Greece: The Lady Really Doth Protest Too Much

We have the specter of Greece’s finance minister insisting really, no really, it will never never default, or default via restructuring. Now given the unfortunate accident of timing, these protests sound awfully Dick Fuld like, although the better parallel is probably Mexico, which kept insisting in 1994, no way, no how would it need to restructure, despite having a lot of dollar denominated obligations and an untenable currency peg. And it was OK, until it wasn’t.

From the Financial Times:

Greece’s finance minister has strongly rejected the idea that Athens will be forced to restructure its debts, saying that a default would break the eurozone.

On a two-day visit to London, Paris and Frankfurt to convince investors that Athens has turned a corner in its year-long economic crisis, George Papaconstantinou told the Financial Times that a Greek default would spark selling in other so-called peripheral bond markets of Portugal and Ireland.

“Restructuring is not going to happen. There are much broader implications for the eurozone should Greece have to restructure its debt,” he said.

“People fail to see the costs to both Greece and the eurozone of a restructuring: the cost to its citizens, the cost to its access to markets. If Greece restructures, why on earth would people invest in other peripheral economies? It would be a fundamental break to the unity of the eurozone.”

Yves here. The logic is not exactly encouraging. It isn’t a fact based “Greece can manage to get its gaping primary deficit and whopping government debt to GDP down,” probably because credible data to support that argument would be hard to muster. Instead, this sounds a lot like how Kim Jong Il must negotiate: “I can blow my neighbors up, so it makes sense for you to buy me off.”

If Greece were the only country in need of help, this still might be a valid argument, since the eurozone certainly has the capacity to rescue Greece. But where does this leave Ireland, Spain, and Portugal? How can their citizens be expected to make sacrifices if profligate Greece gets a big handout?

Another little problem with the “we won’t default” (and a restructuring is just a tidier route to the same end, debt renegotiation) is that Greece and default are on a first name basis. As Ken Rogoff noted:

But the problem is not only the numbers; it is one of credibility. Thanks to decades of low investment in statistical capacity, no one trusts the Greek government’s figures. Nor does Greece’s default history inspire confidence.

As demonstrated in my recent book with Carmen Reinhart This Time is Different: Eight Centuries of Financial Folly , Greece has been in default roughly one out of every two years since it first gained independence in the nineteenth century

The one factor that makes the Greece bluster credible is if it is the earliest periphery country to hit the wall, which is entirely plausible. It would get assistance, but the cost would make it much harder for any other EU country to come to the trough. This might give the idea of first mover advantage an entirely new meaning.

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  1. Expat

    Greece won’t default, restructure or get new EU funds.

    Instead Greece will Institute Reconductive Re-apportionment of Allocations for Outstanding Financial Instrumentational Reimbursement. Or perhaps Temporary Divergeance Policy from Normative Obligatory Monetary Scheduling. And finally, Inter-European Cultural Exchange and Recapitalization Program for the Augmentation of Southern European MacroEconomic Feasability Guarantee Programs.

    See, no default, no restructuring, no new money.

    Rally! Rally! Rally!

    1. i on the ball patriot

      That would work but it lacks sales sizzle and it would be a hard sell to implement all of that boring sounding crap.

      The best way out of this mess — and to properly re-flate the big bubble and feed the intentional perpetual conflict at the same time — would be to have Goldman Sachs securitize and bundle major EU cities, including their sports teams. Securities made up of Paris, Athens, Madrid, Berlin, etc., and their sports teams would be an easy sell as the upside potential in the sports teams alone would provide fantastic smoke and mirrors gloss.

      You package Vilnius and its Lithuanian Football Federation A League team with Nuremberg Germany and its FC Nuremberg team and all of a sudden you have an easy sell product with some sizzle! Come on, you know you would invest!

      Ratings agencies could hire sports analysts and celebrities to hype and apply lip stick to the new products. New issues could be discussed on scamerican TV on shows like Oafhra by Donald Chump and world cup soccer analysts. It would be the housing bubble on roids … screw austerity … let’s refrenzify the mob …

      Deception is the strongest political force on the planet.

  2. Matt O'Brien

    Re: first mover, that would make Greece the Bear Stearns of the Eurozone and one of the PIIGS the Lehman once the will to keep bailing out the periphery wears out.

    Seems like there are only a few endgames left for the Eurozone:

    1) Full-fledged fiscal union
    2) Continual bailouts for PIIGS
    3) Credit spreads widen for periphery, Euro bank fears come back and hit banks in PIIGS as well, making the cost of leaving the Euro largely a moot point
    4) Germany balks at bankrolling the PIIGS and leaves itself

    I’d bet on one of the latter two.

    1. psychohistorian

      I think that it will be more of your #2 because it is not bad enough yet for the oligarchs to put the next stage of their Shock Doctrine into play.

    2. Psychoanalystus

      I’d bet on #2. the Germans love coming to our islands, so they’ll pay for it. Otherwise they can spend summers at the North Sea.


    3. carol

      Most likely your # 4.

      trends often start small …..
      Last month Slovakia refused to pay its part of the bailout.

      “Slovakia’s new Prime Minister Iveta Radicova offered a spirited defence of her country’s decision to refuse to lend money to Greece under a joint EU-IMF bailout, in an interview published Friday.

      Radicova told the German daily Financial Times Deutschland that she believed Bratislava was speaking for a silent majority in the European Union that had serious reservations about the rescue.

      “Yes, we were the only ones who loudly said ‘no’,” she said.

      “But I am sure that our ‘no’ was also in the heads of all the representatives of EU countries.”

      There will be more countries not willing or not able to pay for others bailout. In the end the number of countries that could pay for the PIIGS, and pay the share of the non-paying countries too, is reduced to 1.

      Probably, long before that chain of events, the single currency will have been split up.

  3. IF

    As a bunch of people have written, it was a failure to save Bear Stearns and not Lehmann. So, save Greece but not Spain? Much easier choice if Spain would go first. But unlike you I don’t see degrees of freedom here.

    1. Diego Méndez

      Can you please explain how one of the less indebted Administrations in the West, namely Spain, could default?

      1. Nathanael

        Yeah. Spain’s fine. Spain’s credit rating is *improving*. Spain has built the infrastructure which will attract people and businesses. Spain will have no problems whatsoever.

      2. IF

        Gradually and then suddenly?

        Seriously, without Greece’ help I don’t think the ECB would ever let it happen. At some point it all becomes politics as you point out. But this also goes the other way, as Russia in 98 had less debt than Spain now. In any case, I don’t see any urgency. And in general I think we agree more then we disagree.

  4. Diego Méndez

    The euro is much more than a currency; it is a major step on a project for a European political (including defense) union.

    You cannot get out of the euro and expect to be in a European political union that could e.g. defend you from a Turkish attack.

    On the other hand, if Greece leaves the euro, the EU loses some money, but Greece loses a fundamental part of its legal, financial and trade framework. Greece is the one losing something important permanently.

    Just increase taxes, reduce spending and reform your economy to spur growth. There is no other way out.

      1. Diego Méndez

        How convenient a thought! The Greeks will default because of their stupid culture, which makes them fool enough to organize a successful state! How Anglo-Saxonly racist and financially sound at the same time!

        After all, even if the Greeks were ordinary people, having all world media (i.e. Anglo-Saxon media) repeating once and again the same Greeks-are-culturally-inferior mantra will produce some hundred billions in bets against Greek debt! Isn’t it wonderful to control global media?

  5. Cluf

    Greece won’t default since too many Eurozone banks, backed by law by very respectable Eurozone countries governments (UK, France, Germany) will keep buying until they’ll all collapse.

    And that’ll be another story : not the Greece default story : but the end of the world as we know it.

  6. Kevin de Bruxelles

    The example of Greece and its move towards austerity shows clearly the separation between economic and political thinking. Those who denounce the Greek austerity programs tend to concentrate purely on the economical. Sure at the end of the day, austerity by itself will not resolve Greece’s problems. But from a political point of view, austerity is exactly what is required to help bridge a solution. I don’t think many would question the statement that bailing out the Greece of 2009 would have been a disaster. But, and this is a huge but, if Greece shows the world that it is able to reject the American model of high consumption, high debt, and low production, and make headway towards a more sustainable European model where consumption roughly matches production, then Greece would be a good candidate for a bailout, say in 2011.

    There are often comparisons between the uneven debt levels of the Eurozone, the US, Japan, and the UK. The way I see each group in relationship to their capacity to take on debt is as different types of ships and their capacity to sail away from the shore. For example both America and Japan are the equivalent of debt supertankers and are able to successfully haul huge loads of debt way out to the deepest portions of the ocean. Of course if there is a problem then it can qucikly become catastrophic. The Eurozone, for better or worse, due to its “faulty” financial architecture, is basically just a fleet of cruising yachts, good for coastal areas but they become unstable if overloaded or if they venture too far out into the sea of debt. One can argue whether this inbuilt systemic limit to European indebtedness is a bug or a feature, but with Germans generally in charge of financial matters in Europe I have to think it is a feature. So for European debt levels, they always has to stay within site of land and when the waves get rough the tendency, for better or worse, it to head back even closer to shore by means of austerity. The UK on the other hand is basically a beefed up cruising yacht and it has just enough capacity in fair weather to hang with the supertankers in the deep waters. But watch out when there is a storm!

    So it seems the Eurozone has concluded that they will not voluntarily allow a default (or restructuring) within their zone as this would created a tsunami of turbulence that it might keel over some of the other less stable boats within their fleet. But last year a bailout of Greece would have been foolish, it would have only rewarded them for adopting the American model, for trying to become a debt supertanker within a dinghy frame. It is way too soon to tell, but if things progress well in Greece, in other words if they are able to change tack and start sailing in a sustainable direction, a bailout would be quite possible, which would have to include investment in Greece that would spur job growth.

    But we have to heed the wise words of Harvey Keitel in the clip below from Pulp Fiction; it is way to early for anyone in Europe to start celebrating anything just yet. (BTW, Greece is the car in the clip and John Travolta and Samuel Jackson are the Eurozone leaders.)

    1. i on the ball patriot

      Continuing the metaphor …

      … and the wealthy ruling global gangster elite, through their central banks, own and control the nuclear submarines that prowl the waters and the satellites that allow Mr. Global Propaganda to create the weather …

      … stormy and turbulent ever mounting seas of debt and deception ahead for all vessels…

      Deception is the strongest political force on the planet.

  7. chaosnet3

    From the Baring Crisis, the nineteenth century’s most famous sovereign debt crisis.

    “The borrowed funds were meant for financing railroads and land improvement projects, which in turn would promote internal development, exports, and economic growth. As in many other crises, the slow maturation of the development projects likely impeded the country’s ability to service its debts, creating a maturity mismatch.”

    .. borrowed funds .. meant for .. financing railroads and land improvement projects .. infrastructure ..

    .. as in many other crises .. the slow maturation of development projects .. impeded … the country’s ability to service its debts .. a maturity mismatch ..

    a maturity mismatch? .. I wonder why? .. in any analysis .. it is what you have in mind .. that matters ..

    However, ‘naked capitalism’ .. whose nakedness .. are you so eager to expose .. whose perspective do you apply …

    the folly of governments and states .. or the insatiable greed of financiers cum speculators ..

    .. is the nakedness of the lackeys .. or .. the nakedness of the rapists .. you find more appalling ..

  8. Rik

    Several points:
    1. Historically the relationship between state (emperor or whatever) and money has been: first the state, then the money. The Eurozone is the latest example where things have been implemented vice versa. But since Germany did not want / does not want a political union, and the EU is anything but equal to the EMU, I don’t expect much change. Never underestimate political determination: the project must continue, even if it means just limping along.

    2. The only way Greece can restore confidence, is to immediately return to drachma. After all, drachma allows Athens to deficit spend as much as it likes. Remember that the value of currency rests upon taxation! So if Greeks do not pay their taxes, drachma won’t be worth a damn thing. The Grecian government does not exist solely for some foreign creditor.

    3. The EMU is highly flawed, because it wants every member to export itself out of the crisis. But for an exporting powerhouse, domestic wages must remain low. I think it’s overlooked that Germany exports much more to Greece than it imports. No, Greece doesn’t produce that much that Germans want, but that’s not the point. Several economies that do not match have been lumped together under ‘one-currency-to-rule-them-all’, but again history has been swept under the carpet. I think it’s much easier to use one currency if you and I already share the same values (more or less) and speak the same language. In the EMU there are simply too many bridges to cross.

    1. Diego Méndez

      I am afraid I disagree.

      1. “First the state, then the money”? The European Union is based on the successful creation of a single German state after 5 decades of economic co-operation between dozens of smallish German nations.

      So the precedent of “first the money, then the state” exists and was indeed very successful.

      2. Were Greece to return to the drachma, inflation would soar, thus preventing any deficit spending, since deficits would only turn a high-inflation problem into hyperinflation. Moreover, since capital inflows would stop suddenly, any deficit spending would detract money from private investment.

      Just look at similar economic episodes in Southern Europe before the euro was created.

      The only way forward for Greece is higher taxation, reduced spending and economic reforms to spur growth.

      3. It was Germany (and France) which destroyed the Stability Pact when they relied on deficit spending to overcome economic stagnation, just 5 years into the euro. Different values from Greece’s? I see different economic conditions, but not different values.

      If anything, the Greeks are behaving more responsibly (more Teutonic-like) than France seems capable to me.

      3. Maybe the EMU wants every member state to export itself out of the crisis, but that’s not a flaw. As Kevin said before, it’s not a bug. It’s a feature.

      The euro is devaluing and that’s making exports (including Southern European exports) soar.

      1. Psychoanalystus

        >> The European Union is based on the successful creation of a single German state after 5 decades of economic co-operation between dozens of smallish German nations. <<

        Good luck with turning the Greeks into Germans…:)

        We kind of like our long siestas, long vacations, low productivity, and we hate paying taxes… But like I said, we have nice beaches… and are willing to even allow a few Germans on them for a nominal fee… say 100 billion every 5 years…



        1. Diego Méndez

          It’s technology and organization, not effort, which makes for higher productivity.

          Regarding long siestas and vacations, Germans work far fewer hours than Greeks.

          Closing the productivity gap is not a question of working harder, but working smarter.

  9. Martin

    “How can their citizens be expected to make sacrifices if profligate Greece gets a big handout?”

    So you think, the Greek are getting away to easily? Really?

  10. scharfy

    I hate to pimp it here, but Michael Lewis’s latest in Vanity Fair, “Beware of Greeks Bearing Bonds” is frightening and brilliant. A rare must read IMO. 7 pages of fun.

    A teaser:

    As he finishes his story the finance minister stresses that this isn’t a simple matter of the government lying about its expenditures. “This wasn’t all due to misreporting,” he says. “In 2009, tax collection disintegrated, because it was an election year.”


    He smiles.

    “The first thing a government does in an election year is to pull the tax collectors off the streets.”

    “You’re kidding.”

    Now he’s laughing at me. I’m clearly naïve.

  11. Tortoise

    Of course the finance minister must say that Greece will not default. It is not news and Yves should not be surprised.

    I remain an agnostic on whether Greece will ultimately default. The numbers, and there have always been reasonably reliable numbers despite all the talk about lack of credibility (just look at the right places, like the Bank of Greece website), are not very encouraging. However, Greece has a lot of strengths that foreign commentators cannot begin to understand. In fact, there are some encouraging signs that Greece is gradually adjusting. Greek households are in relatively good shape (on the average, of course) financially and thus Greeks can absorb the cuts in government spending and higher taxes better than you could have imagined.
    I spent a few weeks in Greece this summer and my impressions lead me to believe that Greece has at least a fighting chance to avoid default. There is deep anxiety among most businesses and households; however, they finally understand that they must deal with certain issues. Despite all you read in the sensationalist press (I am referring to the Financial Times:)) Greeks are more stoic than they sound and, at a personal level, are good at handling finances.
    So will Greece default? We have have to wait and see.

  12. Andrea


    1) Troubled past. Victim of first ‘Western’ post WW2 interference. Very recent ‘democracy’ cum independence. 1975! Second tier EU joiner.

    2) Peripheral country, small (though that can be an advantage), with ongoing or recent quite serious disputes with nearby or bordering regions: see Cyprus; relations with Macedonia and of course Turkey. Call it lack of diplomacy, isolationism, military expenditure, or valiant defense of a culture and territory…

    3) High reliance on energy, fossil fuel energy, all imported or acquired in the ‘free global market’, and thus vulnerability to oil price shocks, world events, etc. Construction, tourism and shipping all rest heavily and directly on extraction of the earth’s resources (not that other industries don’t, but these are particularly vulnerable.) Moreover, shipping is dependent on the global economy. Less trade = less shipping.

    First off goog for *shipping Greece*

    4) A minority language and a different alphabet from the EU world. This point is never mentioned, but it is very important.

    5) In Greece, 75% of businesses are family owned, and children often work for their parents/uncles/grand-parents etc., and in this way their education is wasted (paid for by the community), their creativity stifled, they must bow to ‘elder’ authority in often tiny structures to be able to live.

    Sure that 75% is questionable it all depends how you count – mom and pop stores, restaurants, farms, melded in with a large shipping concerns, many of which are family owned….but it sure is the case that young ppl in Greece are dependent on an ‘elder’ structure. I see the NYT has the same number:

    Well, I live in Switzerland, what do I know. I only know Greeks and Greece thru tourism and a few colleagues, slim work experience; and lists that focus on supposed ‘problems’ without ample discussion and offering other types of lists are quite tiresome, kinda cheap journalism, or mindless country-bashing.

    My aim was to point to education, energy issues, the history of Greece, some larger issues. Beyond debt, Banks, etc.


    Heh let’s look at the past, I can’t resist this quote:

    “Again when for many years, Greek money was at a discount in foreign countries, this was due to the excessive indebtedness of Greece to foreign countries, and what did more than anything else to gradually re-establish parity was the constantly increasing deposits paid in to Greek banks from the savings of Greek emigrants to the United States. These deposits constituted a debt due from the United States to Greece and counter-balanced the periodical payments which had to be made by Greece for the interest on her external debt.

    In the United States, on the contrary, at the time of the depreciation of greenbacks, the money was depreciated in the country itself, owing to the excessive indebtedness of the government to the people of the country. A bank note differs in no essential way from an entry in the deposit register of a bank. Just like such an entry, it is an acknowledgment of the banker’s indebtedness, and like all acknowledgments of the kind, it is a “promise to pay.” The only difference between a deposit entry and a bank note is that the one is written in a book and the other is on a loose leaf; the one is an acknowledgment standing in the name of the depositor, the other in the name of “the bearer.” Both these methods of registering the debts of the bank have their particular use. In the one case the deposit or any portion of it can be transferred by draft, and in the other it, or a fixed portion of it, can be transferred by merely transferring the receipt from hand to hand.”

    M. Innes, 1913, The Banking Law Journal.

    1. Diego Méndez


      what made you insist on Greek disadvantages only?

      1) Troubled past. Like all EU members. 2 World Wars, occupation, fascism, communism… that’s the history of Europe.

      You can say Greece’s democracy is very recent, or you can say it was the first democracy in Europe. It’s all a matter of perspective. Out of 27 EU nations, only 10 countries had their current democratic structure in place before Greece.

      2) It’s easy to condemn Greek efforts to hold on their land and their independence when you are based on Switzerland, surrounded by peaceful neighbours. Most Southern and Eastern European countries have territorial disputes and fears of invasions; it’s not a question of diplomacy, but having aggresive neighbours preparing invasions on the other side.

      3) Less trade = less shipping. Then surely more trade = more shipping? Since we are recovering from an unprecedented global trade bust, shouldn’t this support the Greek economy?

      Greece is not Mexico (or any other Latin American country). Its income is not volatile. It doesn’t export raw materials. Shipping and tourism are as un-volatile as any industry can be.

      4) A minority language… so what? Is it a problem for Sweden? A different alphabet… so what? English is the lingua franca in European business.

      5) 75% businesses are family-owned… that’s hardly an outlier in the European context.

      “Across Europe, about 70% – 80% of enterprises are family businesses.” (page 39)

      1. Andrea

        i said ‘negative’ lists were tiresome… see my post…I was not Greek bashing…though maybe it came off like that. As for Sweden / Greece, I do maintain that the different alphabet has, in a global economy, high importance.

      2. Nathanael

        Switzerland actually had a long history of very aggressive neighbors. As for Greece, neither post-Alexander-the-Great Macedonia nor post-1945 Turkey has ever seriously tried to threaten its borders, nor has Bulgaria, yet the Greek governments have somehow picked fights with all three recently. I don’t get it, it seems very dysfunctional.

        1. Diego Méndez


          Switzerland has been surrounded by peaceful neighbours for more than a century.

          Many countries on Europe’s periphery have to face aggresive countries not recognizing their sovereignity over border areas, pursuing redentionist aims, and sometimes even trying so militarily. Greece is one of them.

  13. Ed

    The history of the European Union provides a good lesson that a successful federation will have an orderly process for kicking one of its member states out, and probably should also have an orderly process for one of its member states to secede.

    Though obscured by this country’s success in the 20th century, the history of the United States really offers the same lesson.

  14. Dean

    Economically, it is in Greece’s best interest to not default in the near term if the politics of the situation can hold. Greece has a ‘primary’ deficit which essentially means that it cannot fund its’ borrowing internally. That means that if they default, they would still need to borrow from the markets externally when the markets had just been burned by the default. If, and it is a BIG IF, their austerity package can reduce their budgetary deficits to the point at which the government runs a ‘primary’ surplus, that is the optimal economic point at which to default on outstanding debts. Given they currently have the cover of the IMF and the ECB, it really boils down to politics. Internally will the populace tolerate the austerity for several more years and will core Europe continue to support them. If so, defaulting does not occur for several years.

  15. don

    I wonder if current borrowing covers more than the interest payments, in which case it would be foolish for Greece to default until the net transfer turns negative.
    Good arguments for why Greece won’t default, IMHO, and that should help reduce the interest cost on Greek debt, at least short term. If nothing else, it reminds people of why the tactic of deny and delay has such appeal in this case. They might even point to Iceland to show the lengths that this tactic may be carried.

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