As the impasse between Greece and its creditors is approaching an inevitable train wreck resolution, commentators who should know better have depicted the possible outcomes as Grexit or a deal. As we have said from the outset, the best of Greece’s bad options is a default while staying within the Eurozone. And given that a Grexit would be messy, would result in losses on the ELA and potentially Target2 balances being allocated to member states (a political nightmare) and could lead to eventual political contagion (as in paving the way for future departures) the least risky path for the EU and Eurozone is also to keep Greece in the fold.
As Ed Harrison discusses in a Boom/Bust segment, a default in place is the most likely outcome of negotiations that have degenerated into Greece and the Troika talking past each other. The news wrap starts with an update on Greece and moves straight into the interview with Ed.
Keep in mind that Schauble saying that Greece must stay in the Eurozone is a big shift in his position; he has repeatedly said in the past that if they can’t adhere to the rules, they should leave. However, even though Varoufakis and Schauble now agree that there should be no Grexit, that decision does not lie in their hands. The key party whose forbearance is necessary is the ECB. Now it might seem obvious that the ECB has plenty of reason to accommodate what Germany apparently wants. However, the Bundesbank’s Jens Weidemann has yet to weigh in on this issue, and it is possible that he is more bloody-minded than Schauble. Moreover, the ECB has long been uncomfortable about the use of the ELA, which is meant to be used only with solvent banks that are having temporary liquidity problems, to prop up insolvent institutions.
However, the ECB has plenty of latitude to do as it pleases, and Draghi’s official policy is to do whatever it takes to keep the Eurozone intact. As Paul Murphy at FT Alphaville points out:
Received wisdom has it that the ECB will withdraw the ELA — emergency liquidity assistance — currently propping up the Greek banking system, which will promptly collapse; Tsipras and Co would then be forced to bring back the Drachma (or similar) and Greece would exit the eurozone.
But what do the “rules” here say? In the case of the ELA they run to all of two pages…..Now, Malcolm Barr and the economics team at JP Morgan remind us that when we are talking about Mario Draghi and the ECB, it helps to think of “rules” in the sense of…
vaguely specified guidelines with scope for multiple interpretations at differing points in time
With that in mind — and having studied that ECB ELA two-pager in full — Barr reckons the ECB governing council can pretty much do what it likes in the event of a Greek default, since the rules as they stand are self-imposed and self-policed…
The JPM line here is that sure, Greek default will bring on capital controls, but it is a mistake to assume that it will lead straight to euro exit. There’ll be lots more to play out first, such as a break up of Syriza, maybe a Greek referendum on euro membership, or even the introduction of a quasi parallel currency in the country, such as government IOUs or tax credit notes.
A critical issue to keep in mind is that a default does not bring Greece relief. The prospect of a Grexit (remember, it’s rational for Greek depositors to prepare for the worst) means an acceleration of the ongoing bank run. The imposition of capital controls would further fray nerves domestically, given that polls show majority opposition to leaving the Eurozone. Ongoing cash hoarding plus uncertainty will further weaken the already very sick Greek economy. That will hit tax receipts. If Greece has to resort to issuing TANs or other government scrip to pay workers and pensioners, that will likely further damage confidence. Thus Greece will remain in the Troika’s sweatbox.
Thus even with its intention of remaining in the Eurozone, Syriza may be forced to contemplated a Grexit as it struggles to finance its budget after its primary surplus has vanished. Of course, that assumes that the government remains popular after it imposes capital controls and starts issuing funny money. But if it does, a Grexit is not impossible, since the creditors’ continued unwillingness to fund a defiant Greece will make it harder and harder for the government to meet commitments that it has defined as red lines, such as paying pensions and spending on humanitarian relief.
Thus even if a Grexit is probably not an immediate result of a Greek default, that does not necessarily mean that Greece remains in the Eurozone. Even though the costs of an exit are extremely high, the costs of staying in are set to increase.
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When it comes to denial of reality all this reminds me of the Monty Python dead parrot sketch.
I very much agree overall that Greece repudiating fraudulent debt in no way forces it to exit the EU or even EMU.
But I’m fascinated by this little aside:
The general public using fewer banking services obviously hurts banks. But what is the link to the broader economy? This notion that the banks are interchangeable with the economy is at the heart of our western sickness I’d say.
If we are really not comfortable letting banks fail (or reducing their present interconnectedness to a scale where we are comfortable letting them fail), then we have already destroyed capitalism and representative democracy. The Western world is one big fascist state in everything but name.
Cash hoarding means lower spending. The greater economy doesn’t benefit from lower spending, quite the opposite and lower spending makes it that much harder to save, which tends to make people feel less secure, spending even less…a downward spiral.
This is a separate issue from allowing banks to fail.
Steve Keen has wonderfully simple illustration:
http://www.forbes.com/sites/stevekeen/2015/01/14/beware-of-politicians-bearing-household-analogies-3/3/
See figure 5.
I suspect in this case one could add another box called private saving that also comes out of private non-banks.
And wonderfully irrelevant. The government runs a deficit to fight the drug war. And the drug war makes us poorer, not richer.
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That figure 4 is a kicker. The crisis of 2007-2008, first of all, was not a crisis of 2007-2008. It is a long-term trend. In the US context, LTCM was bailed out a decade prior to Bear Stearns. In the Greek context, liabilities were building up in, shall we say, creatively engineered financial innovation, for years prior to the 2010 bailout. Greece is an example of a country that goes to great extremes to not try collecting too much in taxes.
Second of all, this is built on the growth paradigm. I don’t see what relevance that has for those of us that are critiquing the concept of quantitative growth. The kind of growth I want is growth of freedom, of justice, of free time, of Constitutional rights, of human dignity, of embrace of diversity and pluralism. Not GDP and McMansions and SUVs and worked hours in the formal economy and so forth.
But moreover, even if we’re focusing specifically on the artificially short time span of the 2007-2009 recession, and we’re narrowly constrained within the build moar paradigm, the proper soundbite description is that criminal activity caused the GFC.
To miss that fundamental point, that this is a story of fraud, not deleveraging, is to miss what has been happening in political economy in our era. The issue that confronts us is the dangerously excessive concentration of wealth and power. We have plenty of resources in aggregate to go around.
LTCM was not bailed out. The banks got together and funded a windown. LTCM was liquidated.
I’m really intrigued by that response. The Committee to Save the World is a running joke. The government was obviously involved.
And more broadly, the very act of over a dozen powerful institutions (institutions backed by the government) working together is public policy supported subversion of markets. That’s anti-competitive behavior, particularly collusion. This was a long run (and continuing) conspiracy to defraud the public. LTCM, I’d say, was one of many events in the 1990s and 2000s that fundamentally changed how our system works.
As far as colloquial usage of the word bailout, who doesn’t call it a bailout? Everybody from ZeroHedge to Barry Ritholtz uses the term bailout. Ritholtz titled his book Bailout Nation.
http://www.ritholtz.com/blog/2008/12/bad-precedent-the-long-term-capital-bailout/
LTCM wasn’t bailed out in the sense that it continued as a going concern. The principal creditors, via a plan created by the New York Fed, bailed themselves out by ponying up enough money to take over LTCM and perform a two-year liquidation instead of the crash liquidation they were facing. As a side note, several LTCM alumni (led by Meriwether) then went out and formed JWM Partners, which was a major hedge fund player in the mortgage scam until it too cratered in 2009.
P.S., in a world of excessive concentration of wealth and power, contraction of the private sector is exactly what you want. That’s what progressive income taxation and elimination of wasteful spending does. It zaps those excess currency units and institutionalized oppression that are causing such unsustainable social tension and environmental devastation.
Which of course is why high income people who are dependent upon public support are so desperate to paint their personal gain as some kind of grand investment in the public commons while vigorously defending their pet tax breaks.
If that’s what Yves meant, then yeah, I definitely misread her point there. I thought the argument was that pulling cash out of banks causes bank failures (since there’s a time mismatch between bank assets and liabilities). This is the larger context of that sentence:
I agree spending is a separate issue from bank runs and capital controls. However, I would most definitely dissent from the notion that lower spending matters. Greece can’t pay its external creditors by collecting a marginally higher amount of VAT.
i question what’s really left in Greek banks. Isn’t it mostly government funds, corporate receivables, and state enterprises? The 3 month bank run of 2015 in Greece has pushed most ordinary Greeks to other euro zone banks ( or American and British).
“Continue to issue Euros” rather than “issue drachmas” is an interesting alternative. At some point, Tsipris may be able to turn to the Greek people and convince them that dealing with the Europeans is impossible.
No, we never suggested printing more Euros from the local Greek printing press than allowed. Not clear how that would help Greece and would tempt the ECB to cut off the ELA and throw Greece out.
We mean issuing “scrip” like Greek government IOUs, such as Rob Parentau’s TANs.
But GEorge is right isn’t he? What’s to stop Greece CB from printing Euros itself post default. It’s all electTonic now. Now printing press required. Legal mandate and chartered euro member in place.
Greece, as in the Greek government, does not have a central bank. Greece has what amounts to a branch of the ECB in Greece. No way is the ECB going to credit Greek accounts.
Any time a new country is created/happens the older currency is dissolved via an exchange mechanism. The same thing could happen in the Greece instance of devolving out of EMU with a New Drachma equivalent to One Euro. Strict barter rules would apply in external trade supplemented by very strict controls to avoid crooked seepage. Tourism and external trade will bring in foreign currency. So, the trepidation at “Grexit,” seems unwarranted.
The new currency would be the “coin of the realm” just as in the U.S., with all the transactions taking place in the new currency. Slowly, probably with 6 months or so, the new currency would establish its legitimacy, especially if strict transactional control is imposed.
Any new environment demands drastic new rules and concomitant dislocations. The question is: what are the losses versus what are the gains. The current situation is untenable: precious energy of the new administration is being wasted instead of being directed toward creative solutions to new taxation and evasion of tax and social responsibility. Locally sourced capital in the new currency can then be directed toward better ends than the constant melodrama of interactions with the ECB and the troika.
The Greek government absolutely does not want to leave the Euro. The EU does not provide for member states being thrown out and the Eurozone is repeatedly described as “irrevocable.”
The only mechanism for a formal exit is only vaguely described in the Lisbon treaty, for a member state to ask to leave. If the negotiations on how to leave are not completed by the end of two years, the departure becomes effective anyhow.
However, as we described, the ECB could force a de-facto exit by cutting off the banking system support it provides through the ELA. Greece would have to implement capital controls immediately, nationalize the banks, and print drachma to recapitalize them.
And there is no way one drachma will be worth one Euro. The value of a new Greek currency will be fall immediately below the Euro-equivalent level.
Replacing a currency under duress is a lot harder than that. Unless you run a current account surplus, (i.e. your exports exceed your imports), you will need foreign currency, which will now be much more expensive. For example, while tourism and trade may bring in foreign exchange, how many drachmas will a liter of (imported) gasoline cost?
When you create a new currency, you must decide between two unpalatable choices: keep the new currency value approximately the same as the old one, which preserves the value of people’s life savings, but makes your entire economy uncompetitive vis-a-vis your trade partners (IOW, choosing to retain the value of past earnings at the expense of future earnings). Or you depreciate the new currency, thereby destroying past savings, but giving your citizens a fighting chance of gaining jobs and future earnings. Neither one of these is a great option. Not to mention, that choice will ultimately be decided by the markets.
(NB: the only country I’m aware of that chose the former was East Germany, which was re-united with West Germany at an inflated exchange rate to preserve East German’s savings. But it was only successful due to the massive subsidies that flowed from West Germany to keep the East German economy from collapsing as a result).
FWIW, I’m in favor of Greece defaulting and leaving the EU if they have to (there is enough bad blood that if Greece defaults, I think the EU will find a way to kick them out out of pure spite, even if it doesn’t make rational sense to do so). But the costs to its population will be huge (although, IMHO, less than continuing under the Troika’s mandates).
THAT, by the way, has been the Eurozone strategy hand in hand with the Quisling Greek opposition, since Oct-Nov 2014. The old government refused to implement the Troika’s late 2014 demands on the grounds that it would be political suicide. Together they hatched the plan for SYRIZA to inherit the poisoned chalice, including scheduling the first EWG meeting 10 days after the election. SYRIZA was leading in the polls and would clearly win. Thus elections were pulled forward 3 months, SYRIZA won & the rest is history. Eurogroup & Greek opposition give SYRIZA 6 months i.e. to June. The idea is that SYRIZA will capitulate = end of SYRIZA, resumption of old coalition government on the SYRIZA agreed Troika terms; or SYRIZA will default = end of SYRIZA, since (supposedly) Greeks love the euro so much.
So the last 3 months theatre have been on the cards from the beginning and Eurogroup / ECB / IMF only had to play their assigned roles, in concert with the collaborative press.
Just saying.
Given that the world’s economies are going to have to self-transform anyway, to cope with the threat of abrupt climate change, perhaps it’s in the best interests of the Greeks to do so right away. The big question, then, is one of whether or not they know how to do it right. As I’ve suggested here many times before, more capitalism is a bad idea. The last thing we want in this coming abrupt climate change future is a bunch of Walton families owning as much as the bottom 42% of the American public. I presume that such a prescription is true of the Greeks as well.
“A critical issue to keep in mind is that a default does not bring Greece relief.”
Neither does the alternative. I feel sure the Troika will never permit a Greek default, meaning they will get their bailout money regardless (though probably under some sort of fig leaf face-saving arrangement). However, the bailout isn’t a solution either. The only solution I see is something truly radical, such as large-scale nationalization of just about every bank and large business enterprise and abrupt switch to a socialist type of government, oriented toward production and distribution of resources rather than finance. Whether Syriza will be bold enough to take such steps is another story. They may have no choice.
If Greece stays in the Troika sweatbox AND Syriza keeps its high level of public support, the Troika will not drive that decision. See Lagarde’s remarks in today’s Financial Times, where she refused to give Greece any grace period on loan repayment (notice that this is a big departure from what the normally very plugged in Ambrose Evans-Pritchard thought would happen, that Greece might get cut some slack). She stressed that Greece had to get with the program and define and implement structural reforms. That is anathema to the current government.
The unspoken Troika assumption seems to be that either Greece will fall into line or the pain of Syriza’s defiance will rise, government support will fall, Syriza will be out, and a new government will cooperate with the foreign creditors. But if Syriza keeps its support and it becomes clear that all the creditors want to do is crush Greece to bring it to heel, both the public and the government may conclude a Grexit is preferable. I still don’t see the odds as high, but even 25% odds is much higher than the Eurocrats are likely assigning to this outcome.
And, if that 25% bet pans out, then we imagine a Greece outside the eurozone. With all the pain of it. But surely the Greeks have also considered that now the EU has incentive to see it fail on another level. Greece can’t be seen as a having a big success outside the eurozone. And as a debt defaulter, Europe will still have the knives out. This is why the current top of Syriza is likely very cognizant that the sort of “soft” exit proposed by Syriza’s left wing (for instance, by Costas Lapavitsas) is much to sunny and optimistic. He imagines the EU will cut ties with Greece and then Greece can go on its merry way. He should instead think about Venezuela and Cuba.
Dan Allen: Greece can’t be seen as a having a big success outside the eurozone. And as a debt defaulter, Europe will still have the knives out.
What knives do they have? Europe & what army? What can they do to Greece that is worse than the austerity perpetrated on Greece & the rest of Europe with the connivance of intellectually colonized Greeks and Europeans enforcing their own oppression? Nothing. (Varoufakis is equivocal and confused on this point, sometimes saying austerity is worse than an “austere existence”, outside the Euro, sometimes not).
In general, the claims of Grexit catastrophe are more appropriate to a nation being invaded, under UN sanctions or at least like the USA vs Cuba – none of which are realistic comparisons. They overstate the problems, sometimes evincing what FDR called “basic economic errors” – like assuming a permanent skyrocketing cost of necessary imports. (There is no reason to expect substantial, longterm changes, measured correctly – Greece basically barters for that stuff now, and would post-Grexit.) Even worse the aim and source of the benefits of monetary sovereignty are usually completely ignored. Such analyses, like Varoufakis unsound rebuttal of Weisbrot, are like terrifying people about the risks of cancer surgery – without mentioning the aim and source of its enormous benefit: No cancer! No austerity! (Default without Austerityexit= Grexit is like cancer surgery – but timidly leaving half of the cancer in.)
Many – Varoufakis seemingly, commenters here – get basics wrong, showing that they may still be thinking sometimes in the incorrect and highly distorting terms of “commodity money” & (unnatural) fixed (rigid) exchange rates, not natural = floating rates = “currency war”: E.g. (Substantial) currency depreciation is NOT an aim (or necessary consequence) of monetary sovereignty or an economic benefit, as YV et al seem to think. No – strong currency is always a good thing – obviously. FDR called the source of this bad thinking – fixation on exchange rates & the foreign sector rather than tending ones own garden – “a fetish”, Lerner “a cult”, Eisner “an obsession”. Keynes commented that governments’ foreign exchange policies are almost always to the exact reverse of the national interest. And this fetish cult obsession seems to be the basic problem here and now. The pessimists’ main catastrophe claims are not based on what the EU would do – “the knives” – but on supposed natural/automatic consequences that must happen upon Grexit. And these are based on fanciful exaggeration and unsound economics.
This is why the current top of Syriza is likely very cognizant that the sort of “soft” exit proposed by Syriza’s left wing (for instance, by Costas Lapavitsas) is much to sunny and optimistic.
If anything not optimistic enough. IMHO Mark Weisbrot has the most realistic, soundest and most optimistic analysis. Warren Mosler defends Weisbrot too.
He imagines the EU will cut ties with Greece and then Greece can go on its merry way. He should instead think about Venezuela and Cuba.
? Venezuela was quite successful under Chavez. The main problem under Maduro has been the idiocy of multiple exchange rates (illustrating Keynes’ observation) – thus empowering the regime’s enemies and making it more vulnerable to the recent oil price drop. Even the enmity of the US superpower has not been enough to subvert Cuba, which has had real successes of its own. Greece’s situation is more comparable to Argentina’s except that as Mark Weisbrot maintains, the differences are in Greece’s favor.
Sure, life can stink. But there is no law of nature or reason that pessimists must always be right. The arguments of Grexit economic optimists – Lapavitsas, Flassbeck, Weisbrot, Mosler etc are based on doing their homework – better, more thoroughly and soundly – than the pessimists, and should not be dismissed out of hand.
Certainly agree about Lapvitsas…who by the way can’t seem to get over not being appointed Finmin.
25%? Why so low? It would seem to be the logical outcome of existing trends. And the fact that the elites of Europe are trying to squeeze blood out of a stone like Greece is clear evidence of how desperate they are.
I suggest that you bone up on what a Grexit entails. The cost of critical imports like fuel and pharmaceuticals spikes. Medicines becoming even more expensive means people die. People become poorer immediately in real terms as their Euros in bank accounts (if they are dumb enough to still have any in banks, but businesses have no choice regarding keeping bank balances) are forcibly converted to drachma. The economy becomes even more of a mess as businesses and the governments struggle to rework contracts written in Euros. And only the Greek law contracts can be redone; foreign law contracts can’t be revised.
A Grexit pretty much assures an EU exit. That means Greece now becomes less desirable as a trade partner to the rest of Europe due to having a volatile currency plus border controls. And depreciating its currency won’t buy it much in the way of export gains. Greece has already lowered wage costs by 15%, yet not gotten a commensurate pickup in trade. That suggests that its export mix is not competitive and/or production cannot be increased much.
Oh, and Greece also loses valuable EU subsidies, the most important being agricultural subsidies. And Greek citizens can sue the government for the loss of their status as EU citizens. You can bet Pasok members will launch lawsuits like that.
I could go on. This list only scratches the surface.
I don’t really understand why all of the attitude about how things will get worse for Greeks. I understand all that. You yourself said:
“the ECB could force a de-facto exit by cutting off the banking system support it provides through the ELA. Greece would have to implement capital controls immediately, nationalize the banks, and print drachma to recapitalize them.”
So how precisely would that be the fault of the Greek government?
It is not “attitude”. I am telling you what will happen and you are the one who cops a ‘tude back. And go read Yanis Varoufakis. He rejects a Grexit as an economic disaster for Greece, far worse even than suffering with continued austerity.
In addition, pray tell me where I blame the Greek government. The post very clearly states that the immediate choice of whether there is a Grexit or not is in the hands of the ECB, given that the Greek government does not want a Grexit. Moreover, you’ve consistently charged me with being opposed to the Greek government, which is not my position. You’ve now had to misrepresent what I said to maintain this posture.
You may have me confused with someone else. As far as I know, I haven’t charged you with anything, much less being opposed to the Greek government. Your arguments are fine. All I argued was that it seemed to me more likely than 25% that the EU wanted to force a Grexit, given their desperate tenor so far.
Grexit does not mean leaving the EU. Nor NATO, as some have suggested.
LOL. At the beginning of her report it sounded to me like she said, “Athens and its predators”, instead of “Athen’s and its creditors”.
It stands to reason that governments do not borrow money using entitlement payments as collateral. Or if they do, it’s the bank’s fault. Governments use export surpluses. No? So what the Greeks are asking makes good sense. Do not charge social operations, social services, etc. with paying back the debt incurred by the big exporters. That’s the equivalent of socializing losses. If export-import finance has gone global but has shunned social finance, it should be prevented from asking social systems to pay for private corporations export shortfalls and defaults on global financiers big loans. There should be a two-tiered money system if everybody wants to go global. And it appears everybody does. I can tell you however, that the local daycare center does not want to go global.
susan the other, Bravo.
Britain showed the way to run a country when you are bankrupt. We had to do it when we fought democratic France after the revolution and very quickly ran out of specie.
What Pitt did was to separate the domestic economy from the international one, using the Bank of England as the gatekeeper. For international accounts he trawled the world (mainly India, China and South America) for gold and silver whilst for the people at home he created a paper currency.
That was the eye-popping moment when British politicians realised that people did not mind being deprived of value for exchange, they actually preferred paper because it was lighter. Maybe that will be an example for Greece to bear in mind.
I’ll ask again….because it seems to be even more relevant now. Does anyone really believe the notion that there will be no contagion if Greece defaults and/or leaves euro? Seems an incredibly risky gamble to make. The same kind of cock sure thinking got us into Lehmann….didn’t it?
If this is an economic war then Syriza never had a chance. How can they win such a battle when they have no ammunition? Perhaps it is time to change the actual dynamic of the war. If things are so dire for the Greek people and if the country is desperately fighting for its sovereignty and survival as a functioning society, then shouldn’t the government’s approach be to win at all cost? NATO countries, like Greece, send troops around the world to risk their lives. Yet it’s unthinkable for anyone in Greece to risk their lives – or take other lives – to actually protect the country? I assume Greece has a secret service. How about using it to deal with these anti-Greece politicians and financiers? Doesn’t Greece have a right to defend itself? What would happen if one or two EU politicians were suddenly assassinated? Might Brussels not get the message as to how serious Syriza is?
What we have is death by a thousand cuts. With Syriza pandering to the democratic mandate philosophy, conveniently limiting what they can do. Is this all just some kind of game? Remarkable world where whole societies can be destroyed while not even fighting back. According to the rules, people aren’t even allowed to suggest violent opposition. It’s simply an invitation to destroy more societies. I thought the animals revolt on Orwell’s Animal Farm. I didn’t know their was a neo-liberal version of the same book.