Should Greece Follow Argentina’s Playbook?

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Some readers and commentators have argued that the EU should not have bailed out Greece, but instead should have restructured its debt. The logic is that Greece is a goner; there is no way it can meet its existing obligations, and a bailout serves to throw good money after bad. Better to engage in triage and save resources for countries that have more realistic prospects. In addition, the Greek population might be more likely to accept austerity measures if it saw banks sharing the pain. (Yes, we have that wee problem that Greece still has a fiscal deficit and does not control its currency, but we don’t see the current “solution” as much more than kicking the can down the road).

But a related argument that hasn’t gotten the play it deserves is that a restructuring now could also be better for Greece. And we proudly report that a Naked Capitalism reader beat the Financial Times to the punch. Scraping_by noted last week:

Ah, dear Greece.

I think the fate of the cradle of Western Civ will follow one of two Latin American paths. The first was Ecuador, which can be read in Greg Palast’s The Best Democracy Money Can Buy. When, in the early 1980’s, the IMF forced the Ecuadorean government to take over the debts of its busted elites, it left them in a billion-dollar hole that just grew deeper. This required IMF directed capital liberalization, which meant every peso in the country disappeared in hours, leaving the Ecuador government unable to pay the debt bomb. The IMF responded by pushing the majority of the citizens into poverty with its demands for austerity, until peaceful protesters filled the streets. The police shot the protesters down and claimed anarchists were rioting, justifying draconian police state measures. What was left was a government run by the IMF, with free trade and other slogans in place of economic policy.

On the other hand, Argentina told the IMF to go pound sand. While the Argentines couldn’t force the discounts they got on the private debt, they got them out of governing their country. They’ve been recovering steadily ever since.

So, our Greek friends can tell the ECB and their front group the EU to piss off, or they can hand them the keys to their country. I hope for their sake, they choose wisely.

Today in the Financial Times we see similar messages in “Does Argentina have lessons for Greece on exiting a crisis?” While the piece argues that Argentina has been exaggerating its degree of success, the FT might have neglected to ask what the benchmark was. Stacked up against a properly-selected peer group, Argentina’s still rocky path back might indeed not look so bad.

One myth that creditors like to hold over borrowers is that if you default or negotiate a haircut, you will become a pariah and no one will lend to you on reasonable terms again. But the Chapter 11 process belies that. A deeply indebted borrower is risky; one that has lowered its burden and has a much cleaner balance sheet is a vastly more attractive proposition, provided the lender has reason to believe it has changed its ways.

From the Financial Times:

Argentina defaulted on nearly $100bn in 2001 and has since played hardball with creditors. In 2005, it offered them what was billed as a one-off swap that was worth just a third of their investment. Three-quarters accepted. Now it is now offering a similar deal with the warning that this time, it really, truly, is now or never. The assumption in the government is that 60 per cent acceptance, plus the 75 per cent in 2005, will neutralise any future litigation by showing Argentina’s good faith and will thus discourage judges from ordering the seizure of any bonds or money to pay holders of defaulted debt. This has been the stumbling block to Argentina issuing global debt since the default.

Argentina is widely expected now to ditch its plan to raise $1bn in parallel to the swap, for fear of looking desperate, since it is unlikely to secure the single-digit rate it has said is essential. But it will nevertheless be seeking to paint the swap and Argentina’s economic management as a huge success. As Greece struggles to exit its crisis and Portugal and Spain wobble, Cristina Fernández, Argentina’s president, has been predicting the failure of IMF rescues and grandstanding about her heterodox policy successes.

Argentina has plenty of red lights – including a weakening fiscal situation and accelerating inflation – but it is flush with dollars which should help avert another of the crises Argentines experience so regularly and almost seem to expect.

Yves here. The FT article includes quotes which caution against following Argentina’s lead. But Greece is faced with poor choices, so it is fair to ask which one is likely to be least bad.

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  1. attempter

    We know it’s a lie when lenders claim you’ll become a pariah if you default. That’s exaggerated even in the case of individuals (for example, the credit score hit one takes for strategically defaulting, while severe, is unlikely to be anywhere near as bad as the pro-bank MSM doomsayers claim), and Argentina finally proved it false where it comes to whole countries.

    But that’s really beside the point. Globalized exponential debt itself is an unsustainable Tower of Babel. The whole system must crash and simplify, and economies will again become far less integrated and centralized.

    Since a place like Greece will have to relocalize anyway, the sane thing to do is start now by defaulting rather than trying to zombify their credit standing, which is a vain goal anyway, in order to enable the Bailout of the German banks, by letting themselves be crucified on “austerity” and odious debt.

    Any level of submission to the Bailout is triply bad because it

    1. further empowers the finance racket tyranny,

    2. at the direct price of your own accelerated impoverishment,

    3. and in the meantime you’re both distracted from taking the necessary transition measures, and the wealth which could have enabled such measures is instead destroyed in the Bailout. The opportunity cost here is horrific. (Obama’s health racketeering bill, committing massive wealth to a worthless and destructive bailout of the insurance rackets instead of much less wealth to a truly constructive single payer system which, while ultimately unsustainable as well, could still have helped tremendously in easing the pain of the system’s decomplexification, is a perfect example of this kind of crime.)

    Sanity and morality demand the same thing they’ve demanded since September 2008: Dump the debt, dump the finance sector, and use the real wealth that’s left to reconfigure society along the economically simplified lines which Peak Oil will enforce anyway.

    There will be hardship regardless, but the difference in how much there has to be differs by perhaps orders of magnitude. But by taking the path of the Bailout, so far everyone has chosen the most painful path possible for themselves.

    Will Greece choose maximum pain as well? In article after article the NYT keeps claiming as fact, in almost verbatim words, that most Greeks are resigned to their own serfdom, and that the protestors are just the same terminal malcontents who are always protesting something. So by the hopeful “reportage” of one of its main propaganda shill rags, we can see what Wall Street hopes is true.

    And that in turn should be dispositive proof of where the people’s interest really lies.

    1. Reggie Middleton

      There is practically no way Greece will be able to repay its debts, with or without austerity measures, the implementation of whuch (if implemented with any force, may bring about recession or depression).

      Increase in government debt ratio (Government debt as % of GDP) is unsustainable

      * Increases in government debt ratios stem primarily from the “snowball effect” and the primary deficit. The snowball effect is the self-reinforcing effect of debt accumulation arising from the spread between the interest rate paid on public debt and the nominal growth rate of the national economy. If the average interest rate paid on existing public debt is higher than the nominal GDP growth rate, it will result in increase in government debt ratio (Government debt as % of GDP).
      * PIIGS are recording huge primary deficits, i.e, government expenditures (excluding interest expenditure) exceeding government revenues, which are leading to additional borrowing that then adds to the government debt levels – wash, rinse, repeat… This coupled with the snowball effect, which itself increased substantially due to negative nominal GDP growth and rising interest rates, has been contributing substantially to the increase in the government debt ratios of these countries. In the case of Greece, this effect has been extremely large owing to very high government debt, rising borrowing cost and the shrinking economy.

      See this live model which has the Greek debt haircut at about 40% if things move along the current pace. It is more likely a restructuring will take place that will extend maturities in combination with cutting principal, which may dull some of the pain. See the model here:
      I will be posting info on the restructuring prospects later on today.

    2. DownSouth

      I think it’s important to remember that the Greek rank and file are the victims of a partnership, a partnership between wealthy Greek financial elites and the international criminal banking cartel.

      There will be no default or restructuring in Greece until there is a political change in Greece, such as there was in Argentina. In Argentina, the people finally got enough the Libertarian-Austrian-Neoliberal cabal. Argentine president De La Rua and his finance minister, Domingo Cavallo, were forced to flee for their lives, escaping in a helicopter in the wee hours of December 20, 2001.

      1. Gary Anderson

        Greece needs to keep strong public unions, as they seem to be the only ones who protest for the common man. Even if they show excess, it is nothing compared to the excess of the international banksters. Keep voting out the politicians that raise taxes and subject Greeks to austerity. Just as Tim Geithner betrayed the citizens of the United States, the Greek leaders should be headed for the doors when the double dip comes. And it is coming.

  2. Kevin de Bruxelles

    One problem people have in analysing this problem is that they put Greece in the category of “poor” and then throw sympathy on them and refuse to call out dysfunctional behaviour. Out of 180 countries, Greece is the 24th richest. That puts them in the top quintile internationally. So if were are going to make analogies to society, instead of looking at Greece as a abused peasant country, it is more appropriate to instead look at them as a declining wealthy aristocrat. It is from this point of view that any wargaming of their position should be taken.

    The second point to ask is whether indeed the current economic paradigm in Greece is sustainable? In other words are they doing things the right way but the evil international community is coming down unfairly on them? Or is Greece a dysfunctional mess, low-to-no tax collection, extravagant military spending, over reliance on public sector, that needs reforming?

    What is actually happening is that the EMU has basically had an intervention with Greece and is placing them in economic rehab. Greece SHOULD collect more taxes. Greece SHOULD reduce military spending. Greece SHOULD bring its retirement benefits more in line with the rest of Europe.

    Now Greece always has to option to leave its aristocratic order and try to tough it out by taking its place among the poorer countries. They can default on everything, leave the euro, and they will still have an eight percent budget deficit. Good luck with that one – it’s kind of tough out in the real world for soft former-aristocratic countries.

    What will probably happen instead though is that the EU will hold leverage over Greece to get them back on a path of sustainable aristocratic existence. Yes it might be a little rough but no where near as rough as the countries in the lower quintiles have it. Right now the the ECB is also buying up lots of Greek debt from foreign holders in order to execute a controlled debt restructuring in six months to a year time – the timing will depend on when the euro starts climbing again and therefore the need to smash it back down.

    And the demonstrations taking place in Greece are a healthy sign that within the class structure of Greece the low quintiles of the population will put pressure on their top quintile to share the pain. But this just points out that paradoxically there is no connection between a countries class structure and the international class structure. While many poor within a country will ask to redistribute wealth their way; this class solidarity ends at the border. You don’t get many poorer people in the rich Western countries advocating anything more than symbolic wealth transfers to the poorer countries of the world. Strangely enough poor people in wealthy countries want to keep their nation’s wealthy status. In the end it will be this dynamic that keeps Greece in the EMU.

    1. john haskell

      The Greeks can either bring back the drachma (immediate drop of 50% in dollar denominated per capita income) or effect the IMF-directed 30% “internal devauation.” In either case Greece drops dramatically from its current position as a relatively wealthy country.

      Greece’s position at #24 is nonsense, which is why they are running such an enormous fiscal and current deficit.

      1. Kevin de Bruxelles

        I agree that Greece is heading down that table but the question now is how far. Their main problems right now are that they consume too many imported goods and their labour costs are too high – more than 40% of the gross wages are social security taxes. One idea would be to reduce the social security taxes and to raise instead VAT taxes. This would reduce gross labour costs, help curb excess consumption, all while keeping Greece in the eurozone. They can combine this with raising the retirement age, cuts in benefits, cuts in military spending, and collecting more income taxes and pretty quickly they can come up with say a 25% cut in wages along with a sustainable pension plan.

        If they are lucky the may come out of this in the top 35 or so. Leaving the euro would probably get them down to the 50 spot or so.

        1. pebird

          Don’t confuse high labor costs with high wage income. Labor costs are high because it is taxed at high rates – property forms of income are taxed at lower rates, and also have poor compliance in Greece.

          Note that labor in Greece works more hours than Germany (so they can pay their tax burden) – which is most likely due to productivity – there won’t be significant capital investment in Greece for a while.

    2. DanAllen

      “What is actually happening is that the EMU has basically had an intervention with Greece and is placing them in economic rehab. Greece SHOULD collect more taxes. Greece SHOULD reduce military spending. Greece SHOULD bring its retirement benefits more in line with the rest of Europe.”

      The tax evasion story is questionable. Someone in Greece is paying high taxes. I see revenues at 45% of GDP. 108 billion in revenues, or $12.7k per capita, as compared to say 8.6k in the USA. Tax evasion is a measure of the taxes not paid which should have been, and with variable tax rates from country to country, the measure really is an apple to oranges comparison. I would pay more attention to both tax revenue per capita and gov’t expenditure per capita.

      As for a reduction in military spending, is Europe really telling Greece that? There are articles on a quid pro quo for the bailout that had Greece INCREASING armament buys from Germany and France.

      Greece’s average retirement age is 62, according to Eurostat, so despite hair dressers retiring early and other anecdotal outliers, the country retires at the same clip as other eurozone nations. The pensions are high at an average of 90% to income, but then again, the average income is 780 euros a month. If you clip it to a euro average of 50% of last salaries, you are in catfood city.

      1. K Ackermann

        I’ve read some of the same things you mention.

        Even right here, Yves posted household debt of Germany vs. Greece. It was very interesting.

        We all have our biases. Mine is redheads.

        1. Dan Allen

          There is that famous quote: there are lies, damn lies, and statistics.

          Me, I read Reuters, and though they are the establishment’s mouthpiece, they employ people who are sticklers for facts, and you’ll never read about hairdresser retirements or swimming pools in backyards when the big picture still needs description.

          I’ve gotten so frustrated with news coverage that I’ve taken to reading Eurostat reports. It’s pathetic.

          The main problem the Greeks have gotten themselves into is corruption at the elite levels, and this has put such a shroud on their situation, that they are having a public relations nightmare.

      2. kevin de bruxelles


        I very much appreciate your fact-based approach.

        On the Greek pension scheme it is really hard to compare Greece to other European countries since the Greeks follow the Latin social model which basically concentrates social welfare into pension plans. In any case what I read is that the value of pensions in Greece have risen 30% since they joined the eurozone. I’m all for pushing the limits but they may have overshot a bit here if this number is true.

        On military spending Reuters says that the military budget was 14 billion in 2009 but in 2010 it is limited to 6.7 billion. Military hardware only makes up 20% of the budget so it is possible that both the stories of France insisting the Greek respect the existing orders and the budget is being cut are true These numbers do seem a little too good to be true but I have to believe that military spending is being cut but perhaps not at the rate claimed.

        On taxes your approach (tax revenue per capita) of is certainly correct. But we are hearing anecdotal stories like the fact that only 300 swimming pools were declared for tax purposes but then some clever Greek functionary looked on Google Earth and found 16,000. I think the least we can say is that the rich are getting away with a lot of tax evasion and cleaning this up would reduce the tax burden on the masses and allow the cost of labour to fall (assuming social security taxes could be replaced by collecting other taxes).

        1. Dan Allen

          Kevin, Greece needs a lot of cleanup, especially in the corruption department. Also, given the nature of small business in Greece, the ubiquity of mom-and-pop shops, running from the VAT, and the tax exemption of the biggest sector–shipping–there’s a lot of work to be done. The Greeks themselves reported hardly anyone reporting tax salaries of over 100k. I don’t know if this is pure tax evasion (though it certainly is among a professional class of private doctors and lawyers) or it could be that income arrives in forms other than salary (for tax benefits) and that Greece does collect tax from the rich in some fashion.

          You are absolutely correct however that it is not collecting appropriate property tax.

          I looked at the stats because I simply could not trust the racialization of the Greek people as tax cheats, lazy, high on the hog pensioners, and I think the stats bear out that they are not like this. Sadly, the story about corruption, patronage, dysfunction–that seems much closer to the truth about this country that I have visited about 4 times in 20 years.

          I’m not certain what will happen with the Greek military procurements, but hidden in that 4.8% GDP budget is an additional 2.3% GDP for service/technicians/parts. Not a pretty picture. Actually, the deals that Germany and France insisted on are new deals. But this is also a problem with Europe, since the banks were lending based on pay-to-play. There is corporate welfare in Europe. French and German banks lend, Germany and France get the contracts, Greece gets a sub or an airport. Everyone is happy, especially the Greek politicians pocketing tens of millions in the exchange.

  3. anon

    I think Greece should follow Jamie Dimon’s advice to new graduates in his recent commencement speech at Syracuse:

    “Students need to have the courage to speak the truth, “even when it’s unpopular,” said Dimon, 54. He told graduates to “do the right thing, not the easy thing” and not to become someone else’s “lapdog or sycophant.”

    “Have the courage to put yourself on the line, strive for something meaningful, even to risk what would be an embarrassing failure,” Dimon said at the university’s Carrier Dome football stadium. “Throughout my life, throughout this crisis in the past three years, I’ve seen many people embarrass themselves by failing to stand up, being mealy mouthed and acting like lemmings by simply going along with the pack.”’

    Why should Greece be any financial or political institution’s “lapdog or sycophant” either?

    P.S., No doubt Dimon believes the same sentiment applies to people who default, strategically or less so, on the liar’s loans his bank holds….

      1. anon

        “Has he made it to the top following his own advice? Just curious.”

        I’d wager he thinks he did. And, who would question the self-assessment (or any of the motives) of anyone who has achieved such manifest success?

  4. Fu

    On the other hand, Argentina told the IMF to go pound sand. While the Argentines couldn’t force the discounts they got on the private debt, they got them out of governing their country. They’ve been recovering steadily ever since.

    That seems like a ridiculous statement to me. Argentina collapsed! By October 2002, 57.5% of Argentinians were living in poverty. No wonder it recovered.

    1. Yves Smith Post author


      I have no doubt that what story you get depends on who you listen to. But the comparison made is with Ecuador, which DID follow the IMF line, and is still a basket case.

      The IMF appears to have enacted as an enabler of some bad policies, most important lending billions to to Argentina over a ten year period to allow it to maintain a dollar peg. The IMF pulled the plug in late 2001. The Argentinian government started implementing its “heterodox” policies in 2003.

      In general, the aftermath of ANY big financial crisis is a permanent fall in the standard of living. So the relevant metric is how well Argentina has done compared to other post crisis countries. I’m curious to get reader input here. Merely pointing out that Argentina suffered is inconclusive. So did Indonesia, even more so, when it did follow the IMF regime. I’m not saying those two data points (Ecuador and Indonesia) are conclusive, merely that cases like that are the relevant benchmark.

        1. DownSouth

          To cast Argentina in the same light as Venezuela demonstrates a rather limited knowledge of Latin American affairs.

          Such a rhetorical strategy does not surprise me, however, as anyone who doesn’t fall in lockstep with the Libertarian-Austrian-Neoliberal party line is immediately branded as socialist, Marxist or worse.

      1. rent_is_cheap

        ‘I have no doubt that what story you get depends on who you listen to.’

        Only the Argentinians I know, myself – none of whom want to go back to Argentina, by the way, an attitude which is particularly obvious after they return from visiting family. Which could just be an indication of how well Argentina’s society has recovered.

        Personally, you would have had a much better example, in many ways, by using Malaysia’s behavior during the Asian debt crisis – though of course, Malaysia didn’t default. Which may make another point – maintaining an economy is not merely a matter of blowing off debt when it becomes too burdensome, but actually not going too deeply into debt to start with.

    2. john haskell

      Russia is a much better example. The economy began growing within months of expulsion of IMF flunkeys. Before that (1991-1998) the economy contracted every year.

      1. Eric

        Having lived in Czechoslovakia (and then the Czech Republic after the divorce) in the first half of the 1990s, I wouldn’t take it too much to heart that the “economy” shrank every year. At least in Czechoslovakia a lot of the shrinkage was the surprisingly slow recognition that many communist era products – particularly at communist era prodcution levels – were not very useful for a non-coerced nation. There were a lot of “dead man walking” enterprises that took some time to finally grind to a halt. It looked like economic shrinkage – and if you lost the only job you ever knew it certainly felt like it – but a lot of it was simply that the collapse of the communist regime immediately revalued downward a very large fraction of the national activity. And just like in US banks with their bad home equity loan portfolios, it seemed better to some to recognize this over the course of many years than all at once. Quite possibly the IMF helped screw up Russia even more.

        1. vlade

          Not to mention that price of oil was going down, with late 1998-early 1999 being the historical minimum, and on its way up since then (slowly to start with, faster then).
          The huge depreciation of the real exchange rate (due to the Russian crisis) helped quite bit too.

          Of course, some people still like to stick to the good old post hoc ergo propter hoc.

  5. psychohistorian

    This reminds me of a phrase from a Tom Waits blues song, ” Two dead ends and you’ve still got to choose.”

    We are still not solving the real problems, are we? Very few people own everything. The corporations they own are in control of the US politicians (as I am sure is true elsewhere) and the media that most get their version of the truth, what the issues are and how they are framed from. They continue to increase their wealth and control at the expense of the rest of the world….think about it, BP, a private corporation, is making unilateral ecologic decisions for the world by not plugging the leak immediately.

    Tilt against that windmill for a while.

  6. Kirka

    Competitive devaluation time..! (euro vs. usd)

    It seems EU crew is aiming at near parity. If that is so, boeing is dead. I would say, any usd based industry that hope for export recovery will get a massive pounding soon after 1.15 or so.

  7. eh

    Argentina defaulted on nearly $100bn in 2001 and has since played hardball with creditors.

    I think that’s what they call chutzpah.

  8. Hubert

    Don´t cry for Greece.
    They can always default. They can always leave the Euro.
    They can decide in which currency they will not pay back these loans.
    Then the party will be over – but so what? Do they have a right for eternal partying ? They have enough food and the climate is nice.

    They seem to be able to backstop their whole banking system via ECB now. So now reason to leave Euro at this point.
    Nobody talks about these Greek bank balance sheets. High finance is corrupt in most countries as we have found out. I would guess that Greece will be topping any scandals we know so far – a kind of Iceland squared without vulcanos.
    The lesson never learned is the importance of “private” banks balance sheets. Please, somebody has to look as the Greek government will certainly not.

    The loaning of money to Greece was pure stupidity. Now the “rescue” comes as a kind of farce

  9. Hubert

    Should read: “no” reason to leave the Euro at this point. (not “now”)

  10. Arciero

    I really find it difficult to sympathize with Argentina in the present day. Here their country is not in the best financial shape and so they attempt to subsidize one of their elites to go race in Formula One, an excess of the rich if there ever was one. And then they nationalized all the soccer coverage in the country, put it on the national TV channel which always talks glowingly of the leadership, for an exorbitant fee which again the country doesn’t have the money, or at the very least that money is better spent on other things. Like Greece, easy to see why they went into default to start with. Was talking to an Argentine asking him about this, and he said “circuses and bread, and we’re about of bread so they are just giving us circuses”.

  11. D'Annuzio

    Argentina was in a very solid position versus its creditors:

    Its foreign debt service was (approx) 10% of GDP
    Its requirement for capital (to grow the economy) was about 6% of GDP

    The Argentines correctly concluded that they could internally fund all their capital investment, stop paying foreign debt – and save about 4% of GDP !

    If Greece can self fund its internal investment needs over the medium term future – then hardball is the way to go.

  12. Amit Chokshi

    The Economist did a piece on Argentina and post defaults and found that it’s not that big a deal to come back to the markets. This was the issue with the rainbow on the cover a few weeks ago, about the US being “back.” Dean Baker has also presented stuff from the CEPR re Argentina and how Greece could do the same thing

  13. frolix22

    Bill Mitchell has been discussing this idea on his blog for a long long time. And I have pushed this line in great detail in discussions on the Guardian newspaper boards.

  14. Dan Allen

    Often left out of these discussions is Greece’s political situation, the fact it is part of a union. What does Greece gain from good relationships with EU partners? Answer that, weigh it against the misery of austerity. Greece has national issues, and often receives support for those issues from the EU (albeit in a quid pro quo that requires Greece buy tanks, subs, fighters, etc., from France and Germany). Greece is not going to be so willing to let its euro partners dangle. They worry of possible contagion from default and fallout from German and French banks getting squeezed. Greece might be very willing to go along with the present plan for awhile. The question is for how long.

    Seems to me that the EU is playing for an orderly restructuring a year or so down the road. Greece will be able to cut deals if it actually manages to get its balance sheet in order, AND if there’s still enough money in the bailout package. Its creditors will not only see a healthier balance sheet but also the fact that Greece still has ammunition in the form of EU funds. Greece should be able to cut an orderly restructuring at that point. I’m not too certain the banks will be in that much better position to handle it, but you can expect Greek patience to wear off eventually. Even Argentina had a go of the IMF plans initially.

    Why is everyone in such a hurry about defaulting? Greece still has problems in its bureaucracy and with corruption. The Greek economy is also not going to gain competitiveness as easily as others might. Other peripheral eurozone nations lost competitiveness when multinationals moved to cheaper countries, but Greece has had hardly any international investment to speak of (again, because of the high tax rates and red tape). Its two main sectors are still quasi-competitive worldwide (tourism and shipping) but these are not good sectors in a recession, and one of them is practically untaxed (shipping).

    What I find odd about all this is the many writers sympathizing with the plight of the poor German taxpayer while in reality, it’s the Scandanavian taxpayer making German and French banks whole in the midst of all this mess. Were it not for the EU’s bailout, German and French taxpayers would be left alone to deal with their banks. So, German taxpayers owe thanks to the other Europeans for bailing them out of a mess.

  15. nicos

    I very much enjoy articles and recommendations about Greece without the slightest reference to any figure-fundamental.

    On the same time ignoring the fact of the Greek deficit reduction by 42% for Q1 2010.

    Yeah, why should anyone note it. Has anyone seen the slightest reference here or elsewhere to ANY of the Greek fundamentals? Probably because Eco(nomics) Fi(ction) is more interesting.

    You are very much based on articles written on opinions based on opinions, getting finally to anywhere one prefers being.

    1. Dan Allen

      While I agree that most analyses tend to neglect the relevant statistics, I would say that the 40% drop is baked in, and that together with the drop in the deficit, people assume a huge drop in GDP which will only make things worse.

      Then again, Greece could find a few silver bullets. There are some outstanding possibilities such as land sales, increased shipping receipts, or even some golden nuggets in the budget. For instance, it is practically impossible for the sum total of 1.8 million Greek pensioners and 700k gov’t workers to be sopping up 75% of the gov’t budget of 108 billion. It can’t be done. Do the math. Add it up. And yet we see that this is what Eurostat is reporting, that Greek bureaucracy and pensions are bankrupting the country. Yet, what if the gov’t salary and pension basket were also filled with a bunch of extravagant goodies that allow the politicians to siphon that money into their pockets?

      Greece might very well find that a budget crackdown puts more of a dent into the foreign bank accounts of politicians than it does into the consumer. Greece may very well surprise and confound all the analysts who are treating it as a case-study.

      The truth is, no one knows where all the money went. No one knows where all the money went last year. 83 billion did not go to 1.8 million pensioners and 700k gov’t workers. You can be assured.

      1. nicos

        Dan Allen: at last someone wrote some more figures!! thank you!
        A major factor a lot of people are not used to see is the extend of the black market (meaning not illegal stuff but not declared on tax authorities). Although difficult to estimate, most agree at a figure about 30%. During Q1 the government pressed this part of the market through incentives for receipts. The outcome was a clear increase of about 5% on VAT(it is 7% but 2& of this is due to vat increase) amid deflation, which at the end will come as a declared income increase. Don’t be surprised to find even growth coming out of this, although the industrial production is pretty much down. But in this last issue has contributed very much the mood imposed by external factors.

          1. nicos

            Good analysis (3 charts, backlinking to 2 more), although i would add some paragraphs, such as what exactly is hidden in the increase in loans and inflation during all this “crisis” period. How about be a thriving under-cover economy?

      2. nicos

        Dan Allen: For wages, pensions, public health were paid about 40b, the rest being debt, interest, public works, military etc.

        1. Dan Allen

          Thanks Nicos.

          Both the IMF and Eurostat are reporting much much more. I looked at the tables, and indeed, the IMF is right that Eurostat is showing 75% of the budget to gov’t salary and pensions.

          40 billion sounds a lot more on target to me.

          Why the divergence?

          Someone is siphoning dollars from that social budget.

      3. Vinny

        “The truth is, no one knows where all the money went. No one knows where all the money went last year. 83 billion did not go to 1.8 million pensioners and 700k gov’t workers.”

        Corruption is a HUGE factor in Greece. Not just cheating on the VAT or taxes. Things like outright funneling of government funds into private Swiss accounts.


  16. nicos

    One other interesting issue not mentioned is the fact that last year Greece and Portugal were subsidizing the buying of cars (cash for clunkers), air conditioners etc, that the countries do not produce but their northern partners produce. Raising their debt to support external production that is.

    On the same time, the deficit spree was mainly due to the zirp policy induced upon the country, not being its own decision. Due to its rather old-fashioned people, the private debt did not reach the levels of the northern partners, so now its easier to see an exit, than those in high private debt. But.. the article cannot see even this, that the low private debt can contribute in lowering the high public.

  17. ray l love

    Here is an interesting list of some percentages of ‘shadow economies’:

    Greece – 28%
    Italy – 26%
    Spain – 22%
    Portugal – 22%
    Germany – 17%
    Ireland – 15%
    France – 15%
    UK – 12%
    USA – 8%

    (here is a link to an article about the study from which those percentages came from:

    In most of what I have read regarding the ‘GIIPS’ situation, the commentary seems to be far too much about the economic issues, and far too little about the political realities,(this is especially true when the MMT folks are involved). The simple truth is though that nations do not change much unless there is turmoil and dissent.

    What is happening in Greece is a type of corruption that might best be described as an advanced stage of crony-ism. With 28% of all economic activity taking place in the ‘shadows’, what that means is that the workforce must shoulder so much of the tax burden that any chance of being competitive in the global marketplace is impossible. There are of course other problems as well but regardless of what those are… the international community has few choices as to how it influences what are clearly unsustainable circumstances, and the circumstances in Greece are clearly not sustainable. So discounted bail-out loans without austerity conditions will simply postpone the much needed restructuring to make the Greek economy competitive, plus, the debt just becomes larger so long as the economy remains less than competitive.

    1. Dan Allen

      You can’t totally confuse though a black market with tax evasion. Some forms of black marketeering are not taxable. Drugs, prostitution, etc. And, in Greece’s case, undocumented migrant workers. They have more per capita than America has.

      So, again, I would point toward tax evasion, real tax per capita figures and gov’t expenditures per capita.

      1. nicos

        One should not forget that Greece has had about that height of debt for the past 22 years (100-115% gdp), paying much heavier interest rates.
        During all these years no-one saw it as an imminent default.

  18. Tortoise

    Those who think that restructuring is the “easy way out” for Greece are, excuse the strong words, nincompoops who have not the slightest clue about Greece’s economy and its peculiarities. Greece is a rich country with an impoverished government. Anyone who does not understand this simple statement have better refrain from expressing an opinion. In a way, some of Greece government’s urgent problems are easy to solve. For example, it will be shown to be easy to meet a deficit reduction target of 6% GDP this year. The money is there in the form of overdue taxes that could be collected without resistance. I am not underestimating Greece’s problems — which I have mentioned in the past. But they are not the kinds of problems that are solved through default on debt obligations. Greece needs primarily administrative reforms and a leaner and more efficient public (i.e., government) sector.

    Restructuring is anything but the easy solution for Greece because much of Greece’s wealth comes from outside the country. For example, restructuring (meaning default) would bankrupt the banks and insurance companies that do good business and generate income outside of Greece. They would have to sell their profitable subsidiaries at fire-sale prices. It would be a great disturbance for shipping, manufacturing, and construction companies that generate their income abroad. The uncertainty caused by the shear expectation of restructuring would be a disaster that would damage Greece’s economy, which is very different from that of Argentina’s.

    If Greece must eventually restructure, it will be partially a self-fulfilled prophecy. But it will not be a good alternative and those who think that they are doing Greece a favor by suggesting it have better think again. The hard earned lesson for Greece: Do not depend on the kindness of strangers (markets or journalists or academics); they are clueless, even those who mean well.

    And a note about the shadow economy: The shadow economy of Greece is mainly a highly productive part of the private economy that has chosen (and was allowed) to operate outside of the interference of the government. It produces real wealth that multiplies and at some point becomes part of the rest of the economy. Think of it as a large duty free industrial zone. Or business incentives granted by the flag!

    1. Tortoise

      What should matter is the interest on the debt, which depends on the interest rate … Let us make an estimate: 130*0.04 = 5.2. So, at 4% interest rate, Greece would need to pay 5.6% of its (official) GDP. At 5%, it would be 6.5%. I consider this percentage manageable. Greece will have to default only when the markets decide that it will default. Self-fulfilling prophecy!

      1. D'Annuzio


        Thanks for the back of the envelope calc. Say 6% of GDP just for interest, plus perhaps another 2-4% for principle = 8% – 10% GDP

        I’m also going to guess that Greeec needs no more than 3-4% of GDP for internal capital for growth.

        I’m going state the obvious:

        If foreign debt service is significantly more as a % of GDP than ongoing internal capital requirements – Default is the ONLY WAY TO GO.

        1. Dan Allen

          I think he’s assuming massive growth from wealth capture. Greece is going to collect more tax revenue.

          Think of it this way.

          Greece’s historical gov’t budget expenditure to GDP has been 35%. In northern Europe, that figure rises up to 60%.

          We’re talking leaner gov’t, but more tax revenue.

          So, when you’re restructuring, GDP growth becomes less important if you’ve both reduced the size of government AND collected more taxes.

          I’m not saying this is possible at all. I don’t know. it would be some kind of trick, certainly.

        2. Tortoise

          But then there is the private sector that has savings of about 1 GDP and is running a surplus (clearly, based on increase in wealth). In any case, the situation is changing but I think that it will become much clearer by the end of 2010. For now, let me reiterate that I do not see default as kismet for Greece.

  19. Richard

    Re Argentina:

    Most recently, after a decade of stiffing bondholders, the Kirchners grabbed the country’s reserves from its central bank (there’s an election coming up; cash is needed). Good! It’s the people’s money, the populist posters above will say. But how about the grab before that, when, in Nov. 2008, the Kirchners nationalized individuals’ private pension savings accounts, replacing individually owned accounts with the government’s promise to pay? (See Would you populist posters welcome the opportunity to trade your 401k for Argentina’s promise to pay?

    As you Yves’ comparing the (recent) cases of Ecuador and Argentina: There is no comparison because there is no comparison between the countries (other than both are in South America).

    1. DownSouth


      You guys from the Libertarian-Austrian-Neoliberal (LANie) constellation never give up with your distortions, half-truths and outright lies, do you?

      Historical revisionism is a prominent feature of LANie propaganda, which is what you give us—-in spades.

      Privatizing social security? Where have we heard that one before? That’s what Bush wanted to do here in the US, since it worked out so well in Argentina. The idea is to create a big slush fund for the international criminal banking cartel (I’ve highlighted the most important part):

      Another financial deal that was to favor the financial establishment of Argentina as well as international financial interests was the privatization of a substantial portion of pensioner and retirement funds. Early in 1994 any person in Argentina had the option of choosing a private pension or retirement fund to manage the funds provided for his or her own retirement instead of the state. This implied that a substantial portion of potential government income was transferred to the AFJP, which is the private administrator of pension and retirement funds. Money withheld from government contributed to the fiscal deficits that were to characterize the late 1990s and to the subsequent increases in foreign indebtedness.

      It has been estimated that in the period 1994–2003 over US$30 billion were transferred to these private pension and retiree funds. These companies associated with local and international banks charged US$10 billion in commissions. At the same time the payments that employers were required to make to the overall pension system were eliminated. These factors represented additional subsidies to local firms to the tune of US$35 billion. Thus about US$65 billion was the amount the government did not receive due to the creation of this private pensioner and retirement funds system. This was money transferred outright to finance interests and private firms (see Página 12, 31 August 2004).

      1. DownSouth

        Jacob S. Hacker in The Great Risk Shift spells out what’s behind the drive to eliminate defined-benefit plans, the same motivation that lay behind the privatization of Argentina’s pension system:

        If the old virtues of defined-benefit plans seemed less compelling to employees, the one singular virtue of 401(k) plans became all the more irresistible: 401(k)s are dirt cheap. In the late 1970s, employers devoted more than 4 percent of workers’ payrolls to pensions. By the late 1980s, they were contributing around 2.5 percent. Most 401(k) contributions, after all, are made by workers, not employers. And many workers offered 401(k) plans—-roughly a third—-contribute nothing to them, meaning that even those employers that match employee contributions are completely off the hook.


        As early as 1983, Stuart Butler—-the Waldo of the conservative policy movement we met earlier—-had co-authored a strategy memo I which he called for expanding tax-free private accounts into “a small-scale private Social Security System,” while mobilizing “banks, insurance companies, and other institutions that will gain from providing such plans to the public.”

        1. Richard

          Yadda Yadda Yadda

          I’ll take my deferred compensation and IRAs over the Kirchners’ promise to pay any day. And so would you.

          1. DownSouth


            Lehman Brothers and Merrill Lynch were safer investments than the government of Argentina?

    2. Doug Terpstra


      Your WaPo link returned an error, so it’s not clear how it supports your argument.

      “Would you populist posters welcome the opportunity to trade your 401k for Argentina’s promise to pay?”

      Hmmm, the promises of Wall Street vs. the Federal Govt. Is that the question? The final status of our 401Ks, uh, 301Ks, in banksters’ hands is still unclear, but it would scare the hell out of me if Social Security ever got into WS hands.

      Faced with the global (WS) finacial crisis and unable to print currency, Kirchner nationalized pension funds about the same time Paulson (later Geithner) did the opposite—raided the people’s treasury (via printing/QE/ZIRP) to pay AIG/bankster bonuses.

      Two weeks ago, in “Greece Still Has a Choice”, George Irvin of the Guardian agrees with this post, saying, “Eight years ago, Argentina defaulted on the major part of its sovereign debt and survived quite well…”

      As for Argentina and Ecuador being quite different, wasn’t that the point? IMF rule is a large factor in the differences.

      1. DownSouth


        Thanks for the link.

        Doesn’t this just about say it all?

        Among his criticisms of the bank and the IMF was the imposition of drastic deflationary measures on Thailand and Korea in 1997, and on Russia in 1998, mainly to protect the balance sheets of private western banks.

      2. Richard

        Wait a minute. Let’s go back to the beginning. The question was, should Greece accept (aided) austerity or default. On the pro default side, Argentina was cited as a great success. I said, and say, No. Argentina is governed by a rapacious political gang, who carry the name of the founder, Juan Peron are run today by the Kirchners, husband and wife, and specialize in stiffing people to whom the come to owe money. Historically and repetitively. Domestic retirement savers or foreign bondholders, it doesn’t matter, when payment becomes inconvenient, payment stops. That has nothing to do with US IRAs, 401Ks, 403Bs or 457s, which are as safe as the USA (barring inflation), even if Merrill is the custodian (I had no idea Lehman did deferred comp plans).

        Certainly, to respond to another point, I would much prefer a defined benefit plan to a defined contribution plan (assuming reasonably comparable amounts). Who wouldn’t? Providing, the sponsor of the defined benefit plan is reliable. If the sponsor is Argentina, give me a separate account.

        Finally, I do think Greece needs to restructure its debt, which is a polite way of saying partial default. Greece should probably leave the Eurozone too, so it can devalue to its heart’s content. The Germans and French can bail then decide to make up their losses on Greek debt, or not, as they choose.


  20. ray l love


    I think of tax evasion as nearly impossible without a shadow economy (within the confines of a domestic economy). A ‘black market’ is simply business conducted in cash that is not accounted for and that is prerequisite to evade paying taxes without being caught.


    In the following sentence I meant ‘restructuring’ of the entire political and economic system, not ‘debt’ restructuring: “So discounted bail-out loans without austerity conditions will simply postpone the much needed restructuring to make the Greek economy competitive, plus, the debt just becomes larger so long as the economy remains less than competitive.”

    Based on the problematic conditions that you described:”Greece is a rich country with an impoverished government”, your claims regarding that a shadow economy in these conditions being “highly productive”, is wrong. In an economy not having difficulties collecting tax revenues your claim might be worthy of consideration, but under these very conditions nothing could be further from the truth. Wealth that is not accounted for is what ends up in hidden accounts in foreign lands and that is part of what is occuring. Plus, Greece would not ‘seem’ to be a “rich country” if its wealthy citizens were paying their share of the taxes. Rich countries are productive countries and Greece is not productive, that is in fact part of its problem, along with the inefficiencies of having too many Euros from interest payments also ending-up in foreign banks.

    So, if Greece’s shadow economy were in line with the Euro average, in the 15% range, or about double that of the USA, well, we probably would not be having this conversation.

    1. The Rage

      LOL. The US black market is more than 15%. The fantasy you live in that it is not, is embarrasing. Not only is there no problem in Greece, the “mirage” the media and plutocrats have created is embarrasing.

      1. ray l love


        I suspect that you are correct in thinking that the “US black market is more than 15%”. I am merely using figures from a study that I suppose was done in some commensurable effort to measure what could be measured (I included a link above).

        As for the rest of your comment… I don’t know what to say to that? “mirage” needs some support, and the quotation marks imply that you are quoting someone?

    2. Tortoise

      The shadow economy is mostly at a low level and the money not paid as tax immediately stays within the economy; it ends up either in someone’s savings account or in consumption. At the end, it will be taxed.
      Example: You take your daughter for a private lesson (40E). While you wait, you get a haircut at the neighborhood barber (15E), and you drink a whiskey at the pub (10E). Total expenditures 65E and taxes evaded (VAT and income not paid by the teacher, barber and pub owner) about 25E. This money remains in the bank accounts of these professionals and at some point (perhaps much later) gets into consumption and then is taxed. Fact is that the bank accounts of the households are in good shape.

      “Rich countries are productive countries and Greece is not productive.” I beg to differ. Productivity is not just manufacturing BMWs. Even a good barber, a mason, or a fisherman can be productive. In this sense, the private Greek economy (including the shadow one) is productive.

      1. Dan Allen

        I don’t think anyone really knows what productivity or competitiveness means anymore. If I had 1 billion kilos of the best marijuana in the world, I could productively sit on my butt.

        Things like Krupp Espresso Machines could vanish tomorrow.

        Wealth = Standard of living
        Growth = Improved standard of living
        Money = Distribution of Wealth

        That’s about it. The rest is metaphysics (i.e. How does a Krupp espresso machine improve your life?)

        1. ray l love


          What I meant by saying that Greece is not productive enough to be considered “rich” is that when a nation that consistently consumes more than what it produces it is difficult to classify that as ‘rich’. That is in fact a trend that diverges away from prosperity even when currency adjustments are possible. The USA is of course something of an exception but its reserve currency status and the fact that it has diverted some of its burdens off on other countries makes it an exception (Japan via the Plaza Accords. Humanity via the ongoing AAA securities fraud etc. and of course no nation benefits from the ‘demographic dividend’ quite like the USA does. And of course the USA has vast natural resources and an unrivaled military which has made the US a safe-haven for the world’s surplus savings). Greece has olive trees and tourism and it shares a common currency with some nations that are ‘productive’. That does not add-up to ‘rich’ for me.

          1. Dan Allen

            I honestly believe that none of us know whether Greece is rich or not, not even the Greeks. No one knows whether Greece’s primary balance is positive or negative. As you can see in my posts, I tend to doubt that Greeks are consuming more than they produce. I think some are stealing more than Greece produces, but the solution there is to stop stealing. I’ve also read a Brookings Institution report on Greece that showed if Greece only eliminated corruption at the top, it would have a surplus. No one knows the extent of the dysfunction, so it’s pretty hard for anyone–for you and me especially–to say Greece’s primary balance sheet is a negative one. It might not be.

            Also, realize that the three biggest Greek sectors are shipping, tourism, banking, and since Greek banking is much bigger outside of Greece (indeed, most of the income comes from Turkey for some of these banks), Greece’s service industry is actually a source of external wealth which would better be accounted for under export/imports, since these sectors tilt the scales back towards Greece. Like I said, you don’t have to produce high-value items like espresso makers to bring in external dollars. Tourism, shipping, banking accomplish the same objective.

            I honestly don’t know whether Greece will have a positive balance sheet if it manages to clean up its act. It may, it may not. I will not be surprised either way. I do agree with the analysis that the debt overhang will need to be dealt with through restructuring, but even there I hold out the 1 to 5% possibility that Greece’s meager social safety net combined with a huge wealth capture, may pay it down enough to allow them to grow out of it.

        2. Skippy

          Dan said… How does a Krupp espresso machine improve your life?


          Because it keeps the wife away from the more *expensive* coffee shops….I worked out the wife was spending 10 bucks a day x 365 = 3,650.00 not including petrol to get there…so for 2K I’ve saved thousands over the last 4 years and more to come….ROFLMAO

          Skippy…amends Dan Allen, I could not resist that one.

      2. ray l love


        First, it would not be called a ‘shadow economy’ if the flows could be traced so you are clearly claiming to know what can not be known.

        Second, I own a small manufacturing company and so I fully understand the dynamics of tax evasion… and I also know from your comment that you do not understand much of what you claim to understand.

        The key for a consumer to minimize paying taxes requires expenditures to be divided into 2 categories. Cash is spent on things that are not tax deductible and on things that are offered at a discount by retailers who are also in need of cash. But for the retailer to keep this business off the books he too must purchase some goods with cash. This brings producers into what must essentially be a network of ‘evaders’ and of course the retailer and the producer are also consumers so they too maximize the benefits of their spending by using cash to hide some earnings, while then showing a larger percentage of expenditures on what is deductible.

        This can also include barter, ‘kick-backs’, and some cash trading all the way up the production chain to the extraction level. What happens though is that most of the ‘players’ who are self-employed use price fluctuation to dictate their ratios of cash to accountable funds. Bigger discounts are offered to those willing to pay cash when the ratio needs a little help and of course the reverse is also applied. It is also common to elevate the accountable prices so as to encourage cash business and this method is naturally very profitable when business is up because some consumers ignore prices altogether.

        Anyway… I have never been to Greece but I have been in business for more than 20 years and I suspect that the same principles apply most everywhere. Which would partly explain why the ‘secret bank account’ industry exists to the extent that it does.

    3. Dan Allen

      Remember a few years ago when the Greek PM included prostitution and other non-taxable economic exploits as GDP?

  21. Vinny

    As an indirectly related comment, the other day I drove to Vienna to buy gold from the Austrian Mint. As I arrived there, I noticed a few interesting changes from the last time I was there: there was a pretty long line extending into the street. I bought stuff from them at least 4 times in the past 2 years, and there usually was no line at all. And there were security guards now, which was a new thing too.

    Ah, the signs of the times.


    1. Skippy

      Watch the GLD bubble…Vinny…im out!

      Personally, I favor the security guards in Costa Rica, jeans w/un-tucked khaki shirt and M1 Garand (ex WWII vintage), leaning up against the Banco wall.

      Skippy…Que spaghetti western music…

  22. Benedict@Large

    If Greece defaults on their debt tomorrow and someone sees a profit opportunity in lending Greece a buck on Thursday, that buck will be in Greece by Friday. This argument that if Greece (or others) default, this will make them a pariah, injects upon money a morality that simply does not exist.

    Of course, bankers want you to think this morality exists. It’s so much cheaper than collections.

  23. dbk

    Obviously, there are pros and cons to the “Greek default/ debt restructuring” argument, as the comments have amply demonstrated.

    As an American who has lived in Greece for 30+ years, one thing to which I can testify with assurance is that the “shadow” economy is far higher than 28% – accountants, who are pretty savvy people here in Greece, estimate among themselves that it’s closer to 60-70%.

    An important point to note that is that the “shadow” economy includes not just the proverbial Polish plumber and Albanian stoneworker, but essentially all members of the “learned” free professional classes, viz. physicians/ attorneys/ engineers. While I have not had extensive dealings with the latter two categories, I have never received a receipt for services rendered from a physician that exceeded 30% of what I was charged for his/her services. This would indeed suggest that the estimate of (at least, high-end) tax evasion by what are called in Greece “free professionals” is correctly estimated by professional accountants at around 70%.

    What has been both surprising and encouraging in the past two weeks is the alacrity and decisiveness with which the Greek IRS has begun capturing (very) large sums of back taxes from such individuals (starting with physicians, who are the highest-paid group). The service clearly possesses the technological means and has now been given the government’s permission to go after this particular category of tax-evader.

    It is also important to realize that up until now (like, the past few weeks), Greek citizens’ bank accounts were not available for IRS investigation – this has been rescinded, and is greatly assisting the service’s lightning-swift descent on a group of approximately 1 million Greeks who are declared as “self-employed professionals.”

    1. ray l love


      Excellent stuff.

      Just for record, I did not say that I considered the shadow economy estimate of 28% to be accurate (I called the study ‘interesting’). It may be however proportionate to the 8% estimate assigned to the US. The dynamics of tax evasion here in the US, as I described above, are very commonly applied here among the self-employed; although, whether that could be accurately measured, especially considering the extensive use of dollars as a global currency, is doubtful.

      Your claim that Greek officials have been capturing “large sums of back taxes”, and your suggestion that Greeks are depositing illicit funds in their bank accounts… surprises me. Here, not to say that I have any experience with tax evasion (wink), cash is not put into bank accounts by anyone who is evading taxes unless of course they are very unsophisticated. But I suppose that in Greece the corruption has reached a level of acceptance that it allows less concern for being audited… and, I also suppose that explains why the corruption reached such a dysfunctional degree in the first place.

      What you said above needs more exposure, keep it up.

  24. john

    It matters not my frightened children. It matters not. Just don’t pay the bill. May as well be knocked off your feet fighting while flipping them the finger, than having them drown you in their piss while you’re on your knees. You’re going to die anyhow, so die fighting.

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