EU Brussels’ Agreement. For, as we all know, this is the Agreement that was meant to avert the euro-system’s collapse; a collapse that will force Germany to forge a new currency whose immediate appreciation will be the trigger of the recessionary forces mentioned just above.

Alas, while the world is looking, it is failing to see. Judging by the headlines, the world’s media, markets, political leaders and opinion makers were biting their nails until word came from Greece that a national unity government will be formed so that the Brussels’ Agreement can be implemented. It is as if the whole wide world was praying for the Greeks to give the Brussels Agreement a chance. And since Silvio Berlusconi announced that he will go Mr Papandreou’s way, similar hopes have been raised about Italy.

It is the purpose of this article to argue that the world’s prayers have been misplaced. That the anxiety to see Greece and Italy return to the Brussels’ Agreement fold is a sign of the calamity to befall the global economy. For this Agreement, as I shall be arguing below, is most likely to prove the euro-system’s greatest foe, rather than its cure. If I am right, the sights and sounds of a world agonising over the fate of the Brussels’ Agreement will be followed by the sights and sounds of a world readying itself for a major new twist in an already devastating Crisis.

On the pre-history and the three aims of the Brussels’ Agreement

This particular phase of the Euro Crisis saga began on 21st July when, in the midst of joyous celebrations, the last ‘final solution’ was touted. As some of us had indicated almost instantly, that agreement was doomed as it tried reluctantly to acknowledge one relatively minor problem (Greece’s insolvency) by putting so much of a burden on the shoulders of the problematic EFSF that a much greater problem was created (Italy’s and Spain’s liquidity-cum-solvency crisis). Lo and behold, the Italian and Spanish sovereigns were thrown in sharp turmoil two days later. During the summer, while on their holidays, Europe’s leaders knew they would have to go back to the drawing table come September. Indeed, by the time the leaves had turned brown, not only were Italy and Spain in the sin bin but, to boot, Dexia’s collapse had heralded the beginning of the unfolding of the eurozone’s banking sector. And when Secretary Tim Geithner and President Obama, aided and abetted by the rest of the G20, put it to the Europeans that they had a week to get their act together, Europe got into gear to produce what we now know as the Brussels’ Agreement.

Their task was to deal at once with three related problems: Europe’s collapsing banking sector, the problem with Italian and Spanish sovereign debt (and their potentially catastrophic effects on France’s triple-A rating which would, in turn, wreck the EFSF), and the derelict Greek economy. After days and nights of deliberations, the Brussels Agreement was patched together. On that night, after having read the preliminary document, this was my verdict:

Not one of these [nb.the eurozone’s three problems] was even remotely tackled last night. The banking sector required aggressive, compulsory recapitalisation at a central European level. It will not happen. (Not only is the sum set aside to feeble but, primarily, the bankers will be given multitude chances to wriggle out of losing control over their bankrupt banks through various means that will render recapitalisation a dead letter.) The EFSF-on-anabolic-steroids (which is what its private capital leveraged version will turn it into) that has been announced will neither lessen the burden on Italy (nor remove the dark clouds over France). Lastly, the Greek haircut is a mere empty shell of a number (50% is the rule of thumb agreed on in the early hours of the morning, just in order to have a number) since it is predicated upon a series of ludicrous assumptions and deals that deals with the bankers that politicians are nowhere near completing.

Now that the dust has settled, and new governments are emerging in Greece and in Italy, with the express purpose of endorsing the Brussels Agreement, it is time to take a closer look at what this Agreement is meant to do to tackle each of these three problems.

The Agreement’s First Aim: To re-capitalise Europe’s banking sector

After having, at long last, acknowledged, that Europe’s banks are in desperate need of recapitalisation, the Brussels Agreement allegedly set aside up to €110 billion for the purpose. This sounds reasonably encouraging, despite the low sum (which according to the IMF ought to be at least €200 billion; or three times that if we take into consideration the special vehicles that our wise bankers have created since 2009 and which multiply by a factor of around 5 the banks’ exposure to bad debts and assorted losses).

Ignoring for the moment the low sum allocated in the Brussels Agreement to the banks, the real cause of concern lies elsewhere. First, it lies in the stated target and, secondly, in the proposed means (by which the recapitalisation will be implemented). So, let’s begin with the objective of the exercise. It is, reportedly, to raise the banks’ capitalisation ratio to 9% over their assets/exposure. This constitutes a tragedy in the making. Let me explain.

Ratios sport a numerator and a denominator. If one wants to bring a ratio closer to a certain figure, it is possible to do it either by adjusting the numerator or the denominator (or, of course, both). Sometimes, grand failure results when the policy or decision maker adjusts one assuming falsely that the other will remain constant. [For example, in recessionary environments, governments trying to reduce the debt-toGDP ratio find that austerian attempts to shrink the numerator lead to faster diminution of the denominator (as the recession takes its toll), the result being a stubborn debt-to GDP ratio.] In the case of Europe’s banks, the repercussion of using the capitalisation ratio as the policy target is bound to be detrimental to the real economy. Bankers have already warned us: They will do all they can to avoid taking on new public capital. Which means, naturally, that (since the private sector will not give them any capital, courtesy of their parlous state), the only way they can achieve the 9% capitalisation ratio is by shrinking the… denominator. What does this mean? It means that they will try to sell their loans, their derivatives, their paper assets in general to whomever wants to buy. At the same time, they will avoid issuing of new loans like the plague (since loans increase the denominator). The effect of these moves will be massively to reduce liquidity in the marketplace at a time when the eurozone is entering a new recessionary phase. In short, if the Devil wanted to push Europe into a sea of even greater troubles, he could not have chosen a policy target (regarding the banking sector) better than that we find in the Brussels’ Agreement.

But there is more grief where the above came from: It appears once we delve into the means by which the 9% capitalisation ratio will be achieved. According to the Brussels Agreement, there will be three stages which must be completed by next summer. First, banks will be asked to seek more capital from private investors. [This is absurd, since no sensible private investor will ever invest in insolvent banks – unless they get a controlling stake that the current bankers will not want to part with.] Secondly, if the banks cannot secure private capital injections [which they will not!], then they must turn to their national governments for capital. And, thirdly, if the latter are bankrupt or fiscally strained themselves (as all of them are), the last port of call is the EFSF.

The problem with this process is twofold. First, in the hypothetical scenario that the bankers accept public money, even EFSF money, these sums will be added to the already strained public accounts of the relevant member-state. Yet another migration of the same problem that keeps toing and froing between the private and the public sector. Secondly, as mentioned before, bankers will fight tooth and nail to avoid public capital which will dilute their own control over the banks preferring instead to reduce their assets’ book. So, the three step process envisaged by the Brussels Agreement will give bankers the excuse they need to delay any talk of taking on new capital. In effect, they were given around ten months during which to shrink their loan and assets’ book while taking on only a minimum amount of public capital.

Verdict: The Brussels Agreement will lead banks to take steps which reduce liquidity, fan the fires of recession throughout an already euro-system and, crucially, prevent any serious re-capitalisation of our ailing banking sector.

The Agreement’s Second Aim: To revive comatose Greece

The centrepiece of the Brussels Agreement is, just like that of the 21st July Agreement, its proposed Greek rescue. Much of it centres around the 50% haircut of pre-May 2010 bonds that have not matured yet – and which have not already been bought by the ECB (which somehow places itself over and above other bondholders of Greek debt).

As we all know, Mrs Merkel burnt the midnight oil, with Mr Sarkozy and the bankers shop steward, a certain Mr Dallara, in negotiations the purpose of which were to lean on the latter to accept that the haircut be declared ‘voluntary’ (so as to prevent the triggering of the CDS’ issued in the past couple of years on Greek debt). Mrs Merkel’s negotiating strategy was simple: “Consent to a 50% haircut or take the blast of a full 100% insolvency.” Unsurprisingly, Mr Dallara relented.

There are a number of unresolved issues here but, nevertheless, we already know enough to reach a rather depressing verdict on the chances of the Greek economy even if the Brussels Agreement is implemented to the full and even if the accompanying (exuberant assumptions) are confirmed in practice. To cut a long story short, the agreed haircut will prove an insignificant relief for Greece (another case of too little too late) while the extra austerity that will be traded for it (and imposed on the new government in return for the haircut-loan package) will eat further into Greece’s GDP. In short, it is my estimate that, even if all goes according to the Brussels Agreement plan, Greece’s debt-to-GDP ratio will remain well above 140% by 2020 while the much needed GDP growth will be nowhere to be seen. Soon, perhaps within six months, another Crisis Summit will have to be convened to find yet another ‘final solution’ to the Greek debt debacle.

Ironically, the only reason why such a Summit may prove unnecessary is that the euro-system may have imploded for reasons to be found in its other constituent parts. But even under less dramatic circumstances, the Greek part of the Brussels Agreement will be neither here nor there if the other two planks (bank recapitalisation, see above, and the EFSF’s makeover, see below) fail. Just like the Greek part of the 21st July Agreement meant nothing once Italian and Spanish debt blew up, so with the Brussels Agreement the whole deal on Greece will be confined to the dustbin of history if something similar obtains in the banking sector, in the EFSF’s finances, in France’s triple-A rating, in Italy’s and Spain’s refinancing efforts etc.

But let’s, for argument’s sake, concentrate on the Greek situation alone, assuming that which we cannot, wisely, assume: that the other two parts of the Brussels Agreement hold together. What would the Greek haircut plus the new loans achieve? The official story is that it will shave off around €100 billion of the Greek outstanding debt. Sounds impressive? Yes, but wait. Things appear quite different upon closer scrutiny. For in order to entice Mr Dallara, Mrs Merkel threw in a ‘sweetener’, in the form of around €30 billion. Of this, €15 will be produced by the Greek state through privatisations [which with every day that goes by require flogging harder the dying horse of Greece’s public assets] and another €15 billion which will be borrowed by… Greece (from the EFSF). The sum of €30 billion will then be invested in the usual kitty of AAA-rated assets to be held aside as collateral (in case the Greek state fails to repay even the remaining 50% of the bonds’ value). In short, the haircut is going to reduce Greece’s public debt, at best, by €70 billion. That is an effective debt reduction of less than 19%, in terms of Greece’s debt-to-GDP ratio (the overall €380 billion outstanding debt will shrink, at best, to €310 billion while GDP, already down to €217 will have shrunk to €206 in 2012). In short, a pittance. Much ado about nothing. All this commotion, and the late night negotiations, in order to reduce Greece’s debt-to-GDP ratio to… 140%.

  1. While the meekness of the proposed haircut is, obviously, a problem, it is not the only one. The main source of concern is the insistence that the haircut be pronounced voluntary.
  2. Securing the consent of the bankers means that the haircut is not sufficiently deep (see previous paragraph). Far more worrying however is the following:
  3. Since the Brussels Agreement was announced, a number of hedge funds have been purchasing Greek government bonds (especially those that will be maturing in 2012 and 2013). Why? Because they are planning to call the Europeans’ bluff. If, indeed, the haircut is to be declared voluntary, there is nothing to stop the hedge funds that have just purchased Greek bonds at 35% of their face value from demanding full payment, threatening to go to the IDSA to have the haircut declared involuntary (thus triggering the feared CDSs) if their demand for full payment is not met. If their stratagem works (And it will work if the Brussels Agreement is implemented successfully) Greece’s debt relief will fall much below the €70 billion sum!
  4. The idea of suppressing the CDSs’ triggering, by leaning on the banks, undermines well and truly the Brussels Agreement strategy for dealing with the Italian and Spanish debt crisis – see below.
  5. Lastly, while it is clear from the above that the haircut is woefully inadequate as a means of dealing with the Greek debt, the new round of austerity measures that are part and parcel of the Brussels Agreement, especially in the absence of any tangible commitment on the investment  front, border on the criminally negligent. To put it bluntly, they shall guarantee an acceleration of the freefall of Greek GDP to a level that may well fall below €200 billion, at a time when public debt will be floating above €350 billion (once the new loans, the sweeteners for the banks aand the full repayment of several hedge funds are taken into account).

In short, the international (and Greek) press tell their readers/audience that Greece’s ‘salvation’ is predicated upon accepting and implementing the Brussels Agreement. I beg to differ. In view of the above, a Greek consent to the Brussels Agreement strategy for dealing with the Greek debt crisis is equivalent to a nation’s suicide. The obvious alternative is to default within the eurozone (a 100% haircut on pre-May 2010 issued bonds), to utilise all proceeds from privatisations internally, and to cut all sector pay in a top-down fashion till the government’s accounts are balanced.

Verdict: The Brussels Agreement will lead Greece further into the mire, wrecking not only what is left of the Greek social economy but, perhaps more significantly from a N. European perspective, destroying the remnants of Europe’s policy-making credibility both with electorates and markets.

The Agreement’s Third Aim: To prevent Italy’s and Spain’s exit from markets

This was always going to be the greater of the three tasks, in view of Germany’s steadfast objection to having the ECB monetise any part of these countries’ debt, either directly or indirectly (via leveraging the EFSF). The question is: How can the remaining €240 billion of EFSF guarantees stretch to plug a €3000 billion hole without the ECB’s involvement? The answer, of course, is that it cannot happen credibly and the evidence comes in the form of the skyrocketing spreads ever since the Brussels Agreement was signed and announced.

According to the Brussels Agreement, the EFSF will try to fulfil this Herculian task in two ways. First, by offering ‘first loss’ insurance to investors buying Italian and Spanish bonds up to and including a haircut of 20%. In other words, anyone purchasing a fresh issue of such bonds will be insured by the EFSF for a loss of up to 20% of the face value. In effect, this amounts to a digital CDS insurance contract (digital in the sense that they either pay the full loss or nothing) to be offered free of charge by the EFSF, on behalf of the eurozone, to anyone purchasing these unwanted bonds. The hope is that these bonds will, all of a sudden, become desirable. Secondly, the EFSF, a Special Purpose Vehicle (SPV) set up by the EU in May 2010, will set up… another SPV which will attract (or try to attract, more like it) private funds which, in conjunction with some of the EFSF’s own capital, will be used to re-capitalise the banks, assist Greece, continue lending to Ireland and Portugal etc. Here are some reasons why this pig will not fly:

  1. Investors are being asked to assist the eurozone twice: First, to provide capital to the EFSF so that the EFSF can issue the digital CDSs for fresh Italian and Spanish bonds. And, secondly, to buy these same bonds!
  2. Investors are being asked to behave foolishly: On the one hand to accept the idea that holders of Greek debt are forced by the EU to accept a 50% haircut without the benefit of the payouts they were expecting from the CDSs they purchased together with the Greek bonds while, at the same time, trusting the EU’s own issue of digital CDSs on future Italian and Spanish bond issues.
  3. The world in general, and China in particular, is expected to turn a blind eye to the toxic nature of the EFSF which means that either it is too small to deal with the capital black holes facing the eurozone (both its sovereigns and its banks) or its impact will be too toxic if it is given a large sum to play with. (For this argument click here.)

Verdict: The Brussels Agreement comes hot on the heels of the 21st July Agreement which pushed, unwittingly, Italy and Spain off the proverbial cliff. And instead of pulling them out of the ravine, the Brussels Agreement amounts to an official declaration that Europe cannot help these two countries. The very allusion to potential help from China and the IMF amounts to a  declaration of failure. What followed in the Italian bond auctions after the announcement of the Brussels Agreement was a foregone conclusion.

Concluding remark

Greece and Italy are in the process of acquiring technocratic governments the stated purpose of which is to ensure that the Brussels Agreement is implemented. If my analysis above is right, their task is hopeless. Technocrats may serve a purpose when working from a rational engineering plan. But when the plan is of the sort discussed here, they are bound to oversee the collapse of the very euro edifice that they were summoned to save. They will then be remembered as Europe’s reverse alchemists (who started with a nugget of gold which they then, almost mysteriously, turned into a piece of lead.).

76 thoughts on “On the Brussels’ Agreement: Europe’s Reverse Alchemy in full throttle

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  6. Klaus:

    The only fact which counts at the moment is that the feeble PSI idea pushed by Merkozy seeks to replace existing debt with new debt at 8%(no way Jose).

    Such is the stupidity of this effort that no words can describe the stage of financial illiteracy implied by it.

    You are drowning yourself in details provided by the enemy. One of these days (provided Yanis give us the impetus because it’s his show after all) I will explain to you in strategic and geopolitical terms how Greece’s interests are perfectly aligned with US interests and as such all German inspired programs are doomed to a spectacular failure.

    This is no longer a question of if, but when. When Germany will cry uncle and finally proceed with the only solution available (call it the Modest ECB route as a hybrid of Yanis’ brain child and EU realities).

  7. Klaus:

    The only person you confuse with facts is yourself.

    You put the entire Greek debt at zero interest and you need still to borrow? Are you serious?

    Even at the present German mal-experiment (which has destroyed the Greek economy)Greece is close to a generic surplus. You take away debt service and bingo! Big surplus!

    Your bias is blinding you.

    • Dean, here are 2 “facts”:

      1) Look at page 95 of the Troika-report and you see that Greece would have had an 11 BN€ budget deficit in 2010 before interest expense and will have 3,9-4,5 BN€ budget deficit before interest this year. In 2012, the budget would break-even before interest and thereafter it would turn into the plus but these are projections and so far reality has always turned out worse. TheTroika-report is as PDF in first paragraph of this link.


      2) In the link below you can see that the current account deficit in 2010 would still have been way over 10 BN€ even if no interest had been paid. Extrapolating 1-8/2011 figures into the full year, it looks like 2011 will be worse. These figures come from the Bank of Greece.


      Perhaps you feel that I am trying “to be smart” with you. I really am not, believe me! I just think that there are a lot of other issues than just the financial engineering of Greece’s sovereign debt. Greek brainpower notwithstanding, the EU-elites will march to their own drummer, even if that leads marching into the abyss. If that is not the lesson to be learned so far then I don’t know what is.

      I read the 1st Report of the EU Task Force which came out today. Now that was interesting reading! If the EU can help Greece accomplishing what is outlined there, one can be proud to be a European. If Greece cooperates with that (which is a precondition, of course), then Greece will one day be happy to have been in the EU. And there would be the real prospect of a “new Greece” within only one generation.

      Now that would be something, don’t you think?


  8. Klaus:

    Here is the deal I want.

    Keep all of Greece’s debt face value intact (100% of its debt#. Give me 2% interest applied to all of it for the next 5 years with the ability of a graduated 3% for 10 years.

    Then, take all the IMF/Germanic amateur advisors out of my country.

    I promise you that I will have Greece up and running #w/ revenue surpluses in less than 2 years).

    That’s it. That the whole program.

    I don’t want to hear about controlled or uncontrolled bankruptcies and any other instruments where the foreign banking sector will make more money in the backs of ordinary Greeks. And stop comparing Greece to Argentina. It’s the common currency of the euro that is Greece’s straight jacket.

    • Dean, you are certainly entitled to your own opinions but please don’t confuse others with your own facts. Facts are:

      * even if the interest rate on Greece’s entire sovereign debt were zero, the government would still have to borrow to pay for its expenses; from whom?
      * even if the interest rate on Greece’s entire foreign debt were zero, the country would still need funding from abroad to pay for its imports (mind you: the private sector’s foreign debt is higher than that of the government)
      * even if you returned Greece to the Drachme (which I would support if you manage to do that without causing anarchy), the country would still need funding from abroad
      * even if you achieved budget surpluses within 2 years, the country would still need funding from abroad

      That is mathematics and not economics, and mathematics is the same all over the world.

      Sorry if I have confused you with facts but good luck with your plans!

  9. Klaus:

    Try to avoid mixing apples and oranges.

    Calling in the creditors to restructure debt in any form (mild or severe) is bankruptcy. The rules and reasoning that apply to personal bankruptcy don’t apply at the sovereign level.

    Of all the so called “solutions” out there, the Merkozy 50% haircut is beyond horrible. It’s not a solution at all. It is 100% of the problem.

    After applying a senseless austerity plan to Greece which has decimated the Greek economy, Germany now introduces another cause of bankruptcy in the form of haircuts. It’s like after you kill the patient, you decapitate the patient just to be sure that the patient is dead.

    Don’t even speak of debt restructuring for Greece. It’s the worst idea ever because Greece is not a stand alone but deeply connected to the rest of the world’s financial system.

    The duplicitous German plan is precisely what you suggest. Kill Greece via bankruptcy and then try to erect firewalls while severing any possible connections to the global system. This is the most self-serving plan ever devised and it is beyond pathetic. It’s criminal.

    • Dean,

      is’t really quite a challenge to respond to your points, but I enjoy it. Upfront, let me say that I have personally negotiated 2 sovereign debt reschedulings (Chile/Argentina) in the 1980s on behalf of one of the top-ten creditor banks in each country. The Argentine rescheduling involved about 500 banks worldwide. So I am not talking from theory.

      So much (wrong) terminology about sovereign debt issues has been thrashed around of late that some time ago I took the time to write a post about this. If you are interested, here it is.


      A legally effective sovereign bankruptcy can only take place where there are bankruptcy laws for sovereign states. To my knowledge, there are no such laws anywhere. Neither can you compare a sovereign state with, say, a corporation. After completion of bankruptcy proceedings, a corporation ceases to exist (Enron no longer exists). A sovereign state (normally) continues to exists (Argentina still exists). Sovereign debts remain legally valid obligations for eternity as long as the state exists or until there is an official debt forgiveness (Tsarist Russia no longer exists; no debt needed to be forgiven because there was no one left to sue. Nevertheless, it still took Communist Russia quite some effort to repudiate the debt of the former Tsarist Russia, and Lenin allegedly once said that having repudiated Tsarist Russia’s debt was one of the greater mistakes of his revolution).

      Contrary to what you say, a sovereign debt is much more similar to what personal debt was until countries (not all countries so far) implemented bankruptcy laws for private individuals. Before that, the 20-year old was on the hook for his consumption debt for the rest of his life (or until it got paid).

      A sovereign debt rescheduling (for that matter: ANY debt rescheduling) begins with the borrowing country approaching its creditors and asking them to form a Steering Committee (unless the country only has a handful of creditors). That in and by itself has absolutely nothing to do with default, bankruptcy and whatever other term you want to use. It is perfectly normal operating procedure for a borrower (or borrowing country) to request a Steering Committee if it has something to negotiate with all but can logistically not negotiate with all.

      The trouble with the EU was, as the Chief Economist of Citibank recently pointed out, that Europeans did not know that outside of Europe such reschedulings have come “a dime a dozen” in recent decades.

      An orderly debt restructuring for Greece would not have been the worst idea ever. Instead, it would have been Greece’s obligation (above all to her own citizens) to initiate this process. If a country does not initiate that in time, things tend to become uncontrollable; the country loses ability to influence the outcome; and at the end of the day all citizens suffer from that. Ask the Argentines how much they suffered from their government’s simply being careless about their debt back in 2002.

      Like you, I have opposed the idea of a haircut from the start. On one hand, a haircut on sovereign debt is always a bad thing for creditors, but that’s not my point. A haircut on sovereign debt is about the worst thing which can happen to a borrowing country. This is why I have always argued that Greece should refuse a haircut, if offered one. If you are interested in details, here they are.


      As regards your point about Germans wanting “to kill Greece”, I remember saying once before that I think you have a bit of a “thing” with Germany. There is no point in arguing about this because we have so many better things to argue about (such as: what can Greece do on her own to get her economy going?).

      PS: one interesting thing to argue about – if one has a lot of time at one’s hands – would be the issue of Germany’s legal obligations for WWII-reparations. That, like sovereign debt, is an obligation which exists legally until eternity unless it is forgiven or the state ceases to exist. I don’t have all the facts on that but I think it went the following: in the early 1950s, an Agreement was signed that Germany’s WWII-reparations would not be negotiated until there was German unification (and probably nobody thought there would ever be unification). After unification, some countries (I believe Greece was one of them) starting making noises that now the time for negotiating WWII-reparations had come. Kohl, I believe, told them to go fly a kite and no one tested this out in court (or had the guts to do so). It is by far not only Greece which was affected by that. Realism would command to accept that this issue is dead, but legally it isn’t.

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  12. Mr prof.,
    hurry up before someone else takes the heads up. The only real perspective for Greece with no bluffs or such things.
    Its time for you to support the voluntarily exit from the eurozone. It seems that all other parts of it (especially Germany and France) try to create the favourable circumstances to go on with their own exit. Lets pull the trigger of that f***ing gun that has been on the table since feb. 2010

    We just need a realistic and well prepared plan for the first period (you name the duration needed). It is time for that country to make a real plan on how to run a country (actually for its first time), and i think you have already put the basis for that.

  13. Klaus:

    I don’t have the Greek official figures in front of me, but typically in the world of sovereign debt new loans are used to replace old loans.

    If as you say during a given period Greece undertook 150 billion euro in new loans it does not mean that it increased its debt burden base by 150 Bil. euro.

    Most likely new loans were used to repay and replace old loans (which was the point of my explanation).

    Again, Greece’s problem is her cost of debt.

    To give you an example: If an existing loan of 10 Bil. @ 3.5% comes to maturity and gets replaced with a new 10 Bil. @ 4.5%, then Greece loses in the process because it increases her cost of debt.(not the size of the debt in this example).

    If Greek state revenues are X, and the cost of servicing the sovereign debt is 30% of X (as an example) then if you want to help Greece you decrease her cost of debt to 20% of X. The best way to do that is via lower interest rates, circa 2%.

    • Dean Plassaras

      You now saw my point; great! And let me explain why my point underlines one of your main arguments all along (and of this blog).

      When the first rescue package was approved, Merkozy prided themselves for “helping Greece” and created the impression as though 100% of that money went to Greece so that Greeks could have a good time. With good reason, their tax payers screamed “why should we help Greece?”

      It was clear from the start that much of that money would not stay in Greece but would serve to repay existing loans to private lenders, but the dimensions were not clear. DER SPIEGEL recently published an analysis showing that only 19% of the new money stayed in Greece. The numbers of the Bank of Greece would suggest that NONE of the new money stayed in Greece (which can’t be right; this remains unanswered for me; but it really doesn’t matter very much if one knows the answer or not).

      Whether you take the numbers of DER SPIEGEL or of the Bank of Greece, the fact of the matter is – and I think you have been arguing that all along – that basically what the EU has done so far is using the balance sheet of Greece (and tax payers’ money) to bail out their banks. That has never really been explained to tax payers. My point would be: “If you call that ‘help’, please don’t help!”

      What should have happened is the following: right at the start (around the time when the new government announced that the budget deficit would be at least twice as high as previously reported which everyone knew would eventually turn into an unstoppable run on Greece), right at that time Greece should have invited her existing creditors to negotiate a perfectly normal rescheduling (and if Greece hadn’t done so, the EU should have prompted Greece to do so). As the Chief Economist of Citibank recently said (and Citibank probably has the most experience of all with reschedulings): “Such reschedulings have come a dime a dozen in recent decades outside Europe except that the Europeans did not know that”.

      The word “default” wouldn’t even have come up because if a normal rescheduling is handled well, it avoids a default. Merkozy argued that the market would have seen it as a default. Again, that depends how the rescheduling is handled. But if the present “voluntary haircut” is not deemed as an event of default, then a normal rescheduling 2 years ago could under no circumstances have been deemed as such.

      Of course it is the interest which determines the cost of the debt to the borrowing country but interest can be handled in 2 ways: (a) it can be paid in cash or (b) it can be capitalized. If it is capitalized, it has no bearing on the budget until maturity. I agree that interest expense for Greece must be reduced substantially for some time. If the lenders don’t want to cut the rates that much, they should make that portion of interest which Greece can afford to pay payable and capitalize the rest (at least for a number of years).

      “Evergreen bonds” should have been considered as an alternative to a haircut. Mexico issued, not too long ago, a 99-year bond. According to DER SPIEGEL, Portugal issued a bond in 1943 with a maturity of December 31, 9999 (!) (and the ECB has accepted that as collateral for loans to Portugiese banks…).

      No investor buys evergreen bonds with a view of getting paid on maturity because no investor will live another 99 years. Instead, they buy them for speculation on a country’s economic performance (it would be a classic for hedge funds). I remember how Latin American bonds became a hot investment subject in the 1980s/90s. Banks created entire divisions to only deal with such paper. Many made a lot of money (others lost it). Evergreen bonds don’t move by fractions of a percentage point. They always move by several percentage points at the time and that is where speculators come in.

      I could go on and on showing what Merkozy could have done right if only they had not been so arrogant about accepting advice (not to mention asking for it).

      To repeat my point: “help for Greece” to me means doing something which gets the economy going. Of that I haven’t seen anything yet, really (and my criticism is that I don’t even see suggestions to that effect coming out of Greece). To call the other things “help for Greece” is a charade.

  14. I’m sad to see one more analysis of how things will go wrong, without a real solution proposed in a way that it can deflect common criticism and skepticism. Just saying ‘no’ is the easiest to do and I would expect more from intellectual people.

    I must agree that the arguments sound convincing and the analysis is good, however what most economists fail to see about Greece is the real problems: the debt is just the reflection of them. If you clear out all of Greece’s debts, we’ll create a new. Not because we do not work hard enough, but because we let a few people take advantage of us and we have those people as our idols that we try to resemble to in every occasion.

    What common people think and agree to carry this cross, is that we are provided with a chance to come clean, after the storm. We hope that society will heal and trust me, there’s no easy treatment for our case.
    * Hopefully, people (of the state or individuals) will steal less money from the state, because there won’t be as much as before, and there will be stricter supervision from abroad. We hope that society will get used to that after a couple of years.
    * Salary injustices will be less common, making public sector employment less appealing.
    * Inefficient public sector will diminish. It is not easy for people working there to be productive..Those public services will become private, more expensive, but at least we will get more quality services, and we won’t be paying for other people to sit and do nothing.
    * Hopefully, with computer programs installed, there will be less room for corruption.

    This is the chance to take advantage over the social and economical restructuring and bring something worthy into life! We hope that after this very cold shower, economy, the state, the people will come out revitalized!

    Of course there will be people that loose their jobs, that will not have a lot of money to live. People in Greece are ready to help them, since families care for their members.

    I see we are trying to avoid the unavoidable. Really, when in history life and economy did not move in circles? We reached a peak and we must climb down. At least, lets not start again from 0!

    Let us Greeks worry about our affairs and don’t only whine about our politicians – they are the ones we deserve to have, and unless we change, they will not

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  18. I don’t think that the process is meant to assist any country to health, but instead to further enslave the natural and human resources for an elite few. You can see this not only by the ridiculous nature of the demands, but by what it does to the people. The only real activity is that of “austerity,” and that alone for the people – who are the true target.

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  20. SCARE 20.12.2012
    (Stop Corruption And Repression Effective 20.12.2012)
    Banks were given a very important privilege to create money in the form of extending credit. This function requires diligence and careful consideration in regard to individual credit risks as well as to overall credit levels in the system. The financial crisis revealed that the banks were operating at too high a leverage and with too much risk. They were used to be saved by the Central Banks and certain that in times of difficulties the Central Banks were there to save them. They were like trained dogs and their master Greenspan or Bernanke would always be there to rescue them when unforeseen difficulties arose.
    That may be true but that does not absolve them from their obligation to monitor overall debt levels in the system as well as being diligent in evaluating the debtors ability to not only service a debt but to be able to repay it over time. The banks clearly failed in this function that is the core function of banking but focused mainly on their compensation packages. The way these bankers enriched themselves in the process of driving the financial system into a wall was appalling and the average income earner was never able to comprehend their schemes but preferred to simply ignore them. Of course, the bankers explained their outrages income levels with free market principles of supply and demand, where the best simply could be hired with those kinds of benefits only. In hindsight those superior managers seem to have missed their mark considerably. The most interesting aspect of all of this is the fact that, after we have been more than 3 years in this financial crisis, the bankers continue to loot the system as if nothing ever happened.
    True to form the Central Banks “saved” the financial system by saving those great financial institutions without whom the system would have collapsed, as was argued. Hardly were we out of the danger of collapse, the banks immediately went back to their old ways and were certain that this was a problem that would occur just once in a lifetime and now all was clear again. The real problem, however, had not been addressed but had simply been muddied.
    In actuality, the losses produced of extending unsustainable levels of credit by the banks have been transferred to the public. Different ways were chosen to achieve this task in the form of free money for the banks, injection of government funds into some institutions, increase of basic money supply and so on.
    The threat of system collapse would have been labelled blackmail if it would have occurred in another setting. However the bankers were able to influence the media, the legislators and regulators in their favour with all the financial resources available to them. Nobody was made to take any responsibility and no one was taken to account.
    This represents a serious violation of the spirit of the Rule of Law that is the basis of western society. It seems that now the new rule is Might is Right. This changes many parameters in the compass of the social system within the western world. No one can be sure on what level and when one will be subjected to the financial abuse of those elites. Presently, the people in charge are trying to enhance financial repression of which one form is to keep interest rates below the level of inflation which affects mainly those that lived within their means over the past many years; another clear violation of the spirit of the Rule of Law as it transfers losses from bad investments to the innocent and decent part of the population. In addition, the increased level of government debt puts in doubt all those benefits promised by governments the world over.
    It is interesting how the banks were able to confuse the public who was/is unable to grasp the actual situation. But considering the banker’s great financial resources, it seems not that much of a miracle to influence the media and the legislator and having politicians do their bidding. The question is what the heck can WE, THE PEOPLE do about it.
    Usually, we could address such things on a political level as we are a democracy, right? But it seems that the system has been corrupted by all the money sloshing around and it is extremely difficult to find any electable person that will act against those powerful interests. In addition, it will take many years until sufficient numbers of persons with the new thinking and with integrity not to be corrupted by those lobbying efforts will be elected to office that will implement the changes needed. So, what should we do? Start a revolution?
    Well, the blackmail used by the banks may be the only way to address the injustices that have occurred over the past few years. They showed us how to leverage one’s limited resources to achieve one’s goal. Therefore the following proposal to start the movement “SCARE 20.12.2012” should be seen in this context. The idea is that if by that time (20.12.2012) some serious injustices have not been removed from the system, people will start to withdraw their money from all financial institutions driving them into default. And it might work, because those who hesitate to support this threat may be left with no money as the banks will have to close down before all has been paid out.
    Now, what demands are made if that scenario is to be avoided.
    1. Bankers and past Bankers (all those working in the financial industry that earned in excess of $500k plus annually for more than 2 years during the past 15 years and this without any downside risk i.e. risk of financial losses, except the possibility of losing their job) have to be made personally accountable for their past activities and be removed from any such position that might directly or indirectly have influence on the money creation and lending aspects of the economy (this includes regulating agencies and politics) before 20.12.2012.
    2. Present and past regulators have to be made personally accountable for their past activities and be removed from any such position that might directly or indirectly have influence on the money creation and lending aspects of the economy (this includes financial institutions and politics) before 20.12.2012.
    3. Politicians that accept any financial support from institutions that are involved in the money creation and lending aspects of the economy will have to face a jail term of no less than 2 years without the possibility of parole.
    When these 3 points are implemented before 20.12.2012, we the public will not destroy the financial system but support the way to find back to the RULE OF LAW and away from the idea of MIGHT IS RIGHT.

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  22. To default without leaving the eurozone and tell our ‘partners’: Get us out if you can.

    Shouldn’t Greece want out itself?

    Isn’t Greece’s main problem that their currency (the Euro) is drastically overvalued. If you had never entered the Euro and instead had a free-floating drachma there would be far far fewer problems – certainly not the prospect of a decade-long recession.

    Of course it is difficult to get from where they are now back to a free-floating drachma, but I don’t see an alternative in the long run.

    Better to default and exit – take the pain now and try to orderly devalue than to be slave to the European banks.

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  27. Science fiction scenario: Greece
    For two years, Greece has been the center of economic discussions. Why a country of 10 million people, the 1/700 of the global population, and the 2% of Eurozone GDP became the Delphi (center)of the world.
    First reason, it was the weaker part of Euro. In 2008, Lehman Brothers saw the world the effect that globalization has and question the biggest asset of the earth, which is land (housing) . The solution for federal reserve was to print money in order to save American economy and banks in a short run(American way). In 2009, Greece come to play in questioning all the economic basics that we knew until then. A)Treasury Bonds of a country member of Euro zone , which is the globe’s largest economy, are less safe than common stocks. b) a country has to have surplus budget in order to borrow money. The solution for Euro zone was the troika (IMF, ECB, and EU).In 2010,Portugal and Ireland join the club of troika.(European way).In 20011, Italy and Spain have problems to borrow money from the markets, so we have the 27th October Brussels’ Agreement in order to find a solution(German way).
    Second reason, it is a good wealth experimental country.USA, Japan, Britain, and others have deficit budget but they are too big for experiment. Thirteen years ago, I used to read economic articles, they were two discussed issues a) the euro and b) multinational corporations (MC) vs politicians. For the first issue, we have a common currency in Europe because the multinational corporations want to have a common currency to run their business without risks. For the second issue, we have difficulties that are not solved yet. For the point of view of MC, they believe that create new jobs, help the economy to grow, invest in new products, pay taxes to the countries, give money from their profits to investors and etc. In order to do that, they come in contrast with politicians who do not create products, do not create new jobs, bring obstacles with bureaucracy, ask money for their elections, borrow money in order to reelected and etc. Politicians on the other hand, believe that are elected from the people and so they have the right to know the whole of the world.
    I believe the American way is a good way to solve the economic crisis in Europe in the short run. Constant Inflation (future value of money)was introduce about 100 years ago to help the financial markets to became so powerful. The German way, 27th October Brussels’ Agreement, is a defense of politicians in the short run. In the long run, both ways are insufficient because they are made by economists. It comes to me that a MC government will implement in Europe and the European wealth(assets) will became stocks. Which is OK as long as, unemployment rate is law, and European people can leave well with written collaterals from politicians and MC to them. Otherwise …..
    Mr. Varoufacis economic theory is a science that has 200 years old history. It is too small for the human history. I believe, your article had a target group, the Greeks. The numbers are good only to economists and markets. The philosophical thought of how to bring a solution to globalization is more complicated. China brought a good thought to the table which is common currency to the whole world.

    • I also want to bring in a good idea, and that is prtectionism of the western society against the chinese communist threat and its associates, namely the world bankers!!!

  28. An open letter to the new President of Ireland.

    Dear Mr. President,
    allow me to say, dear Michael and family,

    I have no idea whether these lines will reach you, I think rather not, and I never wrote a single line to a president in my life, so I might just print it out and send as letter as well. I am putting a lot of thought and concern into it to the best of my abilities and with the best intentions, intentions that I know with all my heart we share!

    First, allow me to express, within the limitations of my not so fluent english, my deepest thanks for your deliberate choice to change the inauguration protocol and have a member of the humanist society speak up. It was an important statement long overdue in deed!

    What I try to express now, is a matter of gentle but loud warning and is about your speech, and what I thought to be able to read between the lines, and of course, I might be totally mistaken. My warning, this red flag, which I hope to be able to express and raise in the warmest and friendliest possible way is about closing a chapter.

    To close a chapter and go to the next one can be done in two major ways.

    a) You did not read the chapter at all, ignore it’s content and flip to the next one, or you just skimp it and rush over.
    b) You read the chapter in full

    Trumpeting positivism is ok, but it should not come at the price of ignorance, and therein lies a great danger. It is way too early to close this chapter, and ripping out a few pages from the book, which of course is a common exercise in writing history, it is not advisable. We should acknowledge that only by learning the lessons, think Iceland, we can achieve a public that is educated enough to build a better future, otherwise, you would need a trauma therapist for generations to come. We can not just go on as if nothing happened, as if all was just a nightmare, nodding it off and mumbling forgiveness, and of course we can not take out the pitchforks and ropes, both scenarios, they are on the rather extreme end!

    In the grand scheme of things, and in my humble opinion, on the political stage in Europe, the forces at play who steer behind the curtain are opening the next chapter for all of us in the next few weeks. Forgive me for speaking it out as it comes to my mind, avoiding the language of diplomacy on purpose and for the sake of clarity, so here it is in my own words.

    Ireland was the test case. Greece the pawn that had to be sacrificed to trigger the impulse that builds momentum, and Italy is that momentum.

    G-Pap goes, L-Pap comes, with blessings! Berlusconi goes, Mario Monti comes, with blessings! Portugal no longer in the headlines might be on the brink of a military putsch soon.

    Did it ever occur to you that the events unfolding in Europe since a few years are no coincidence at all? By rendering national sovereign democracies untenable, and then, once a certain threshold is reached, to present ‘the one and only’ possible solution to a confused, angered and scared public? When Angela Merkel spoke to the Parliament the day they voted on the EFSF, she made a remarkable statement that caused my jaw to drop on the table, perhaps I am too fine tuned on the rhetorical changes that I observe since the better part of two years now. She said, ‘People should not take peace in Europe for granted!’, and then continued with a phletora of reasoning on the importance to ratify the EFSF.

    To link peace in Europe with the EFSF, or war and the absence of the EFSF into the public brain, it is a deliberate, and a first sign on the major rhetorical changes to come. – On a private note, how dare this woman to call on the ghosts of war to nourish her political goals? I am not astonished though. – When Klaus Regling was presented to the Irish public by FF as the head of the team, ahem, a three men team, to investigate Irish banking matters, I warned about this event, this stunt, in the clearest possible words. His task was of a different kind and had nothing to do with the alleged Investigation, the evidence is now on the table, he is the head of the EFSF, and the results of this pseudo Investigation can be seen on DoF website. He was granted full clearance and full access for other reasons. and the pubic was deceived again!

    I think, by now my warning on closing a chapter too early has enough substance for you to see my motivation, and I trust you to read it on these grounds. Allow me in this context to point you to a recent publication that I feel you will find enriching,http://www.suhrkamp.de/fr_buecher/on_europe_s_constitution-juergen_habermas_6214.pdf it is ought to be translated into english soon, and I would highly recommend it in the light of our own quest towards an Irish constitution that deserves this name, a constitution that shall not be rendered superfluous by the superiority of a private company in Luxembourg that is designed to be wholly untouchable I might add, but can enforce their policies against all existing and future national constitutions, rendering them not worth the paper written on.

    Let me finish by another observation, which did not astonish me either to be honest, when it was clear that you will get the mandate, the financial times commented in their headline ‘Left wing Poet new President of Ireland’, it is stereotype. Let me give you my version instead, ‘A life long human rights activist is the new President of Ireland’, which I find much more significant than your eloquence in poetry or Irish language.

    As an artist, I send you my warmest greetings and enclose a thoughtful portrait I took around 2005 I think, I normally do not do portraits as I am a landscape photographer and musician, but on this occasion I did it spontaneously after speaking with this gentleman for nearly an hour on the streets of Dublin where he offered a service to the public, to destroy their mobile phones for a small fee, and was also selling his own writings, Trauma poetry. Once this was a well known public figure on Irish Television, his writings are a mixture of Charles Bukowski and Franz Kafka, bordering on the grotesque, but reflect a sad and certainly limited wisdom that only untreated pain, and traumatizing events could have induced. He liked the portrait very much. To me it is a mirror of Ireland today, and we are in danger to skip this chapter and become as traumatized as he is.

    x x x x

    The portrait:

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  32. The McKinsey report linked below has now been out for quite some time (500.000 new jobs within 10 years and 50 billion EUR new GDP). Why is Greek brainpower not discussing this kind of thing? Why is one not asking other institutions to come up with more reports like this? These are the kinds of things which the debates should be about. The salvation of the Euro can be left to others!

    If Greece started to take real initiatives along such lines (not only words; actions please!), she would quickly have a lot of friends between Paris, Brussels and Berlin and there would be much less resistance to help with financing. As a matter of fact: if Greece came up with some really convincing growth plans like in the above report, I would love to see that EU-politician who would stand up and object to it! No one in his right mind would object and most everyone would problably be supportive.


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  34. Here is a quick reality check from today’s Economist.

    Economist, November 12, 2011 (Charlemagne)

    “Much has been written about the subjugation of Greece, the cradle of democracy, under a second German occupation.

    And much of it is nonsense. Italy and Greece chose freely to join the euro, and every club has norms of behaviour. In a monetary union, irresponsibility by one member endangers the well-being of others. If Italy and Greece had not been so over-indebted and sclerotic, they would not be in such trouble today. Countries that extend financial help have a right to impose conditions to ensure that their loans are repaid. The alternative to euro-zone diktat is being abandoned to the market. And if a response is needed, it will inevitably be led by Germany and France”.

  35. Great work!!!
    I think the main problem is that the future benefits of the “healthy” european economies in a deflationary Europe seem to fade. Investing in the growth of the periphery includes risk. It would be very interesting if you referred to the interests of the german tax payers in long-term.

  36. Georg R. Baumann says:
    November 11, 2011 at 8:38 am
    Coup d’état – “A coup consists of the infiltration of a small, but critical, segment of the state apparatus, which is then used to displace the government from its control of the remainder”

    This will be very short and crisp!

    ROMA, what an amazing place that city is, and just as my own hometown, Colonia Claudia Ara Agrippinensium, Cologne, where the Carnival festivities are launched today at 11:11AM, and in a coup d’état women are capturing the city council and declare Carnival, both these cities span around 2500 years of history! Whether you are a religious person or not, you will feel humble when you stand the first time in front of the cologne cathedral, the Gothic architecture that took more than half a millennium to be built.

    History is full of coups d’état. ‘Crossing the Rubicon’ is a well known coinage referring to Julius Caesar illegally crossing the River 49 BCE and leading his army onto Rome to seize control.

    1922 the fascists marched onto Rome and Benito Mussolini came to power as the prime minister of the Kingdom of Italy, three years later Giacomo Matteotti who spoke out agains the fascists and the election fraud of 1924 was assassinated, and Mussolini became Italy’s fascist Dictator.

    x x x x

    In Italy, it is not for certain yet, but the press is already calling Mario Monti to become the Berlusconi’s successor. Italia’s upper house is voting on austerity laws today.

    In Greece, with the blessings of the Troika, L-Pap is taking over the helm.

    In Ireland, the Troika took full control of government, Irish politicians are the Troika’s compliance managers and responsible for propaganda.

    In Portugal, the Troika forced austerity and a new EPP , European Peoples Party, friendly government took over.

    x x x x

    It is difficult for most people to see the reality of these changes as a coup d’état because it is happening in slow motion and not like a military putch over night. This slow motion process has now reached a first major climax, substituting the heads of states by unelected people who will stay the course.

    Mario Monti is the first Chairman of Bruegel, a European think tank founded in 2005. He is also European Chairman of the Trilateral Commission, a neoliberal think tank founded in 1973 by David Rockefeller and member of the Bilderberg Group.

    Loukas Papadimos became the Vice President to Jean-Claude Trichet at the European Central Bank from 2002 to 2010. In 2010 he left that position to serve as an advisor to Prime Minister George Papandreou.

    …. I rest my case.

  37. Dear Professor (can’t call you Yanis since I have actually studied under you) congratulations once again for another eye opening article that everyone in Greece should read (hope you make good on your promise to translate it soon) now that economical analyses have become “crowd-pleasers”. At least I wish that instead of the public getting their facts from people that speak with terms such as “ταμειακές διευκολύνσεις”.

    My question is this and refers to your proposal of defaulting within the eurozone :
    Do you think this will be enough to “shock” our partners in Europe and encourage a “final solution” (sorry for the politically incorrect term, can’t think of a better one) for the eurozone crisis? If it doesn’t do we run the risk of being isolated politically?

    • The question I have been asking – τον Γιάννη – is, does anyone seriously expect the Papadimios government to really pursue the unstructured default alternative within the Eurozone. I think NOT. Also, if for argument’s sake we say that somehow Greece does file for an unstructured default within the Eurozone; does not anybody sense there is some apparatus in Brussels that has been designed to anticipate and suppress any potential of that happening? I say, yes; I am not convinced I have a full grasp of real intent behind the existence and design of such an apparatus, however – and Yanis has stayed away from addressing this question. Yet, in one week, two governments within the Eurozone have been brought down and their heads are being replaced with Brussels insiders whose sole objective for being is to ultimately implement their respective countries’ structured default. How about that in response to anyone supposing the apparatus notion is too farfetched!
      Harris P

  38. Yanis, the soonest we tell them so the better. We must not wait for ten more years because the Euro will be history by then.

  39. When we default and suffering from the severe known impacts how can we survive without “cutting” our curency in order to overcome the lack of euro liquintity? In fact I am asking whether we are forced by the facts to abandon eurozone.

  40. Hello Yanis, great article providing the meat on the bones of my suspicions.

    It seems to me that what might be historically looked on as the worst part of this Greek tragedy is how your countrymen/women have been bled dry in order to try & save a system that was bound to fail anyway. Bankers, bondholders, bought politicians & a bunch of unelected power grubbing eurocrats interests & greed put before the interests of those who I at least thought were the supposed beneficaries of the EU. The default will come for Greece, but instead of the country being able bodied with a fighting chance, what is left is a half starved version much less able to cope in this predatory world.

    They spout off about having kept the peace in Europe, but isn’t war mainly fought for resources & control, except for the absence of the military isn’t this what has basically happened in Greece, without a shot having to be fired ? I was initially surprised by the fact that these supposedly clever, educated & extremely well paid people seemed to be acting like headless chickens, but looking back through history, hasn’t it always been the same ? As it is 11.11.11 it made me think of the Generals & politicians of WW1, on all sides. They assumed that nothing changes, it would be the same as all the other times & they couldn’t lose. They stuck with totally idiotic methods for probably 80% of the conflict, making the same mistakes time & time again, but who paid the price for the attrition ? the soldiers, indirectly their families & due to the war 20 million or so people who died in the later flu epidemic. These idiots were thought at the time by the majority to be the ones who knew what they are doing.

    I just hope that Greece & the other GSIIP * countries can recover & learn from their experience & eventually prosper. It looks like everybody else will be joining them soon anyway. Hopefully for the sake of my Grandchildren & everybody elses, the rapacious greed can be controlled & we can separate politicians from the financial teat they are currently sucking on & improve our tattered Democracies. More power to you Yanis & keep up the good work, the World needs people like yourself.

    * I prefer this anagram to the normal arrangement, which I think is unfair.

    Just a link to a blog where I received my economics/banking education – David Malone, you are both fighting the good fight.


  41. Good evening Mr. Varoufakis,

    Firstly, I would like to congratulate you on creating this blog. I read it constantly to keep myself updated. I am really interested in your opinion about Mr. Papadimos. From what I read, he has an impressive CV. Do you believe that he is going to turn the new government into a government of salvation for Greece? Personally, I hope so. You?

    • Dear Vicky,

      Pardon me for the intrusion and let me call to your attention that, on Papademos’ “impressive CV” we can also descry a rather crucial plausibility: that however impressive his CV may be (or not!), it nevertheless exhibits that rather unfrotunate characteristic for a PM to possess – Opportunism!

      Let’s take a look.

      1970 BSc Physics (Too hard. Let’s move away.)
      1972 MSc Electrical Engineering (Takes work too. Let’s ditch Science.)
      1977 Ph.D. Economics (No easier feat. We sure don’t love this either.)
      Come teaching & business posts – upgrading resume abroad. Soon enought: Lo and behold!
      1988 Professorship in Greece
      Come more business posts, Enter politics (BIG TIME!), Out go students/research/knowledge.(did he ever care?)
      2011 Prime Minister of Greece.(aaany country would do)

      “Opportunism is the conscious policy and practice of taking selfish advantage of circumstances, with little regard for principles.”

      If this stream of thought get’s any close to reality, those brackets would make -oh!- such a wonderful story.(front page)

      Regards to you, and I would like to take the opportunity and join you on your compliments for this blog!

      I feel enlightened after reading even a single paragraph of Yanis’ stridently rigorous flow of articles. They are much needed indeed.

  42. It’s beyond self-evident that a bunch of smart people (let’s call them broadly “markets”) can outwit career politicians at will (running circles around them at any conceivable speed).

    The mismatch is so great that it begs the following question:

    What gave the impression to a bunch of ill-prepared, semi-ignorant, out-of-depth, amateur class of euro politicians (Merkel et al) that they can possibly win the contest of regulating global markets?

    And to compound misery to such Herculean task, to undertake such improbable outcome at a time when global capital can exit the jurisdiction of any given country with a push of a button?

    Isn’t so obvious that what it takes politicians months to artificially construct – at a snail’s pace mind you – markets can undo within seconds?

    Of course private funds purchasing sovereign debt at 30 cents on the dollar can look forward to substantial profits which they are safeguarding with the potential triggering of CDS insurance. This is the proverbial “win-win”. No matter what politicians do, private capital wins. The fact that we need some global rules in regulating capital does not excuse this ill-fated campaign of euro-politicians which will end up in a crushing defeat (familiar Tuetonic territory, I suppose).

    • There could have been one single answer:Trichet.The only one thinking as fast as the markets and the rest of the politicians together, being in this hybrid state of the central cashier of the system.If he left the…Da Trichet Code with Mario Dragghi politicians may have a chance…But whether swiflty or with huge lags in their reactions, the latter are not acting not even remotely on our behalf anymore so how this match evolves has no interest (a word that brings on shivers anyway anymore, not arguments).

  43. Yanis, maybe you have a chance some time to educate me on “Greek numbers”.

    According to the Bank of Greece, the foreign debt of Greece was 413 billion EUR at YE 2009 and 399 billion EUR at June 30, 2011, that is 18 months later. During this time, EU/ECB disbursed around 150 billion EUR in new loans to Greece. Normally, your debt goes up when you take on new loans. Here it went down by 14 billion EUR!

    Everyone knows that much of the new debt which Greece took on served to pay off maturing debt. But these numbers would suggest that Greece used every Eurocent of the new debt to pay off maturing debt (and even more).

    With all of that, I don’t understand who financed the budget deficit and the current account deficit during this time (domestic savings could not have because they declined significantly during this period).

    Have you got explanations for me?

    • Klaus, let’s try it again for the Nth time.

      Sovereign debt(Greek et al) consists of a series of overlapping loans at various maturities. When the old loans mature, they get replaced with new loans (of the same, similar or different maturity depending on market terms). The name of the game is to replace a maturing loan with a new loan at a lower rate.

      As an example, in the world of “interest only” loans it is one and the same to have debt the size of 100 at 2% interest, or debt the size of 50 at 4% interest rate.

      Most people and countries would opt for the 100 @ 2% rate – from the example above – for obvious reasons.

      Greece’s problem is not a debt to GDP ratio (albeit high; but Japan exceeds 200% of debt to GDP). It’s a cost of debt problem.

      Greece’s existing debts are perfectly serviceable at a certain interest rate (let’s say 2% to bring in some focus).

      Therefore your advice about cutting debt and replacing it with smaller debt at punitive interest rates is not rational thinking. The Merkel haircut simply puts Greece back to debt levels of 2009 (when we started) but at higher interest rates and as such it is completely defective.

      The same applies to Italy and others. When X size of debt goes from 3% to 7% interest rate it becomes unmanageable.

      Instead of giving advice to Greece on how to grow its economy, why don’t you go back to the drawing board with Merkel and others and come up with what the whole intelligent world is asking for: an effective mechanism of lowering the cost of debt for the eurozone as a whole.

      Anything less than that is unwanted advice and it also becomes a focal point for this disturbing financial illiteracy that is plaguing most European citizens. It fills us with despair when we encounter the intelligence of a brick.

    • Dean Plassaras

      Thanks for your educational piece. Sometimes it helps to remember what the question was.

      The question was: how can the nominal amount of foreign debt decline from point A to B when between point A and B roughly 150 billion new foreign loans were disbursed?

      Think in terms of a bucket of water with the watermark at 100. You pour another 50 into the bucket and after that the watermark stands at 95. What happened?

      If you answered that question in your piece, I overlooked it (but I do appreciate the education).

  44. They are not pushing “unwittingly”.They are willingly
    implemening full european integration on the back of us.
    Your proposal promotes democratic growth,theirs unequal appropriation of the resources of the weaker citizens,countries or playerp.”Beware of the financial-political complex”.

  45. But then what if ECB stops accepting Greek collateral after default? To this “get us out if you can” hey may reply “stay there if you want”.

  46. Although it sounds reasonable why the Brussels agreement solution could be hopeless it is not that clear to me how a greek default within Eurozone could help the country.
    Are you sure that the greek society could absorb the repercussions of such an event?
    How our european fellows could use our unsolved external affairs issues as pressure levers or even as punishment vehicles if we told them “get us out if you can”?
    After reading your analysis I feel that even a eurobond solution is doomed to fail. True?

  47. Very informative Yani. What happens if there the new greek government co-op is overthrown? What happens if there is people’s uprising? Is that indeed possible as Greeks struggle to pay their winter gas bills? When will the political masters admit that this is hopeless for the people?

  48. Yanis, once again I totally agree with your analysis. At this “information set” and time, the “Frankfurt group” rules, imposing technocratic govs to implement the next step . End game will be Germany leaving E-zone. If Berlusconi resists and proves a harder target, I would not rule out Italy switching to lira, thus breaking E-zone and resulting in a new German Mark (north euro) as well.

  49. “Bankers have already warned us: They will do all they can to avoid taking on new public capital. Which means, naturally, that (since the private sector will not give them any capital, courtesy of their parlous state), the only way they can achieve the 9% capitalisation ratio is by shrinking the… denominator. What does this mean? It means that they will try to sell their loans, their derivatives, their paper assets in general to whomever wants to buy. At the same time, they will avoid issuing of new loans like the plague (since loans increase the denominator). The effect of these moves will be massively to reduce liquidity in the marketplace at a time when the eurozone is entering a new recessionary phase.”

    It is exactly this scenario that underpinned my thinking regarding how to ensure the funds were available to fund the Vanishing Bonds, embedded into my proposals for The Capital Spillway Trust.

    That the answer is to do exactly that; buy all the junk, for pennies, (it will be worthless otherwise), convert the face of the junk into Vanishing Bonds; which in turn get invested into new start up micro businesses; who, in turn again; return the funds back to the banks as new deposits by all the millions of new companies; as business bank accounts with the banks.

    That the only viable solution to both sides of the problem is the creation of millions of new very small businesses using the junk converted into vanishing bonds; which in turn again, create new employment on a very large scale.

  50. A thorough verdict for a nightmare in the making.

    As far as the point 3 raised under Argument 2 discussion, with which I fully agree, an additional comment:

    A report concernibg unloading by European banks of Greek and other PIIGS bonds,

    Now, the “beasts” (e.g. hedge funds etc.) that thrive on these unloaded bonds, can be one of either 2 categories:

    – either killer-hunters (lions, leopards etc.), of the sort that you imply, that will blackmail with “credit event” – CDS explosion trigger if they do not receive 100% refund or:

    – scavengers (hyainas, crows etc.) that would just go at the cashier and pick up a a hefty check or sort of, consisting of AAA rated new exchange bonds, valued and insured at 50% of nominal value, i.e. in a blink of an eye a 67% profit (50/ 35 assumed price payed to banks unloading bonds).
    What a marvel! The banks are willing to take a loss to unload Greek bonds in order to ensure their 9% capitalisation goal – and the scavengers have a quick and dirty profit overnight!!! At the expense of taxpayers money and the firesale of Greek public property!

    But of course, there is an increasing (and accelerating) chance that this whole thing will explode in the hands of anyone involved – unfortunately this involves the people in Greece, other European peoples and possibly the whole world. Defaulting on the Greek debts is the only way to unravel this catastrophic scenario – but then how can the Greek state survive if it does not reconstitute its national monetary policy, via abandoning the euro? In any case, even by not voluntarily abandoning the euro, but having defaulted, Greece may be in direct conflict with EU and Eurozone powers that be, so effectively would cause its “expulsion” – even if this is not provided in the current statutes (there are means that it would be forced to do so).

  51. Pingback: Ο αστόχαστος στόχος της νέας κυβέρνησης « EcoLeft

  52. Yanis, I can clearly see someone making money on the latest Greek t-shirt:
    “Get us out if you can”
    It could be hung next to the Molon Labe ones, the “Come and take them” ones.

    On a far more serious note I find it so devastating daily to observe the “serious” people (the ones in charge) actually go out of their way to willfully ignore the economic realities as you describe them and then face zero repercussions for their malicious and intended consequences.

  53. Thank you so much for your effort to educate one more victim of garbage information – me! .It is the first time that I can see clearly the situation. Only if those involved could take one step back to reflect on public interest instead of assuming that institutional interests are linked to public ones. We are at economic Thermopylae…where is a Leonidas and perhaps more importantly 300, to scream “Get us out if you can” !!!!

  54. Yanis, an excellent account of the issues facing the EU and Greece. I am very concerned that the Greek state has been duly used albeit effectively for now at least to deflect the real issues facing Europe which in my mind make Greece appear irrelevant. With the Brussels accord being implemented, there is no hope for Greece to dig itself out of the social and economic mess it finds itself as there are no catalysts able to catapult the country to a path of growth. Austerity up to a point …! A reduction in GDP and a weakened consumer in Greece will not positively impact the country but serve to weaken it further. Although I appreciate what it means for Greece to leave the EU – I wonder what choices are really left for Greece given a deal from hell? Is this the best of all worst choices available to Greece?

    • Let me, please, share my experiences with the debt reschedulings of Chile/Argentina in the 1980s in which I actively participated.

      It’s not quite so simple as to say “we will default; get us out if you can!” (in practice it will play out this way but if a country does not go through the proper motions, there will not be a practice).

      Even Argentina (more or an economic mess and more corrupt than Greece) knew that a sovereign default – just like the bankruptcy of a corporation – is always the most expensive way to solve a debt problem for all parties involved. Because everybody knows that, a default can often be avoided (finally, in 2002, Argentina forgot that knowledge; defaulted and even repudiated part of her debt; and to this day they are regretting this!).

      It is the primary and most important responsibility of the borrowing country itself to avoid default. The way it does that is that it invites all of its existing creditors in time to form a Steering Committee with which the country can negotiate an orderly rescheduling of its debt. It is the country (and not a 3rd party) which proposes the terms of rescheduling. Obviously, this is only a formality because, in the end, the country will largely have to live with what all the creditors can agree on but it is a very important formality: the country displays ownership of its own problems. This is more important domestically than internationally because no government will sustain domestic political support if it says “we have to do this because the foreigners impose it on us”.

      Why will creditors eventually agree to a debt rescheduling? Because they know that the alternative is much worse. They will normally impose strict conditions (like the event preceeding of an IMF-loan which assures that covenants can be negotiated on a government-to-government basis, which is the only way that covenants can be negotiated with a sovereign nation).

      The advantage of an orderly rescheduling for banks is that they continue to hold 100% of their claims (no haircut) and if they play it right, that is if the appearance of “voluntariness” can be upheld, there will not be a formal default. All which happens is that maturities are moved out way into the future and interest rates and/or payment forms/dates are adjusted.

      If the debt is held by banks (loans), like was the case in Argentina during the 1980s, this is almost a “normal operating procedure” because one knows all the creditors and can reach an agreement with them (I would paraphrase it with: “all you need is a couple of hundred people in a conference hall who can agree on something”).

      If the debt is held by the public (bonds), it become far trickier because one does not, at least not officially, know the investors. Also, while banks can agree amongst themselves not to declare default even if it technically occurs, with public debt instruments this is much more of an automatic consequence. However, with enough legal expertise, an orderly (i. e. “voluntary”) rescheduling can also be accomplished with public debt instruments.

      Greece chose a different path back in 2009. Perhaps for lack of knowing better, Greece by-passed her existing creditors and went directly to a 3rd party (EU). If the EU had known what it was doing, it would have told Greece to go back to step 1; first negotiate a proposal with existing creditors and only if and when that phase was completed, come back to the EU for the “icing on the cake”. The EU would not have been formally involved at this stage but, obviously, they would have pulled strings behind scenes.

      That way, and only through that way, would existing private lenders have remained “on the hook” from the start (which must be a conditio sine qua non in any rescheduling).

      Greece might not have known what the proper procedure was but the EU should have known (or accepted advice). That they didn’t is inexcusable and that is the cause of today’s mess: the EU took on immediate ownership of the Greek problem; they immediately declared the Greek problem as a problem of the Euro and of the EU; and they let the existing lenders off the hook from the start. I don’t believe there is one single precedent in financial history where existing creditors were let off the hook so easily and so quickly. This is now being carried to such an extreme that a banker like Mr. Ackermann publicly demands that it is high time for the EU to assure that sovereign debt becomes risk-free again. Now, that takes some gall! Normally, the creditors should be thankful when governments bail them out.

      Even if an orderly restructuring could not have been accomplished in time and even if a default would have occurred, the problem would initially still have remained contained to Greece. The EU would have told the creditors “you don’t have to play ball but if you don’t, there is a high chance that a default will occur and if you don’t play ball now, don’t expect us to play ball when you need our bail-out. We will bail you out for sure, but then your shareholders will be wiped out”.

      Why no contagion effect? Well, contagion might still have occurred but it would not have been perceived so dangerous because the creditors would have seen a clear precedence of how the EU reacts and that they have much more to win if they do play ball.

      Typically, an orderly rescheduling plays out in the following way: existing bonds are “prepaid” (voluntariness!) with the issue of new bonds with longer tenors and adaptation to interest payment mechanisms (capitalization of part of the interest). The new bonds are traded in a secondary market and the market prices there reflect how well the borrowing country is coming along with its reforms (regardless of what rating agencies say). Following the Latin American debt crises during the 1980, a very active secondary market developed where investors could make substantial returns by betting on the likelihood that a country would make it).

      This only covers existing debt; it does not cover the need for Fresh Money to finance the budget deficit (and only the budget deficit!). If, however, an orderly rescheduling is accomplished with existing creditors, it becomes justifiable to use tax payers’ money to finance the Fresh Money needs. Tax payers’ money becomes the “icing on the cake” which serves a justifiable purpose (instead of today where tax payers’ money is primarily if not exclusively used to bail out banks).

      The providers of short-term trade finance must also be included in such an agreement and they must be required to hold credit lines for trade financing available in existing amounts. If additional Fresh Credit is required to finance the current account, that would again be an issue for tax payers’ money.

      Could this still be done today with Greece? Probably not without significant collateral damage because the EU has already set the precedence that it will bail out existing creditors at all cost to tax payers. A default is probably now the only way to achieve that which is why, bottom-line, I agree that a default should no longer be feared so much by Greece.

      However, the default must never come about by the borrowing country saying something like “we’ll default; figure out what you want to do with the problem”. That is what Argentina said in 2002 and to this day they have regretted it!

    • I acknowledge what you say Mr Varoufaki as to be in the right direction. My concern is that , if a PM decides to take this position , will he be backed up by the “political system” in Greece?
      What you say , to my understanding , can not be implemented by the current political system . Interplay of interests is too complex !

      A PM implementing such a course of action must have wide public support , to iron his will and determination .

      And a question : Oli Ren’s statements about underinvestment in Europe and re-adjustments in predictions , can be perceived as a official realization on behalf of Europe elite of what is really going on?

      Just a few months ago , officially only Greece was the problem and Euro was the master of the universe !

      As it is wisely said , posing the right question is substantial in producing a solution .

      A perfect answer is utterly wrong if it answers the wrong question !

    • My intention is not to pose a political question to you Mr Varoufaki . I
      t is a unfair .
      I deeply respect you analysis , global economics understanding and problem solving .

      It is more a realization that it is in our interest as greek citizens to force our political system towards such solution .

      Regardless of how the two major parties are trying to “interprete” the current situation , the statements of Mr Papadimou were more than clear !

    • “To default without leaving the eurozone and tell our ‘partners’: Get us out if you can.”

      Nobody can get Greece out of the Euro just like no one can prevent a country from pegging their currency to the Martian peso if they want to. That’s not the problem.

      The problem is that to avoid ‘moral hazard’ and contagion (i.e. italy or spain also contemplating default) they will make sure Greece suffers a catastrophe such that will set the nation back by 70 years. There are infinitely many ways to inflict such punishment should they wish to. No, I’m afraid our only option is to stick to subservience, buying time until hopefully someone bigger tries to play the renegade.

    • «To default without leaving the eurozone and tell our ‘partners’: Get us out if you can.»

      This, in my view, is silly.

      Greece absolutely needs the flexibility of setting rates and managing its own currency. The productivity gap with Germany (which is what has thrown the otherwise solvent Italy into the crisis) and the lack of competitiveness can’t be tackled without drastic changes in the system, some of which the EU leaders won’t accept (capital controls, import tariffs, low corporate taxes, lower income taxes etc.) and others that we need time to see through (less bureaucracy, corruption, stability and social order). The attempt to fix the productivity gap (in the current adverse environment) by excess taxation/firings/flex labor is self-defeating, in the sense that it kills more GDP than debt, and increasing social unrest and sense of unfairness (because the big cats get away anyway).

      Staying within the euro would have required Greeks to “out-German” the Germans in productivity and competitiveness. We had a shot at that up to a decade ago. From within the debt-deflation trap that we find ourselves now, it’s futile.

      So, let’s change Yanis’s quote above to: To default without leaving the EU and tell our ‘partners’: Get us out if you can.

      Because, who gave Germany or France the right to kick a country involuntarily outta EU? Not the EU treaties, for one.

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