While Greek Finance Minister Yanis Varoufakis appeared to be gaining ground in his quest to build support in his uphill battle to restructure Greece’s debts and its relationship with the Eurozone, unelected technocrats may be about to lower the boom.
In Paris, Varoufakis met with Finance Minister Michel Sapin, and headlines said France would “support” Greece. However, if you read the news stories, there is less here than meets the eye. “Support” simply means act as an intermediary with Greece’s, when Greece has already hired Lazard for that role. In addition, Sapin made clear that France did not back Greece on its most important demand, that of debt reduction, which he called “cancellation,” but would back a new timeframe and other changes in terms. Conventional wisdom in finance circles is that Greece will accept an extension of maturity, say from its current 30 years to 50 years, with a cut its back-ended interest payments, but that falls well short in terms of economic relief from what Syriza has asked for. Nor does it solve Greece’s real underlying problem, that of insufficient demand.
Press accounts typically described Varoufakis as striking a more conciliatory tone, but he did not back down from his statements on Friday, of being willing to deal with members of the Troika only separately and of not taking the February 28 bailout funds. Greece has apparently done a careful cash flow forecast and believes it can last until June, when it has principal payments on some of its debt coming due. Further details from the Financial Times:
The finance chief said Athens would make proposals within a month for a “new contract” with the eurozone, which would be in place by the end of May. “We are not going to ask for any loans during this period. It is perfectly possible to establish liquidity provisions with the ECB.”…
The bailout programme is due to expire on February 28. If it is not renewed, Greece will for the first time in five years be left without an EU financial backstop. Because the International Monetary Fund is unlikely to distribute funds without the EU’s participation, Athens could lack access to emergency funding to repay billions of euros in debt due in the coming months.
EU officials believe the country could eke out €4.3bn in payments owed to the IMF next month, but will run into a wall at the beginning of June when the first of two bonds worth more than €3bn must be paid. Without bailout funding, and an ongoing sell-off in the private bond markets, Athens would be forced to default.
Pushing out the negotiation timetable to June works for Varoufakis and Greece in two ways. First, it provides more time to try to get backing for the sort of major revamp of bailout provisions that he believes is necessary. Even June is an insanely tight time frame for something so novel and ambitious, but mere weeks is obviously unworkable. Second, the longer Greece is in the news standing toe to toe with various Eurozone power players, the more it will embolden anti-austerity parties, particularly in periphery countries. Spain has regional elections in April, and a strong showing by anti-austerity and/or anti-Eurozone parties, which would give Syriza some tailwinds.
However, there is a fatal flaw with this scheme. Greece depends on ECB support of its banks. And thanks to a bank run that started with Syriza’s win and intensified with Varoufakis’ bold statements last week, four of Greece’s five biggest banks have asked the Greek central bank for emergency support. That means the Greek central bank has to tap the ELA, the Emergency Liquidity Assistance. Any loans made from the ELA are subject to ECB approval.
As the New York Times describes, the ECB is to give its approval on Wednesday. However, many members of the ECB governing board, including most important Mario Draghi, are not at all happy with what they see as Greece’s intransigent behavior. As the cliche goes, one man’s terrorist is another man’s freedom fighter. The ECB has said it is considering imposing conditions on this extension of funds and also made remarks about Greece needing to come to an agreement.
Now if I can see from this side of the pond that a longer time period for negotiating a deal works in Greece’s favor, it is even more obvious in Brussels. It’s an obvious move for the ECB to use the ELA to bring them to heel by requiring that they do a deal pronto or lose access to the liquidity support. A short runway forces Greece to deal within the existing bailout framework rather than bust it open as Varoufakis planned. And an article in the New York Times by Landon Thomas suggests that that is the way things are moving:
In January 2013, as Cypriot banks faced collapse, Jens Weidmann, Germany’s powerful representative at the European Central Bank, made it clear how unhappy he was with the Cyprus bank bailout.
It was not the E.C.B.’s job to “fund the gap of any bank runs,” Mr. Weidmann told the central bank’s governing council….
On Wednesday, the E.C.B. will meet to decide whether it should approve a move by Greece’s central bank to provide emergency loans to some of the country’s largest banks…
On Saturday, one of the hard-line members of the E.C.B.’s governing council, the Finnish central banker Erkki Liikanen, said if Greece did not reach a deal with its creditors by the end of February, the central bank would stop financing Greek lenders.
It was Liikanen who was responsible for the original February 28 date for the expiration of the bailout funds. Cooler heads wanted an additional four months for the new government to settle in, which would also have had it more or less coincide the need to refinance maturing debt.
Despite the blocking role that Liikanen played before, his opposition might not be fatal. But ECB chief Mario Draghi appears to be on the same page. Again from the New York Times:
Recently, Mr. Draghi has appeared to have secured victory at Mr. Weidmann’s expense with his plan for the European Central Bank to buy a huge amount of the bonds of eurozone governments (otherwise known as quantitative easing). He may not be willing to pick another fight with the recalcitrant German over a second rescue of Greek banks.
“There is a danger that the E.C.B. will not allow the funding,” Mr. [Gikas] Hardouvelis warned, while acknowledging what an extreme step this would be. “It’s politics. Mr. Draghi is being pushed by Germany on Q.E., so cutting funding for Greece is a way for him to gain points with Germany.”….
In such a situation Mr. Draghi will have to confront the thorny question posed by Mr. Weidmann: Is it really the E.C.B.’s responsibility to keep Greek banks — or any of the eurozone banks — afloat in the face of a defiantly noncooperative government?
Hardouvelis, as the outgoing Greek finance minister, is clearly not an unbiased source, and also clearly had significant influence on the tone of this article. And as much as the Germans and Finns are up in arms about Syriza’s opening gambit, it would take a 2/3 majority of the ECB governing board to put a time limit on the funds to Greece.
On the one hand, quite a lot of the official commentary in the news is posturing. Our understanding is that a lot of pressure is being applied behind the scenes on Germany. But so far there has been absolutely no change in Merkel’s and Schauble’s stance. And there are signs that other European technocrats who might be able to exercise a moderating influence on the ECB, are also worried that Greece is overplaying its hand. Even Michel Sapin, the French finance minister, reportedly stated that Greece needs to come forward with its proposals “calmly and quickly.” From the Financial Times:
His [Varoufakis’]comments on Sunday underscored the fears of eurozone officials that the Greek government was unaware of the precariousness of its financial situation.
“Everybody [in the eurozone] wants a deal,” said one senior eurozone official. “But through their actions and their rhetoric, the new government is making a lot of people upset. They are putting themselves in an impossible situation.”…
Despite a more emollient tone from Alexis Tsipras, Greece’s radical leftwing prime minister, over the weekend, EU officials have been dismayed by Athens’ repeated rejection of a bailout extension — and refusal to co-operate with the troika of international creditors. German officials were also irritated at its refusal to engage with Berlin, although Mr Varoufakis said he had now been invited to the German capital.
And the last paragraph of the story is ominous:
ECB president Mario Draghi has told colleagues he is planning to drive a hard bargain on bank liquidity — a similar strategy used with Cyprus in March 2013, which forced Nicosia to accept onerous bailout terms. But Mr Draghi is also wary of unelected central bankers taking a decision that would force Greece from the euro.
So Wednesday is a critically important day. If the ECB does not put a time limit on the bailout funds, or has the backstop go until June, when Greece needs a deal regardless, it means that Syriza’s high stakes strategy is still alive. But the ECB may move decisively, turing the promise of a new deal for Greece and democracies finally taking the reins back from financiers into a false dawn.
133 comments
Comments are closed.
I am still surprised how someone like Varoufakis still does not get how little his behaviour helps in solving the problem. The broadseated alphamale posturing may win votes and clicks in the blogosphere. Merkels path though is littered with the corpses of guys like him, and she has to deal with someone like Putin on a regular basis. A more conciliatory tone when inhabiting a weak position is easier than trying to pull a Talleyrand.
I’ll take that bet. Her track record is pretty good when “negotiating” with technocrats who believe in the same political economics theories that she does. We’ll see how she does, in the long run, with Putin. Right now, I wouldn’t say she has the strongest hand there. Yanis V. is a little deeper than the “posturing” epithet implies.
Would be interesting to know if this is the first time Varoufakis is practicing game theory at this continent-wide level.
Well said….
Yowsa, Miss kathrin, Mr. Varoufakis, sho best mind his place. And them other Greeks, speaking up that way when they needs to respect Ms. Merkel!
Clearly you have not read Varoufakis’s writings and thus know nothing of the man . He is not posturing he is facing down a bunch of featherbedded politicians and their hangers-on who rely on this charade being played out over and over again and until someone like Varoufakis comes along and calls it for what it is – a charade nothing will change and frankly if that change were to mean a complete collapse of the financial system the biggest losers would be the parasites you seem to think he should kowtow to . He is in fact a very polite man . Just take a look at the so-called interview conducted by the stupid Emily Maitlis on BBC’s Newsnight last week when he struggled to explain his approach only to be repeatedly interrupted in the most discourteous way.
Bravo!
(To John Hope)
Disagree, on several levels.
‘His behaviour’ sounds a tad headmistressy. German much? What about Ms Merkel’s’ ‘behaviour’? One of the many virtues of Bill Mitchell’s piece (in Links today) is this pickup – ‘Angela Merkel has reiterated over the weekend that there would be no further debt relief. Why she is now a spokesperson for the Troika that does not include the German government is interesting in itself’ Indeed. We have become so inured to this arrogant ‘behaviour’ that we tend not to notice it.
And Varoufakis’s stance is not alpha male posturing so much as the unvarnished truth presented forcefully but with a notable premium on courtesy, which cannot be said of many of his interlocutors, in particular the alpha female from BBC Newsnight.
As for ‘the blogosphere’, blogs are written and read by people. Lots of them. I wonder if you asked the 100,000 plus people in Madrid the other day if they agreed with Varoufakis’s analysis and solutions what the result would be. In fact I wonder what the result would be in a EU-wide referendum on that question… but that doesn’t matter apparently, so long as he obediently tugs his forelock to the relatively tiny group of unelected financial whip-holders.
Also beg to differ on the ‘conciliatory tone’ – it is not YV, or Syriza or Greece generally that ought to be conciliatory at this point, it is the Troika who have pushed Greece to the abyss while pretending to pull it back and now propose to throw it over.
YV’s controlled anger is not only entirely justified, it is appropriate as a tactic to counter the overwhelming power of the murderous stasis he and his party face. Teeth bared in this context help shift the ‘Overton window’ of political perception across far enough for some sunshine to be admitted. Kowtowing to demands for more of the same obsequious mealy mouthed platitudes (of the sort you heard from his predecessors and from the Irish government, in order to win pats on the head) plays into the hands of what now really must be regarded as ‘the enemy’.
The fact that Varoufakis’ tone, as reported by the media, became more conciliatory says that Varoufakis, who has a better grip on the situation than you do, disagrees with your reading. He moreover has made it clear, repeatedly, that he is firmly in favor of the EU/Eurozone project.
In addition, your charge that Varoufakis, combined with the vitriol in your comment, confirms that you are projecting your anger onto Varoufakis. I’ve never seen him as angry, even in that interview with a horrible, confrontational BBC reporter, where he did an admirable job of keeping his cool. His crisp, direct speaking style and his shaved head seem to lead people who are so inclined to see him as aggressive when he is merely trying to cut through bullshit.
You like many other readers want Syriza and Varoufakis to be something that they are not. They are not here to act out your pet fantasies. Greece has no leverage here, none. Going to Russia for a rescue is a non-starter for a whole bunch of reasons. The ECB would bring down the Greek banking system pronto, which would kill their domestic support. Syriza understands that and they’ve already retreated from their sidling-up-to-Russia gestures.
Baring your teeth against a much bigger predator is a recipe for getting your throat torn out.
Your cold water douche of reality reading turned out to be more accurate than my hot-headed wishful thinking, as per usual. Another reminder of the audacity, or should that be futility, of hope.
That would make Dantes’ famous epigram carved above the entrance to another, more literal H— apposite for the European Union: “Abandon all Hope Ye who enter Here.”
When the Greeks don’t back down, you will have your answer as to why he is being forthright when he says they will not continue the austerity policies.
It is all bluster and posturing, until people realize that, um, hey, they really aren’t continuing with austerity measures.
re:
Those are the municipal elections, tied with regional except for major regions. Spain has regional elections for Andalusia in March, and those are highly significant:
* Andalusia is the most populous region in Spain, and a very poor one
* Andalusia is governed in minority by the PSOE (supposedly socialist party, neoliberal at its core) in coalition with IU (left), which IU was questioning. In previous elections PP got short of absolute majority by a few representatives.
* Polls show Podemos growing very quickly there, currently 3rd but already blocking most coalitions except for the ominous “grand” coalition PP-PSOE which would further “pasokize” them.
* I think Podemos will win or get a close second, as they are sailing the wind of History right now and they are growing very fast. This could change the April map a lot. There was a famous saying that one cannot govern Spain without winning Andalusia first, as it is a very big region
* Even if Podemos gets just third, they can stick to their program and vote only those proposals that enforce it, come they from a minority PSOE or a grand coalition, opposing the rest. This is a very comfortable position while the remaining elections unfold.
* If Podemos wins but not with enough majority, PP-PSOE can block them together with disastrous PR effects or new elections will occur.
So the situation is a bit better than if all elections were in April.
Thanks for the correction/clarification. That of course gives the hardliners even more reason to push for a February 28 drop dead date.
Hmm, what keeps Syriza/Greece from following the Icelandic model? Just default!
Greece is much more integrated/trapped in the EU/euro framework, takes much more to change currency than to abandon a currency peg and change some laws and rules for once monetary and fiscal policies.
As EU member it is still trapped in SGP and EU laws and rules. The Euro is mandatory in the EU treaty. Will they be allowed to stay in EU, if not it needs an EFTA deal. So new contracts and settlements have to be made. Then will EU (Berlin moral squad) punish the villain with shitty deals to set an example.
It’s ironic that Germans seem to dis-remember back when the shoe was on the other foot and they suffered an impossible-to-repay debt imposed on them at Versailles. The also apparently don’t recall how they reacted as a nation to that burden. The EU (which is to say Germany) is seriously playing with fire.
Not to mention the debt forgiveness following World War II.
Because Greece is not exceptional, a global debt jubilee is justified.
Suffer now or let your children be on the hook for 50 years.
Repudiate the debt or there will be no Greece in 50 years.
Other possibilities:
1. Become the 51st state of America
2. Become a province of China
3. Ask Apple to buy it
I hope Syriza is doing something in the background to prepare for a default exit from the Eurozone and E.U and return of the Drachma if things don’t go as they planed in the Eurozone an E.U.
Return of the drachma would take many months.
They’d likely issue scrips for paying taxes and local economies–while people hoard euros.
I hope that behind all this, Mr. Varoufakis is creating a currency fall-back plan. Should the worst occur and the ECB deliberately engineer a banking crisis, Greece enacts a capital freeze. It then declares a temporary internal currency peg, say 100 drachma per euro, and issues its own currency in sufficient quantity to “buy out” all domestically held euros. They key is to move very quickly in heading off a failure of the payments system or risk ECB shoving the country into what might be the most severe depression in history.
Note how the ECB applies different, harsher criteria for small countries.
In 2012, it provided all the needed liquidity for hundreds of billions of euro deposits to flee Spain and Italy for a safe haven in Germany.
Now it threatens to cut liquidity for a much smaller bank run in Greece – just like it threatened Cyprus before.
But will it really dare to do so in the end? Take responsibility for what amounts to the first expulsion of a member state from the “irreversible” euro zone? Perhaps the time has come for Greece to call the bluff.
As I posted yesterday, Obama has gone public in support of Syriza’s (and pretty much everyone else’s) position on debt/austerity.
Makes it impossible for Merkel to continue her Nein, Nein, Nein………..
Draghi has spent, what, three years getting his QE-show on track, working every day against Germany. Should he then, one week later or so, pull the trigger on Greece and go down in history as Merkel’s hit man who blew up Europe by de facto pushing Greece out of the euro (and the rest of Europe into the abyss)?
This is not impossible. But I would think that Draghi prefers to continue to provide liquidity, also in return for trash collateral, as long as it takes for the politicians to either find a solution or for Merkel to pull the trigger on Greece (and the rest of Europe).
As I recall, the voting inside the ECB is now public, i.e. the world will know exactly who voted to kill Greece and Europe. Barring Weidmann, I doubt that any other of the Central Bankers want to go down in history as the EU’s supreme mass suicide squad.
Varoufakis, the birth of a Rock Star:
https://twitter.com/bellamackie?original_referer=http%3A%2F%2Fwww.theguardian.com%2Fbusiness%2Flive%2F2015%2Ffeb%2F02%2Fgreek-finance-minister-yanis-varoufakis-george-osborne-debt-deal-live-updates&tw_i=562209141675266048&tw_p=tweetembed
What is this story about an “abyss” if Greece exits the euro? I believe that this has been enormously blown up by the Brussels technocrats. Think for a second: Greece exits the Euro (and maybe the EU); very quickly it will become more like Romania than Germany. Say another 25% drop in GDP. The so much dreaded “domino effect” stops just there. Would italy or Portugal wish to be drawn on the route of poverty-for-all by a Portexit or an Italexit? No way. It would stop with Greece and trust the ECB to invent some scheme to draw the blanket over the whole thing.
Grexit would be a Lehman moment, i.e. a giant leap into known unknowns and unknown unknowns.
Only fools attempt that.
Fools and very desperate people. (Not the same group at all.)
The Greeks have known that this is how it will go down for a very long time.
Obama’s support is like a godfather’s kiss. Run, Syriza, run!
Obama prefers Syriza to Putin and European chaos (which could radically slow down the U.S. economy).
That’s all.
Maybe Obama (or more likely Zbig, Henry K, etc) feel that supporting Syriza and allowing parts of Europe to shade into leftism is the lesser of two evils, the other being the prospect of Russia (and the BRICS) etc picking up the periphery discards and turning them into a significant bloc. They would be holding their noses for sure, but from their own pt of view, keeping Russia in particular isolated means more than saving Euro banks and politicians. Left parties and pols can be managed if not suborned. There are precedents.
You can set your compass to what ever direction Obama points at, from 0 to 360, by adding (or subtracting) 180 degrees.
Obama and his team played a huge role in this. It was Geithner’s book detailing how the Eurogroup planned to punish and humiliate Greece that caused the Greek public to turn. That revelation played a key role in all this, and it was planned by the Obama administration.
Sir Edmond Lyons, 1846: ”A truly independent Greece is an absurdity. Greece can either be Russian or English and since she must not be Russian, it is necessary she is English.’‘
Do the Russians have Euros to finance Greece for a short period? Could the Greeks refinance by selling bonds to the Russians or anyone else?
In any event, it would be worth the investment for Russia.
This is what Obama does get but what Merkel is delusional about.
Hmmmm.
http://www.keeptalkinggreece.com/2015/02/02/juncker-moscovici-berlin-signal-to-scrap-the-troika/
If the ECB pulls the plug on Greek banks in effect it kicks Greece out of the Euro. The ECB is not going to do this yet, not at this stage. This must be Varoufakis expectation. He knows that agreeing at the outset to the old negotiating framework would have weakened his bargaining position.
I never said that. It will extend liquidity on Wednesday but may impose conditions, like having a deal done by Feb 28. Thus if the conditions are not met, whatever happens next is Greece’s fault.
If banks going bankrupt is a major problem, then said banks shouldn’t be privately owned and operated in the first place.
This isn’t a bankruptcy issue, it’s a payments system issue.
So you support socializing the losses in the banking system?
My prayers are with the Greeks. May you have strength for this fight against the Goliath you face!
I don’t think that the ECB has that much the upper hand. The Greek government, through the Bank of Greece, can do two things :
– proceed with the ELA even against the ECB council decision : the only way the ECB can fight it is by pulling the plug on Target2 clearing, which precisely plays in the Greeks hands : It is not them who impose capital controls, it is the ECB that does it for them.
– print Euros banknotes, to make sure that ATM are always replenished. Syria’s constituency is not the kind of folks who have bank account abroad, so they don’t care about Target2. They do care about accessing theirIt would be real eurobanknotes with all security features and Mario Draghi’s signature : Good Luck for the latter to put in every retail point of the eurozone an explanation that one should note accept banknotes with a serial number starting with a Y, except for a long list of Serial numbers. If the Greeks really want to play nasty, they use other Eurozone countries prefixes.
The ECB will cry for murder of course, but Greece can play the game : “for you it’s a Drachma, but for us it is a Euro” quite a long time. Enough time to negotiate with the Creditors and relink back to the Eurosystem as before after the agreement, or for other countries to create their own currencies (without banknotes if they are smart) and have the value of the Euro banknote float against it.
The Bank of Greece can print Euro banknotes? Really?
Presumably by a similar authority that Cambodia and Burma use to print US dollars . . .
Pretty sure each country’s CB prints its own euros, in the Greek instance look up IETA. In theory, if the Greek-printed currency could be identified as such, then Greshams Law could kick in and the Greek-printed currency trade at a discount (presumably a much bigger discount offshore) but as charles2 points out – do TPTB really want the newspapers telling people to check serial numbers before transacting in them?
Member states can produce euro banknotes only with authorization of the ECB Governing Council.
All Euro banknotes have a one-letter, eleven-digit serial number located on the back at the top right and bottom left corners of every denomination. The letter indicates which NCB has issued the banknote.
Greece’s letter is Y, easy just to tell the Greek people only to accept those (I know, easy, but also hard). German merchants are already preferring theirs, letter X.
Steve Keen’s Jubilee is the answer, we’re pumping the patient full of morphine instead of excising the cancer. Duh.
Greece isn’t authorized to do what you suggest. It doesn’t matter that they technically have the capability, hijacking the currency of 800 million others would be illegal and unethical, and ultimately will fail as the foreign sector quickly moves to financially isolate the country.
Right, but they can issue scrips which would have the same impact.
All the mainstream “socialist” and “liberal/conservative” parties in Europe have been completely faithful for some time now to their masters in Brussels. The same was generally true, for the past ten years and up until recently, for the hard left parties. Only the harder right, sovereignist parties have been engaging in the fundamental fight to restore national sovereignty in Europe. The best example of which is the Front National in France.
So the rise of Syriza is a potential threat to the duplicitous pro-European mainstream parties and from their point of view must be crushed as soon as possible — but of course with a smile. I use the word potential because Syriza is covering itself in layers of ambiguity, which is not necessarily a bad policy in this type of conflict, where room to maneuver could be an advantage. Of course Syriza is fighting two battles, one against its European masters, and another against the expectations it created among its own citizenry. So this ambiguity is being aimed at whom?
Greece is currently nothing more than the equivalent of a US state within Europe and Alexis Tsipras is not much more than a glorified governor. They have next to no leverage against Europe. Even if Greece defaults, Europe has its new QE program that I am sure can be used to temper any damage. Without a default, the only way Greece could ever repay its loans is with a bout of Chinese-style growth which no sane person believes is going to happen. No one is going to send any free money to Greece to launch this growth.
The fact is, time is the enemy of Syriza. The longer this goes on, the more dependent they are on Europe. Rich Greek people are emptying their bank accounts. One of their main election promises was to collect more taxes; that’s going to be kind of hard when that tax money is in Switzerland.
Just yesterday, Greek Finance Minister Yanis Varoufakis had to publicly state that he was working in Europe’s interest first, and Greece’s second. The only hope for Greece was if Syriza were secretly nationalists, who as soon as they came to power would provoke a crisis, nationalize banks and then impose capital controls, and reintroduce their own currency. But this has to happen fast. Tsipras has to yank off his nice-guy “radical” leftist mask and expose his inner Marine Le Pen. He chose the correct coalition partner; what he needs to do now is provoke the crisis this week and blame the evil Germans for the necessity to “temporarily” pull out of the Euro.
If Europe were only contending with Syriza then their plan would be to stall and with every day the Greek position would weaken. But the real and true enemy of Europe is Marine Le Pen and the Front National. As time goes on and the neo-liberal economic disaster only deepens, all the media scare tactics in the world will not keep a majority of French citizens from voting for her (in 2022). All the moral hysteria of soixante-huitards, all the denunciations by privileged bien-pensants; none of these will stop an eventual Frontist victory. It’s only a question of time before we see this victory that will be the end of Brussels’ power, first in France, and eventually throughout southern Europe. So, whether Syriza wants it or not, even if Tsipras really is that bluffing globalism-loving huggable little leftist some believe he is, Europe might decide to make an example out of Syriza by playing hardball and forcing Greece out of the Euro and then insuring that economic disaster strikes the country. This would serve as a warning to French voters to not dare think about leaving the Euro by voting for Marine Le Pen, whose party continues to surge in popularity, especially among disgruntled working class people who used to vote Socialist. And I don’t think Europe have much to worry about in terms of Greece overnight becoming some great model of economic dynamism once they leave the Euro. While it certainly is the right move for Greece to leave; with rich people taking all their money away; and there not being a whole lot of domestic industry, etc; Greece is going to take a long time to recover.
But this would be a pretty bold step, they type for which European politicians are not known for delivering. So as usual in Europe this will drag on and eventually Syriza will claim some hollow victory and get busy imposing European discipline on Greece in the name of fighting fascism. But in the medium run, any way you slice it, the clock ticking on Europe’s control over its citizens. But only the weapon of national sovereignty will be effective to break those chains of austerity that bind. It would be best if this could be a collaborative left/right thing but given the left’s natural hostility to national sovereignty and the growing doubts about Syriza – it is looking more and more like in the end the radical right will probably have to accomplish the destruction of the EU all on their own. I truly hope I am wrong about this and Syriza actually are able to deliver national sovereignty to Greece.
“The only hope for Greece was if Syriza were secretly nationalists, who as soon as they came to power would provoke a crisis, nationalize banks and then impose capital controls, and reintroduce their own currency. But this has to happen fast.”
Yes. It’s obvious. Am puzzled why so many doesn’t see this?
Syriza personalities may be testing the water. I’m skeptical, but since 2008 how many EU countries have elected political parties that so openly challenged dictates from Brussels? I don’t know if it can easily be categorized as bravado and swagger. There might be a plan. Push, see how much they will concede, if they give nothing, we might see something like a default, Euro exit, and reissuing of the Drachma. There is no point in negotiating with the countries holding power any longer if they insist on the same tired (and wrong) approach. Germany is the obstinate party here. Expecting a country to forfeit its future to maintain debt ideology is irrational and immoral. As with labor, at some point a strike is the only way.
As soon as it gets above freezing, is my guess. Very bad move to do any major overthrow in winter.
Great post! For all the NC readers who hate the nationalist Right, Syriza is their one hope for the Left to lead the liberation. Domino effect then kicks in with both Spain and Italy following with their own left wing democratic revolutions. Eventually Sein Fein in Ireland?
I’ve a very conservative friend who believes the left stands for nothing and believes in nothing. I wouldn’t be that harsh. Nevertheless I note how for Liberals it is more important to appear to care rather than to actually care. We’ve just seen that from the French minister and of course Obama. Appearing to care for public consumption while offering nothing meaningful to help. Thus I have serious reservations about Syriza, simply because I don’t trust anyone on the Left to back their words with actions. If Syriza backs down then it sends a clear message that the Left can/will not offer the change needed. Whether it be Le Pen or Golden Dawn or UKIP, more citizens will turn to the right as the last hope for change.
If this does end with another Brussels triumph then one does have to wonder what’s going on with the political Left. In many western countries there is no meaningful Left party and the ones calling themselves socialist are following the Tony Blair New Labour playbook to power(see NDP in Canada). So what Left representation one does have is just waiting for the chance to sell out. Maybe that’s why we’re moving into a post-democratic world. But how bad does it have to get for people, like in Greece, to have their leaders demand for change at all cost? Perhaps Syriza will surprise us by holding to that position. Yet with each political Left sell out I can’t help thinking of my conservative friend: does the Left really believe in nothing and stand for nothing? That would explain these endless betrayals no matter how bad things get for average citizens.
‘one does have to wonder what’s going on with the political Left’
First targets, then victims, now operatives of a global ‘deep state’? :-)
A very astute analysis. BUT …
What if there is no way out within the current paradigm? If Greece plays by orthodox rules, kowtows to prevailing-but-defunct wisdom, stays within the Euro and pursues Growth to pay off its ‘bail out’, it faces a slow-grind death: perpetual growth is impossible, even before we look at Greece’s particular chances at this doomed game.
If, on the other hand, it chooses to be bold — some would say foolish — and take a very close look at what is required to establish steady-state growth economics, then there’s a chance not only for Greece, but for all of humanity. Flowery language I know, but surely acceptable in the circumstances.
The decision to break from orthodoxy is always frightening, especially at the national level, and the move would invite violent opposition from TPTB. Greece is harldy a major power. However, genuine change starts at the fringes, not at the centre, and the alternative is death anyway. And, once a directional vision is understood and embraced by a population, miracles can be wrought.
It’s very possible that the nation state is simply the wrong format for steady-state economics, that we need a more medieval, city-state structure. If this is the case, then Greece may well become another ‘failed state’, but street-level changes already underway there would find more room for manouever if things unfold that way…
I think yours is an astute comment. As Yves writes:
But the ECB may move decisively, turing the promise of a new deal for Greece and democracies finally taking the reins back from financiers into a false dawn.
That is ominous indeed. If the Left persists in pursuing the neoliberal New World Order then the Right will promptly emerge as nationalist “saviors.” And we have seen that movie before. The European Left best open its eyes immediately: beware neoliberals bearing gifts.
(intended as reply to WCN 8:14 A.M.)
This analysis leaves out the fact that Greece could get funding from Russia. That’s the Plan B that gives Greece bargaining power.
They can’t get euros to backstop their banks from Russia. And Russia itself is in a world of hurt financially.
When Greece looks east, think military and ports. When it looks west, think money.
Greece’s only option is to hoard euros (and it may have more than people realize) and to issue local scrips for things like paying taxes or even allowing them to be used in local transactions. Either way, they can’t coexist with hard currency, as we’ve seen a thousand times before in many countries. But Greece may have enough hard currency to slog through for a year while reversing all austerity measures, lowering taxes, flaying the oligarchs, and looking to someone for some kind of support.
There is this IMV strange fixation on Feb 28th. Everything o.k. till then, various levels of disaster after that – default, Grexit, Euro disintegration etc. If I were Syriza and I’d spent the last year game playing the possibilities I would be looking to start the Drachma presses rolling the very next time some dick-brain in the ECB threatens to destroy the Greek banking system via ELA/Target2/whatever. Not as revenge, mind you, but as the only way to minimise the damage to the overall Greek economy.
Under that scenario I’d be doing exactly what Tsipras, Varoufakis, and others in the Syriza cabinet are doing – playing the “reasonable negotiator” card up till it becomes clear that the ECB is serious about its threat and there’s no longer any alternative to dumping the Euro … at least “temporarily”.
So the question for the ECB is: Just exactly how strong do they think that choke chain is ?
Varoufakis has tried to get past that date, as the post describes, but the question is whether the ECB will use the approval of the ELA (which is it certain to give) to impose additional conditions.
“…whether the ECB will use the approval of the ELA (which is it certain to give) to impose additional conditions.”
If, as you assert, the ECB is certain to bail out Greek banks, why would it be able to impose additional conditions? I know little about macro-finance, but I do understand fear. Given that failure of the major Greek banks would impact the entire eurozone – and could in fact lead to a Grexit (followed by Italy, Portugal, Spain, Ireland…..) it is Varoufakis, not Draghi that holds the high hand. Further, and this is the larger fear, if Greece left the eurozone it very well could nationalize its banks ala Iceland, thus starting a trend. To be clear, Draghi is intent on saving the euro and the eurozone, Varoufakis not so much, and while Draghi could push Greece around while it is inside the euro, he is powerless to prevent it from leaving and defaulting. I suspect Varoufakis will get the bank liquidity he needs and I also suspect some accommodation on debt as well.
As regards Greek debt – the number I have read is around $300 bn – a perhaps manageable number – BUT, it is my guess that if Greece fails to make a coupon payment – the ECB would do it for them. Why? Because I would bet that there are several times this nominal debt in CDSs and given our experience with AIG, it appears that global central banks have no stomach for the conflagration that would ensue when a credit event occurs. I suspect that Mr.Varoufakis is a far more astute observer of central bank behavior and has in fact, gamed this out. The first half of 2015 is shaping up to be very interesting.
Did you bother to read the post??? Please do that before commenting.
Germany and Finland are on the ECB board and are already furious with Greece because they believe their own domestic PR, and have gotten even hotter under the collar due to what they see as Greek insubordination. Draghi is not too happy either, plus he may feel the need to throw a bone to Germany due to QE. We’ll see what happens on Wednesday.
Greece would appear to be a pretty good illustration of what is in store for what remains of the world’s Middle Classes – or whatever you want to call those of us who have achieved some degree of material comfort as an accident of history or geography. Allow your national economy, particularly the vital sectors like agriculture and health care, to become dependent on suppliers beyond your borders; allow your government to become dependent for funding upon debt rather than taxation and – TINA (there is no alternative) to austerity and / or asset stripping.
The austerity is to insure the bond holders can be paid interest, their pound of flesh, instead of paying taxes; the asset stripping and looting for those who want something more backing their money than “the full faith and credit” of the governments to whom they ‘loan’ what should have been taken from them outright through taxation.
Participation in the global economy has obvious advantages. But the cost of that participation should not be the impoverishment of 99% of a nation’s population in a race to the bottom with the world’s most desperately poor. If the authors of the Washington Consensus and the founders of the European Union are so concerned about the world’s poor and the virulent nationalism that gave rise to two world wars in the last century, they need to come up with a better plan than one which robs their own people so they can become Masters of the Universe, our new feudal Lords of Finance.
It’s cheaper to import until one day you don’t remember how to make them.
Two separate issues – price and origin of the product…like insolvency and illiquidity are two different issues.
Today, the paradigm is ‘it’s cheaper and so more consumers can afford it.”
“Better plan” = debt write down. As much as we see it here, it bears repeating.
If you want to save more money than all the money in the world, you can’t stuff it into non-sovereign mattresses. Nice try. Now take a haircut. Functioning states and the security they provide are more important than savings and rent.
So, taxes are really just interest payments, and assets are no more than collateral. I love it. Brilliant.
No doubt the argument for an at least partial, global citizen crowd-funding effort for Greece has been made, here, but, since I’ve not come across it yet, I’m going to treat the idea as if it were my own .
As for me, I’m what one would call a medium-poor European; not destitute, yet, but living day by day. Still, I would be immensely pleased to donate a Euro or two to Greece, to get the EU vampires to back down from their rapaciousness.
What if there were hundreds of thousands of us [preferably billions, of course] who could donate 2€/$/¥ or more to ease Greece’s pain and to bring the EU banking hegemons down a notch, if not ultimately render them obsolete?
“We’ve got the power!”, as the old 60’s slogan went. But it just so happens to be true …
Once Greece is out from under grinding financial pressure and has some freedom of choice, hopefully with a helping hand from Russia, it would be time to turn to others who are caught in the jaws of global finance and poverty.
Oligarchs everywhere are freaking out over growing popular grass roots movements in Europe, as they’ve done virtually everywhere across the globe, throughout modern history. But Europe is particularly ‘dear’ to them.
What are your thoughts about such an idea?
Count me in. The amount wouldn’t matter so much as the further toll it would take on the legitimacy of the bankster crooks and their institutions should millions from all parts of the world, but especially Europe, sign on.
I’m in – would be happy to contribute
Hey, great to have had some positive feedback!
Key will be to find a trustworthy entity to manage the funds. It shouldn’t take much in the way of manpower [salaries], but reliability / honesty obviously is of an essence. I’ll look into this … In the mean time, if an idea or two comes to NC readers, please let me / us know.
Then it would be a question of a big, continent-wide media campaign, which is something I am in a position to manage.
The wise Buckminster Fuller observed: “You never change things by fighting the existing reality.
To change something, build a new model that makes the existing model obsolete.”
Let’s go!
‘Key will be to find a trustworthy entity to manage the funds. It shouldn’t take much in the way of manpower [salaries], but reliability / honesty obviously is of an essence’
One way to ensure confidence in integrity might be to specify a transparently open source online register, with contributions searchable by name and region. The amounts could remain private. Secrecy of contributors would kill confidence no matter who ran it because opponents could always claim or just infer skulduggery.
Very good points, norm de plume. — Thank you.
Transparency, transparency.
I am liking what Charles Hughes Smith is saying:
http://charleshughsmith.blogspot.com/2015/02/greece-just-blew-up-empires-death-star.html
” Let’s set aside the propaganda for a moment and get real: anyone with the slightest knowledge of Greek finances and the power structure of the Greek economy/society knew it was insanely risky to loan Greece billions of euros. No one can deny this, yet somehow the lenders deserve to be paid for their avarice, stupidity, incompetence and total disregard for the standards of prudent lending? No, they deserve to be destroyed–closed down and their assets auctioned off.
(snip)
2. Greece will not be wiped out by leaving the euro currency–it will be freed to rebuilt itself with prudent fiscal management and policies that reward investment and penalize risky borrowing, speculation and corruption.
Here’s the thing about Greece issuing its own fiat currency–it will force fiscal discipline in a way that the euro did not and could not. This is why the Greek Status Quo is quivering with fear–the gravy train of irresponsibility enabled by the euro is ending, and they are terrified of living within their means and having to face the discipline that the market will impose on the Greek fiat currency.”
The entire article is very much worth reading.
I really liked CHS’s description of “fiat discipline.” A phrase I’ve never really heard before because fiat is usually referred to in some disparaging rant about irresponsibility and lack of discipline. In fact, fiat is only as good as it’s own fiscal discipline. And that makes discipline the key. Which becomes a problem when the very definition of capitalism – growth – no longer functions. What can you do to “discipline” your economy then? When growth stopped, the old discipline of capitalism got turned on its head and banks were promptly bailed out. This isn’t your grampa’s creative destruction – this is the end of growth. Scary. If everyone were honest we would all be fessing up that we don’t have a traditional solution. And admitting that without growth there can be no capitalism. So where do the bankster/lenders get off demanding austerity and full repayment of loans made on false assumptions?
There are many things that a government can wisely spend money on to better the welfare of the citizens
http://www.voxeu.org/article/fiscal-policy-explains-weak-recovery
As IMF economists Kose et al. (2013) write, “The current and projected paths of government expenditures in the advanced economies are quite different than during past recoveries. During the past recoveries, fiscal policy was decisively expansionary, with increases in real primary government expenditures. This time is different.”
To illustrate the force of this point, I did the following back-of-the-envelope calculation. Suppose real spending on government consumption and investment (hereafter G) had grown by 2% per annum in 2010, and in each of the following years up until 2013, in the US, UK, and Eurozone. This would seem to be close to a neutral path for government spending. (Growth in G in the US – which includes expenditure at the state level – was a little above trend in 2008 and 2009 at around 3%, compared to an average of about 2.3% growth over the previous decade.)
A counterfactual without austerity
If G had followed this trend path, the level of G by 2013 would have been around 15% higher in the US, a bit less than this in the UK, and about 10% higher in the Eurozone. This indicates the extent of austerity that occurred from 2010 onwards. The question then becomes what sort of multiplier to apply to this number. I have used a multiplier of 1.5, which I think is reasonable for three reasons:
First, when nominal interest rates are at the zero lower bound there are good reasons for expecting multipliers to be large.
Second, in many countries fiscal consolidation included large cuts in public investment, which may have additional negative supply side effects.
Third, the fact that G is higher in all three areas in this experiment should reduce the extent of import leakages.
I assume the multiplier is instantaneous just for simplicity. Remember as well that I am ignoring changes to taxes and transfers, which from 2010 also tended to be contractionary. I am also assuming that none of the positive effects on GDP that I describe below would have been offset by a tighter monetary policy, but the point of the exercise is partly to argue that at some point they might well have been.
With this multiplier, higher G would have by 2013 raised the level of GDP by over 4% in the US, over 4.5% in the UK, and nearly 4% in the Eurozone. To put this in terms of changes, US GDP growth would have averaged 3.2% over those four years, rather than the actual average of 2.2%. We would probably have described that recovery as robust rather than anaemic.
A more comprehensive measure of fiscal stance is the underlying or cyclically adjusted primary deficit, as calculated by the OECD or IMF. Using this measure to gauge the impact on GDP suffers from the drawback that tax or transfer changes probably have smaller multipliers than government spending changes. However even if we make the quite conservative assumption that every 1% reduction in the underlying primary deficit reduces GDP by 1%, then we get changes in GDP by 2013 of the same order of magnitude as those already calculated. (Jordà and Taylor 2013 estimate larger GDP effects in recessionary periods, but with significant lags.)
I have never been a fan of this kind of thinking for Greece because I never believed the Greece problem was a matter of discipline. More a matter of corrupt officials taking part in vendor finance scams.
Realize that Greece has spent $150B on military weaponry in the last decade. Read these two articles to get a sense of the depravity.
http://www.nytimes.com/2014/02/08/world/europe/so-many-bribes-a-greek-official-cant-recall-all.html?_r=0
http://www.reuters.com/article/2010/03/23/us-eurozone-greece-warships-analysis-idUSTRE62M1Q520100323
This is all by design. A fleecing.
ohmyheck and plantman
You could say this about just about any Western currency:
The West, Germany apparently excepted, has been paying its way in the world with debt ever since globalization and the Washington consensus kicked in. The whole Western political establishment likes this because it is much easier to borrow than tax. The United States, and in particular its “Congressional military industrial (and now financial) complex” likes this arrangement because Wall Street can remain the world’s chief purveyor of debt and its military the chief “muscle man for Big Business, for Wall Street and the bankers”.
Smith appears to have a blind almost religious faith in the redemptive powers of free markets. If there ever was such a thing as ‘free markets’, in the age of mature Industrial Capitalism it is doubtful if they could exist anywhere but on the fringes of the economy. One thing economists got right was ‘economies of scale’. Greece will be able to “rebuild its export sector” only to the extent that sector doesn’t compete with say factory olive farms in the U.S. or starving workers in the ‘developing world’.
People like George Soros make a good living insuring the “Empire’s Death Star of Debt” survives and prospers. Don’t expect either the U.S. or the United States of Europe version to go quietly into the night. There is, however, something to be said for EVERYBODY, freed from the odious debt imposed by the Lords of Finance, starting over and dividing up the rewards of needed, genuinely productive economic activity. (Those of us who might be left out in the cold by that first criteria can be employed studying the machine that sustains us and the myths and lies being used to destroy it and enslave us.)
great points, thanks
Exactly, the King owes no debt to his subjects because he is king. Though materially this relationship is absurd, he owes them everything. Seems after thousands of years of civilization we still can’t seem to understand the role of power in debt and relations. The USA and its chosen minions have the big stick right now that is why we define the debt relations.
And the master of one manor said to the serfs: “Come over to my side. I will show him, your current master…put him in his place, so you can be my serfs.”
And king after hearing that, said to his subjects: “I will be benevolent and come to your aid against the Infallible Church and its omnipotent deity. Let’s march on Rome and I will set up a democratic government that is so infallible that you will trust it and invest it with omnipotence to print as much money as it can in order to help everyone in the world.”
Right. Debt is the mechanism neoliberal governments use to stay afloat, just as the public takes on massive amounts of debt to stay afloat when most everyone is “living beyond their means” amidst a crisis of overproduction. The crisis of overproduction, however, is an inherent feature of the capitalist system.
“The West … has been paying its way in the world with debt ever since globalization and the Washington consensus kicked in. The whole Western political establishment likes this because it is much easier to borrow than tax.”
So true. While the world has fiddled with monetary policy over the past 40 years hoping to create a magic growth fairy that will paper over – yet actually exacerbates – significant inequality issues, fiscal policy has been essentially ignored other than increasing mostly regressive VAT, payroll and sales taxes while reducing taxes on capital, rents and land speculation. Of course the families that already owned decent amounts of capital and land resources are going to come out far ahead over a couple of generations if their economic inputs are taxed far less than labor, even though it’s mostly labor that actually creates new wealth. Go figure.
We’ll see soon enough if Syriza is serious about changing the status of the domestic and foreign economic elites if they quickly legislate tax reform that sharply increases taxes on interest and rent income derived from the Greek economy, and either concurrently reduce taxes on the lower and middle-income Greek families, pay off the most onerous government debt and/or reinstate government jobs with the increased tax revenues. An added benefit to much higher taxes on rents, interest and capital gains is that the value of Greek government bonds should become cheaper to purchase and retire. We’ll also see if Syriza reduces high VAT taxes on Greek producers that mainly sell to the lower and middle-income Greek families, which would encourage more Greek production and increase disposable income to Greek families. More family income equals increased demand equals more jobs equals more tax revenue. A virtuous cycle.
It seems every 5-10 years since at least the late 1800’s the world powers grapple with unsustainable debt levels in some part of the world. Rather than just raise taxes on the economic elites to pay for government services (and to pay off existing debt), the debt is usually papered over with more debt or the terms are extended and pretended until the next debt implosion. Since the S&L melt-down that started in the late 1980’s, we’ve seen governments step in to absorb huge amounts of bad bank debts, supposedly so the entire financial system doesn’t crumble to pieces. Other countries are following the same model, enriching the bankers and asset speculators, while further indebting society along the way.
We should be tired of the wasted human effort propping up a terrible debt-based system. Instead we ought to increase taxes on those most able to pay to help create a safe and relatively productive society, eschewing debt financing except in the most extreme situations (eg, natural calamities, foreign invasions). If the Greeks and everyone else who is burdened under the current system want to see Wall Street and its many supporters (politicians, powerful lawyers, elite financiers and wealthy business executives) really start to squirm and scream – a nice thought – then Greece and every other country in a similar debt bind should significantly increase the tax burden on interest, rents, dividends and capital gain income and use the proceeds to pay off government debt and reduce taxes on the lowest and middle-income families.
I bet what you proscribe is precisely what they have in mind.
The cynic in me suggests they can trade labor market reform with the troika all the while knowing it will make no difference. Anyone who has spoken to Greek business people in the last year knows they have a wild west situation in their labor market. People working double time for part-time. People working without being paid for weeks or months. People scrapping for jobs. Millions of desperate unemployed–no way to enforce any labor regulation.
Basically, a conforming labor market simply doesn’t exist right now in Greece, so any “reform” is not likely to improve things.
Greece leaving the Euro is a good idea, but not for the reasons given by Charles Hugh Smith. Rather, Greece needs to print its own money for the sake of local economic control, a prerequisite for some version or other of socialism. More and better capitalism is not going to solve Greece’s problems.
though I have to say that I’m a sucker for Star Wars metaphor.
Sure, it makes sense in terms of what the Greeks should do (kinda), but it carries itself on this ridiculous (when you look at it racist) notion that the “Greeks” brought this upon themselves. As if every poor county in the world deserves its lot because they were irresponsible. Whatever that means. I guess the USA/Britain are responsible? What of Goldman Sachs, what of dumping all of the bad debt on Greece, what of 100 years of Greece being the toilet for European Colonial powers? Syriza should bring this up in their “talks” because it is just as relevant as the BS balance sheets getting shoved in their face by the ECB.
Also, what are we supposed to make of “they are terrified of living within their means and having to face the discipline that the market will impose on the Greek fiat currency”. As in, if only the monetary system was pure enough the market would force it to work properly. This is total nonsense. This is the same logic Soviet officials were conveying to their population as the entire country was crumbling. “It’s failing because the Communism is not pure enough.” The fiat currency is only as effective as market (actually politics and society) that it operates in, if the market is full of parasitic financiers extracting rent from everything the market will do a terrible job. We aren’t doing much to stop the rot of financial Capitalism so what the hell does a soverign currency matter?
Sure they should leave the Euro, but not because their sovereign Drachma will be forced to abide by the rational will of the market and then they will stop being so reckless and irresponsible (the swarthy, hot-blooded Mediterranean archetype). They should leave because they are being exploited and undermined. Greeks are being sacrificed for ideological inflexibility, a religious commitment to “The Contract”.
Varoufakis has REPEATEDLY ruled out leaving the euro.
I keep telling you readers that you make the mistake of wanting Syriza to be something it is not. Syriza is a pro-Eurozone party.
There may be no other choice, if the ECB and EU intransigence continues. At which point, the “guilt” falls where it deserves to fall.
Great analysis, but I’m disappointed that you didn’t offer an opinion on how you might proceed if you were Varoufakis.
Unfortunately, there’s no middle path. Any choice that does not involve leaving the euro means that Greece will continue endure perennial depression.
Germany will not accept greater inflation, so that’s out.
No one will agree to a transfer union, so that’s out.
And Greece will never be as competitive as Germany, so they will have to continue along the path of internal devaluation and high unemployment.
When the only choice you have is to leave, then leaving is a reasonable choice.
Am I missing something?.
As I say immediately above, Varoufakis, even before he became finance minister, has consistently ruled out leaving the Eurozone. He sees it as a disaster for Greece. It is not just the immediate leg down. He sees it as setting the stage for a Eurozone break-up, which would create a Great Depression in Europe. That downdraft means not a year of pain for Greece, but years, and a huge, sustained leg down from its already weak position.
It’s easy to call for grand gestures when you don’t have to live with the consequences. The result of Samson pulling down the house was that Samson wound up dead.
It’s a bit unfair to say I’m calling for “grand gestures” when, in fact, I’m just looking for a way out of what-appears-to-be a hopeless situation. I think the Eurozone was conceived with this very predicament in mind. ..a failsafe way to keep the proles in line for eternity while the banker class makes off with the loot.
There’s got to be a way to fight back, so what is it?
It looks to me like Varoufakis isn’t going to make any headway unless he breaks some china.
Could Tsipras and Varoufakis be playing “Good cop, Bad cop,” for the benefit of the E.U.? After that, I’m afraid we enter the Fun House ‘Hall of Mirrors.’
I see their comments as consistent. Both have talked about negotiating with Europe, but avoiding anyone who wants to discuss implementation of austerity measures (i.e. euro technocrats).
That’s their line in the sand: austerity policies.
Not the drachma. Not the euro. Euro-denominated tax-anticipation certificates, domestically equivalent to the euro as a medium of exchange, in a quantity equal to the amount the Greek public will need to pay taxes for the next fiscal year. With it’s central picture, the Certificate will come to be known as the SOLON. The Solons will account for Greece’s domestic liquidity needs, leaving more than enough from present euro reserves plus export earnings to finance its imports for the next year, while the economy recovers from austerity and tax collections (hopefully now effectively enforced) become again sufficient. Then Greece, quite unlike “Europe,” will have nothing to fear from “default,” and it becomes entirely in the European interest to agree a full rescheduling (not cancellation) of Greek debt that would eliminate all debt-service payments for the next two or three recovery years.
We need a global liquidity mechanism. GLM. Calculate all the debt afloat in all the world’s economies, divide it by the world population for a global debt to person ratio. Betcha Christine Lagarde already did this. (Neat thing here is that as the population goes down people do not become poorer and the planet does get saved.) Assume this ratio represents what each person is entitled to financially just to maintain well being and survive. Distribute this amount by a global fiat authority so there is a reasonable amount of money, liquidity, to keep the world turning. Then in addition to that we need a global investment mechanism to promote progress and environmental protection. GIM. The key to growth will be that only sustainable growth will be financed. Included in sustainable growth can be education, and the beneficial services we all need and any industry that cleans up the toxic mess we have made. Too commie? Gosh, who will pay for war and tanks and bombers?
A global reserve currency, to the extent it’s accepted everywhere, does not have to be always for the immediate and direct advantage of its imperial issuer.
That global fiat currency can be used in times like this, benefitting even the empire, if only over time or indirectly.
You want to establish a concurrent currency. It’s an interesting idea but doesn’t solve the root problems of continuing current account deficits and national insolvency from lack of fiscal replacement mechanism.
Central bank liquidity is never needed according to some. Banks create money by lending…. Or is that theory just made up?
I believe it’s more like banks don’t need prior deposits to lend, if they have adequate Equity according to the rules they lend. After this at the end of the day they have to balance their books, money flow in and out of the bank during the day. If I lend to buy a home those money is credit my account but probably immediately I will transfer to the seller, maybe in another bank.
So at the end of the day the bank have to balance its debit and credit, primarily the central bank wants them to do this on the interbank market so CB have a nod higher interest, but the bank can always get it from the Central Bank if they cant get it on the interbank market. Banks adjusts their deposits afterwards, but if the borrower let it be on the account it balance out just fine. This system do that the money supply in total can grow when there is plenty of creditworthy borrower, money is created. But there is always two sides in the accounting, only Central Banks can create on only one side of the ledger.
Yep, I know. I’ve worked for a bank that couldn’t lend as it had no access to liquidity.
The myth that banks create money out of nothing is surprisingly well spread. Banks are intermediaries, they do not create wealth nor do they create money. If banks did create money then the banks in Greece could just lend enough money/liquidity into existence that they wouldn’t need to go to the ECB for money/liquidity.
The key thing here is “bank lending creates deposits”, but if the deposit move out of the bank it have to fill up it’s deposit ledger, they do that primarily on the interbank market, if they can’t get money there the central bank will always guarantee the liquidity in the system and supply them. So in good times with plenty of creditworthy customers the money supply grows when loans creates deposit all over the system. Money is created, in bad times people pay back their loans and the money supply shrinks. Money is created and destroyed all the time, there is no finite amount of money.
The central bank in a fiat system can always create money out of thin air, a country with fiat-money can’t go broke on debts in its own currency it can always create money to pay its bills. Well the money can be worthless in relation to other money on the international market but that another issue.
From your post:
“The key thing here is “bank lending creates deposits”, but if the deposit move out of the bank it have to fill up it’s deposit ledger, they do that primarily on the interbank market, if they can’t get money there the central bank will always guarantee the liquidity in the system and supply them.”
You say that the banks have to fill up the deposit-ledger after banks lent out money, why would banks have to fill up the deposit ledger if they just create the money?
What you’re describing in your post is the actions of an intermediary.
Yes but not as it is conventionally believed, quite a difference if you first have to get the deposit and then lend it out in contrast to fix the balance sheet afterwards and the system guarantees that it’s always possible as long as you fulfill equity requaierments and what ever regulations. And if you don’t; you still will be bailed out because of “to big to fail”, systemic risk and so on.
If there isn’t a finite supply of money there cant be an crowding out effect like different interests competing for a fixed amount of money. The main argument from mainstream economists to prevent governments to stimulate the economy. The limiting and what can be crowded out is availability of real resources.
As for Greece with a sovereign currency it can always buy what is for sale in its domestic currency and alleviate unemployment, that is when private sector won’t consume and invest so there is full employment. the real resources available is the limitation for inflation.
/lasse:But there is always two sides in the accounting, only Central Banks can create on only one side of the ledger.
Jesper:The myth that banks create money out of nothing is surprisingly well spread.
No, there is nothing intrinsically different about the way central banks vs other banks or states or even private firms or individuals create money. They are all just IOUs, credit-debt relationships & nothing else. That banks create money is not a myth. As Minsky said, anyone can create money. The hard thing is to get it accepted.
Central banks create central-bank-money. Private banks create private-bank-money. Private banks usually exchange their money for firms/individual’s “money” (= debt) – that is lending, e.g. with mortgages. There is just more happening all at one time when a mortgage is taken out than when a central bank buys a pre-existing government bond, which is why it can appear different. States like the USA create their own money – Treasury bonds. If you like pain and masochism, you can separate the state and its central bank. But then the state’s bonds “back” the central bank’s money, provide liquidity to the central bank if you will (imho “liquidity” is a needless and often confusing locution) – not vice versa.
That’s an intriguing statement. The implication is that both banks and central banks have limits. Central banks as well as regular banks have to exercise prudence. Banks grease the wheels as you say but I see central banks as more the true backer of the ‘labor card’.
Banks can default and so can countries. But I think this is taken too seriously. Are we more worried about debt or about people? I think Greece is fighting back in an admirable fashion. They are cutting to the chase and their economic team is first rate. They are first and foremost anti-austerity which has a large following. Both central banks and regular banks can contribute to this process but need to have the right focus. Greece definitely has the upper and stronger hand. As you have said they are a sovereign country and are acting like one. One that is interested in the well-being of their population.
Ambrose Evans-Pritchard give his support to the underdog taking on the neighborhoods bully.
“Mr Osborne pointedly refused to take sides, and came very close to rebuking the EMU authorities for carelessness after his meeting with the Greek finance minister Yanis Varoufakis.”
One of the most disheartening posts and threads I’ve read in the past eight years of following nc almost daily.
A few observations:
(1) the Greek bank liquidity issue was created in the run-up to the election on Jan. 25 (a Sunday). It was brought about by two factors : (a) fear that the new government would begin looking into inexplicably large deposits and (b) a systematic intimidation campaign that Greece would be forced out of the EMU immediately after elections.
(2) a question for the various commenters who believe that departure from the EMU and reversion to the drachma are the only alternative. As someone who lived through 25 years of the drachma – rampant devaluation, rampant inflation, rampant fear, a raging black economy in all sectors – this really doesn’t sound like a good solution. Maybe it’s the only one, ultimately. But it’s, frankly, a very bad option amongst other very bad options. The drachma would probably open at around 350:1 and slide in a few days or weeks to 500:1, then 1000:1. Bummer, really.
(3) for those same commenters: what do they imagine Greece as exporting? Fruit? Vegetables? There’s no industrial base – what little there was has been destroyed in the past five years. Tourism accounts for approximately 18% of current GDP – where is the other 82% projected to come from?
(4) Varoufakis is, well, complex. Game theory is great, but he’s now responsible for the real-time lives of 10,000,000 people. Does he have a sense of the responsibility lying upon his shoulders? We can only hold our breath and wait to see.
(5) Varoufakis and Merkel: I don’t think she’ll do well with him, simply because she really doesn’t conceive of where he’s coming from.
(6) re: the new PM, who is charismatic as well, though in a different way. He’s only 40, but he’s an old hand – been in leftist politics since he was 15 (one of Greece’s most prominent journalists [think “Judy Woodruff”] interviewed him when he was in high school, and afterwards remarked “this kid will become PM”). It’s not so much a case of “good cop, bad cop”, but of “short game, long game”. Greek leftists play the long game, the very long game, because they’ve been forced to by history.
(7) the first official act by the new PM was to lay a wreath (well, bouquet) at the Kaisariani Rifle Range, the site of a killing by Nazis of around 200 Greeks in 1944. I would imagine he’ll do the same when he pays his first visit to Greece’s second city, where in a nearby village 300 residents were killed when WWII was for all intents and purposes over. The symbolism was not lost on the Greeks, though it may have been lost in translation.
(8) the first official visit by the PM (today) was to Cyprus, which is traditional on the one hand, but the ensuing press announcement suggests that the Greeks and the Cypriots may be coordinating their financial (read: banking) and investment (read: offshore natural gas deposits) and foreign relations policy (read: Russia) more closely than in recent years.
(9) Obama’s interview: okay, well, yeah. But the real issue, as some State Department expert must have clued him into, is that Russia has been looking for Eastern Mediterranean deep-water ports for, like, centuries.
(10) Greece’s geo-strategic position: Greece is the “bastion-bulwark” of Western Europe in the Eastern Med. If it leaves the EMU and EU, it will turn to Russia, inevitably. Churchill clearly understood this when he insisted that Greece be forced into the Western European sphere at the end of World War II. If Greece leaves the EU, as a sovereign state it will seek alliances elsewhere, and these will be eastward-looking, both naturally and inevitably. Italy will become the new “bastion-bulwark” – and this is something neither Italy, nor the EU powers-that-be, would welcome.
Very thorough and insightful post–especially on some of the nuances that westerners are likely to miss, such as the bouquet-laying. In regard to your point number 5, this article ends with the following observation:
I think it’s possible to substitute Merkel, and perhaps others, for Draghi in that observation.
While I’m not sanguine yet about the outcome in Greece, this morning I asked my best friend, who reads the Dutch newspapers daily, to tell me if there were any stories about Varoufakis’s takedown of Jeroen Dijsselbloem, the Dutch Finance Minister who heads up the group of EU finance ministers. According to my friend, there was absolutely no mention that the two men even met. If the Dutch press is in lockdown mode on this meeting, that tells me the Troika is desperate to hide the truth from the public. The story wasn’t even covered by the Dutch financial press, which tells me that Greece is being more effective in its tactics–and its choice of ministers–than might appear on the surface. Sometimes the stories that aren’t publicized tell more about reactions than the stories that are publicized. Instead, the lead story on ad.nl was about more pieces of wreckage being obtained from MH17. Can you say “Look over here at this bright, shiny object”?
As a totally irrelevant and politically incorrect aside, I’m really enjoying all the articles about Greece as a delightful dose of eye candy for women around the globe. I’d almost forgotten how handsome Greek men are. Varoufakis has bedroom eyes, and Tsipris could have been a model for Praxiteles. What a pleasant change from prune-faced Angela Merkel and all the Dutch Harry Potter look-a-likes.
Very interesting about Dijsselbloem and coverage of the meeting in the Dutch media. It wasn’t his finest moment.
Re: Varoufakis – highly charismatic, but to my understanding a bit of a wild card, though today I read that his father was imprisoned on Makronisos (an Aegean island used as an exile – prison for political dissidents). If true, this is pretty significant.
Re: the new PM. Yep, he’s very handsome – I’ve seen him in person – but far more importantly, he’s just not anything like the politicians the Troika have encountered to date. He’s unflappable, he’s incredibly astute politically, and, mirabile dictu, he believes what he says.
What the EU/ Troika wants very much to ignore is the history of the left in Greece. This is entirely understandable, because Europe has never encountered the Greek left in power.
“what the EU/ Troika wants very much to ignore is the history of the left in Greece “–wants to ignore, or simply cannot see?
i keep thinking that TPTB running the EU, and the troika, are so dangerous mainly because, as is my impression from the comments of observers far wiser than myself, they are little better than a bunch of greedy fools. they are a new kind of “aristocracy” that has arisen and entrenched itself, one that can only see its own immediate short-term interest, nothing else, and takes it for granted that they deserve to hold on to what they have simply because they have managed to obtain it (by unscrupulous, shall we say, means).
yaroufakis has repeatedly mentioned the stupidity of the crisis “solutions” that have been imposed since they first were.
the problem is that it is people like this who have, and might again, recklessly (in the literal sense of the word) sacrifice not only the well-being of the majority of europeans but the existing peace in europe (and beyond) without even realizing what they are doing, let alone the moral enormity of it. kind of like the people currently in charge of what passes for a government in the US.
the kind of “aristocracy” that they are has perhaps not been seen for quite some time in europe. they are literally thieves, under a veneer of expensive self-presentation, who are enamored, primarily, of themselves. like all such groups in europe from ancient times, they never alter their worldview, not even after a great many of them have been, say, fed to the guillotine (or whatever “people’s justice” may occur, as when peasants repeatedly would rise up and kill them and their children where they stood in their castles in the Middle Ages); as a group, they come to a bad end through their own arrogance and stupidity, only when they are finally simply taken down.
i applaud yves for–among other things, and if i am not presuming too much by saying so–grasping the nature and extent of the stranglehold that these people have on the future of the rest of europe’s people, recognizing how entrenched it has become, and reminding us how far down the road europe has traveled already in surrendering control to them.
she is not saying “there is no hope,” merely encouraging readers to take the time to engage thoughtfully with the full existing reality. and she provides the information one needs for that, which is not so easily accessible.
It’s not so much the stupidity of the austerity policies but the fact that a weak euro benefits a lot of people, especially in Germany.
I tend to think the whole crisis is cynical, rather than stupid.
‘I read that his father was imprisoned on Makronisos (an Aegean island used as an exile – prison for political dissidents). If true, this is pretty significant’
a bit more YV backgrounding, from his ‘Rural sanctuaries in the time of permanent crisis’:
‘my mother’s accounts of the ghastly winter of 1941 implanted in me the idea of the countryside as a sanctuary at a tender age. Mother’s stories often began with the horse-drawn carts doing their morning rounds in the streets of Athens, collecting the corpses of those who had died of hunger the night before. It was then that my grandmother apparently managed to evacuate her children to the Northern Peloponnesian countryside for a few, short weeks. Away from the cesspool of grief and disease that was occupied Athens, mother forged lyrical stories out of the small pleasures that they had enjoyed in the countryside. Those stories, which she lovingly recounted, came back to me when a new wave of Athenian escapees abandoned our troubled city, following the nation’s recent Great Depression, to ‘return’ to their ancestors’ untended lands’
This is the prelude to a piece (on an art project site he shares with his partner) where he makes it clear he thinks there are no longer such sanctuaries to be had.
http://www.vitalspace.org/text/rural-sanctuaries-time-permanent-crisis
And this essay page on his own site gives you a feel for his range and depth:
http://yanisvaroufakis.eu/ppe/
He is the lightning rod right now, and I can’t think of many others as well equipped to handle it.
I agree with dbk that the Dutch insight is important, and any inside oil on German reactions (or lack of them) like Patrick Schmidt’s the other day would be even more valuable.
Very informative, both dbk’s comment and your response, GL. By all means keep us informed about what your Dutch friend says is and is not covered in her nation’s press.
Great comment. One of the great pleasures of NC is that some of the comments are as interesting and informative as the original posts.
Agree that maintaining the euro should be a priority since a thinly traded and likely depreciating currency almost always hurts the lowest income sectors of society the most, while the economic elites continue to use dollars, euros and yen for their investments and business operations outside the country. And the banks and money-changers always take a nice cut whenever people need to travel or buy something in a different currency. If Greece goes back to the drachma, it will be another signal to young Greeks to migrate to another country with a stronger currency and presumably a stronger economy.
Tourism and real estate assets (other than a family home) provide the best route to generate tax revenue to pay down debt and finance government operations. A 5-15% tax on gross rents, less costs of repair and maintenance, and on gross revenues from tourist businesses would raise substantial revenues. These taxes are generally easy to audit since real estate (buildings, hotels and large agri-businesses) can’t flee the country. Based on what I’ve read in many places elsewhere (but don’t know personally), Greece has substantial leakage in its current tax system. Taxes imposed on gross rents and business revenues are generally difficult to evade and provide the opportunity to bolster the professionalism and tax administration competence of the assigned government agency.
A new “emergency excise tax” on gross interest income (over a base amount, say 50,000) derived from Greek sources would also provide substantial revenues and help drive down the value of Greek bonds, making them cheaper for the government to purchase and retire. And I’m guessing that the current Greek tax system allows for the deduction of business interest expenses and phony real estate depreciation deductions. Eliminate those tax deductions (exempting very small businesses) and additional revenue would be available for government expenditures and debt retirement.
Another excellent option is to invoke the recent Cyprus solution and require current bondholders to take a principal haircut (bail-in), exempting smaller bondholder families (say under 100,000). As others have said, lending money has substantial risk, especially when lending to a country (or business) that the lender knew, or should have known, could have severe liquidity issues based on its total debt outstanding. A 10-20% principal haircut puts all lenders on notice to be more prudent before they start making loans to less-than-robust borrowers.
The financial pages will be filled with drama over the next few months as the major players dance around the current Greek debt situation, but what we should be watching too is the fiscal changes made by Syriza since they virtually control the entire operations of government. If they start to reduce regressive taxes on the lower and middle income families, and increase taxes on the economic elites that mostly earn interest, rents, dividends and capital gain income, then we’ll have a better idea that they have a solid grasp of enlightened fiscal policy and are watching out for the best interests of the lower and middle-income Greek families.
Drachma without drama!
More than 2 millennia ago, Greece showed humanity the way by inventing democracy, science, logic and many other things. 2 millennia later, it is up to Greece again to show us the true meaning of democracy.
We’re all Greeks! Eimai ellenikos.
I have heard the ECB is proposing a summit meeting of all players at Pyrrhus to address the Greek problem.
That’s seeking victory at any cost.
I think a deal gets done – I hope the perpetual bond portion is accepted but I would expect a pushback to a finite duration. Surprised at the surplus budget target, but it’s an offer on the table. Per an article on Lazard in 2012, Lazard will try to get those in the creditor bloc perceived as more willing to compromise to pressure those in that bloc that are more aggressive – and I think that bloc knows this, which is why we have heard the same line from multiple finance ministers: “extend, yes…haircut, no.” Now all we need are the Greek rich and the poor, the private and the public sector to covenant with one another. Shouldn’t be hard :)
Can’t we just change the accounting rules so as to make everyone happy?
I believe we did it once in 2008.
Yves, or anyone else: what would the downside be if the Greek government were forced into the position of allowing its banks to fail… then nationalizing them at no cost or at cut-rate compensation to their stockholders. I suppose it would depend on the nature of the debt on the banks’ balance sheets – problematic if it were owed to pensioners, etc., but less so if the majority were owed to the 1%… Can anyone clarify?
Does anyone else find it almost surreal that a respected guest blogger here has suddenly become the Finance Minister of a NATO member country? That means anyone here could write a comment and Mr. Minister Varoufakis “could” very well read it if he cares to. Even me. And I can even hope that he may have found some of my past comments so amusing as to be fun to read even if having potentially little or zero analytical or prescriptive value. Talk about one degree of potential separation!
In that spirit, I here offer my comment. I agree with blogger Ian Welsh that Europe stands ready to engineer a Holodomor within Greece in order to terrorise other Euro-members into obedience to the TroikaNazi Authorities. (How respected is blogger Welsh here? Well . . . he is blogrolled on Riverdaughter The Confluence, and Riverdaughter is respected by NaCap’s own Lambert Strether. So that is two degrees of separational respect). And Ian Welsh has now written a second blog about where Greece is at, what Europe plans against Greece, and what Greece should do to torture Europe into letting Greece survive.
I will give links to them both in case Mr. Varoufakis cares to read them, think and consider.
http://www.ianwelsh.net/lets-talk-turkey-about-greece/
and . . .
http://www.ianwelsh.net/syriza-wins-in-greece-what-it-must-do/
‘Does anyone else find it almost surreal that a respected guest blogger here has suddenly become the Finance Minister of a NATO member country?… Talk about one degree of potential separation!’
Yeah, I feel that too. It’s like breaking thru a glass ceiling of sorts, a kind of relief that all the hand-wringing frustration we all (understandably) indulge in here is not in vain, that our collective voice now has a flesh and blood champion in the actual bullring rather than the stalls. I appreciate Yves’ cold water approach as a necessary corrective to untrammelled optimism and hope, but when even Evans-Pritchard is saying things like ‘We are witnessing a democratic revolution’ and ‘it is hard not to feel a welling sympathy for this popular revolt. If it takes a neo-Marxist like Alexis Tsipras to confront the elemental folly of EMU crisis strategy, so be it’ then you know there is a real game afoot. HIs latest is headed ‘Germany will have to yield in dangerous game of chicken with Greece’ and notes Obama’s support for ditching austerity and also that ‘Mr Osborne pointedly refused to take sides, and came very close to rebuking the EMU authorities for carelessness after his meeting with the Greek finance minister Yanis Varoufakis’
What we are feeling is the exhilaration of action after years of talk, of the prospect of freedom (and not just for Greece) after years of slavery.
I met YV once or twice briefly at the University where we both worked. He struck me as a smiling, polite, down-to-earth sort of person. Here is a short piece by one of YV’s friends, another economist of Greek descent from the same faculty (and another nice guy):
https://theconversation.com/yanis-varoufakis-from-accidental-economist-to-finance-minister-36827
Syriza must stick with their campaign pledges to undo austerity measures and to halt the privatization of public assets if they want to survive. The problem is that even these changes will be unacceptable to troika officials (that is what the troika will be threatening Greece about over the next couple of weeks). Since Greece is already insolvent, it does not matter whether any changes on the debt end in the form of a haircut or something similar to a haircut with a different name such as a maturity extension is negotiated with the EU.
In the next 26 days, Greece will not be able to convince Germany and the troika to allow them to undo austerity and scheduled privatizations in addition to a debt maturity extension. Greek officials should spend as much time as they can over the next couple of weeks convincing potentially receptive governments such as France and Italy to join them by opposing austerity in principle. The more time that Greece spends making its position known and negotiating the better it will be for them and the harder it will be for the ECB to yank their ELA funding. Greece should be prepared, however, to act proactively if the troika’s threats accelerate deposit flight from its banks.
Greece has a euro printing press in Athens. Greece also has the precedent set by Ireland in 2011 when the government created 51 billion euros to save its banks. The next time either Schaeuble or a troika official threatens Greece over their decision to end austerity (thereby accelerating deposit flight), Greece should begin having the central bank in Athens create as many euros as possible. If the brinksmanship extends to the final week with the troika still not willing to budge on austerity and still threatening their ELA funding then Tsipras should announce that the Athens central bank has been ordered to respond to the crisis by printing sufficient euros to meet any withdrawal needs. The new euros should be waiting first in line for immediate distribution from Greek banks. It will be better to ask for forgiveness from the ECB rather than permission.
It seems the only other alternative is for Greece to meander aimlessly over the next couple of weeks until Draghi, Schaeuble, Juncker, Dijsselbloem, and the rest of the troika toadies get Varoufakis alone in a room at two in the morning and threaten his life and Greece’s very existence. Greece needs to be prepared for Varoufakis to tell the troika to kiss off with a Tsipras announcement the next morning informing the Greek people that the troika’s bad faith forced them to print euros to stem deposit flight.
The best case scenario is that Greece is able to make an appeal to the EU to break free of the austerity straightjacket that is causing deflation in Europe over the next couple of months. The worst case scenario is that Greek depositors will have a bunch of extra euros tucked away in their mattresses before Greece starts printing drachma.
Either Syriza ends austerity or it will be Golden Dawn’s turn next election.