Warning: Greece Can Break Glass and Leave the Eurozone

One of the things that has been intriguing about the handwringing among European policy-makers has been the general refusal to consider the idea that one of the countries being wrung dry by doomed-to-fail austerity programs might just pack up and quit the Eurozone. The assumptions have been three fold. One is a knee-jerk assumption that the costs of exiting are prohibitive (this argument comes from Serious Economists in Europe, but they never compare it to the hard costs of austerity and the less readily measured but no less real cost of loss of sovereignity). Second is that an exit would come via a country being expelled, since the Eurozone treaties prohibit unilateral departure. Third is that it would be too much of an operational mess to revive a defunct currency.

A very good piece by Floyd Norris in the New York Times fills this gap by describing that Greece has the motivation and the means to leave. He points out that the treaty arrangements are pretty meaningless: no one is going to send troops in to Greece to force compliance.

He also dismisses the notion that going back to the drachma would be insurmountably difficult. The model is Argentina going off its dollar peg. Set a value of the drachma v. the euro and convert existing debt at that rate. Per Norris:

In early 2002, a new Argentine government ended the peg and did much more. It defaulted, and it required its citizens to do the same. If you had a dollar deposit in an Argentine bank, it became a peso deposit, soon to be worth about 30 United States cents to the peso. That was true regardless of who owned the bank. If you wanted to get dollars back from your Citibank deposit in Buenos Aires, you were out of luck.

Argentina was cut off from international credit. Imports plunged and the country entered a deep — but relatively brief — recession. The peso lost two-thirds of its value within a few months. Argentina was sued by everyone in sight.

But devaluation worked, as it often does. Argentine exports became competitive thanks to lower costs, and the economy rebounded. There are international judgments still outstanding against the country, but when it comes to sovereign states it can be easier to get judgments than to collect on them. Diplomatic assets are off limits — no one can grab the Argentine Embassy in Washington — and monetary assets can be kept with the Bank for International Settlements in Switzerland, which will not allow them to be seized.

In fact, Argentina has since had the best growth among Latin American countries and has shown improvement on social indicators. And remember, Iceland’s central bank collapsed and it was similarly cut off from foreign capital. The first six months after the failure were chaotic, but the Iceland economy has rebounded nicely while Europe is mired in flagging growth.

But he dismisses concerns about violating private bond agreements with a currency change. Most are subject to Greek law, and suitable legislation would presumably be passed. While bondholders of bonds issued under English law could sue, good luck on collecting.

The biggest operational challenge Norris anticipates would be how to print enough currency in secret, since a move like this would need to be announced over a weekend. And word getting out would precipitate a run on Greek banks. Perhaps the Greeks would need to declare bank holiday to buy more time. He also bizarrely says the Greek government would need to balance its budget. Huh? The big risk is that Greece prints rather than getting its tax collection and bloated civil service under control and generates serious inflation.

The obvious question is that as much as this move might be painful and disruptive for Greece short term, it would be disastrous for the Eurozone. Greece has a credible threat it can use against escalating European demands for austerity. Even Angel Merkel has indicated that she understands that Greece being expelled from the Eurozone, meaning an orderly departure, would hurt Germany. A surprise exit would have all sorts of nasty knock-on effects.

So why hasn’t the Greek government done a better job of playing its cards? After all, the rising level of civil disobedience is reaching its endgame.

Unfortunately, the example of Ireland shows that it only takes a very few, in its case, one, critically placed quislings to sell out a country. The Irish government had not engaged in deficit spending; the problem was it had a boatload of bust banks. The Irish central bank had issued a guarantee of bank debt in 2008 which was a colossal mistake and experts argued could have been reversed. EU and ECB pressured the Irish government to keep the guarantees in place in order to get a rescue. But the Irish government could have stared down the Eurocrats; it didn’t need help immediately, and Portugal and Spain would go into crisis long before Ireland would. The finance minister (and the IMF actually supported the Irish position) wanted a bailout for the banks only. But the head of the central bank, Patrick Honohan, backed the ECB/EU position. And who is this Patrick Honohan? A man who led Ireland’s bank stress tests and declared losses to be manageable. Oh, and a member of the council of the European Central Bank, which meant he was playing a role opposite to that of representing the best interests of Ireland. We can see which one prevailed.

Right now, the Greek government seems to have bought the TARP sales pitch “capitulate to the banks or there will be armageddon” hook line and sinker and are knuckling under to ever more draconian demands. But unrest is rising and the parliamentary majority of the ruling coalition is only five seats. A few defections could change the dynamic substantially.

The point of the Norris article is not to say a Greek departure from the Euro is likely, but that it would be possible and in the long run might be a better outcome for the nation. And we learned in the crisis how things that seemed to be low probability were precisely what wound up taking place.

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  1. Swedish Lex

    What a difference a year or two make.
    Even with a euro-TARP and 50%+ haircuts, the Greeks, Portuguese and the Irish according to the EU master plan have austerity without domestic growth to look forward to for the foreseeable future. It is therefore likely that those countries will leave the euro zone (but stay in the EU)in the next 2-3 years. That time will allow for France and Germany to figure out how to avoid defaults of the Soc Gens and Deutsche Banks of this world. Those banks’ balance sheets will get gradually worse in the coming 1-2 years. By much more than they now anticipate.

    Orderly (well) euro exits by Greece, Portugal and Ireland should allow for Spain and Italy to remain. If Spain & Italy look like they will require haircuts too, it would be game over for the euro. That test could come 1-2 years from now.

    1. Mark P.

      Some estimates place US banks as having $1.4 worth of exposure to ‘the Soc Gens and Deutsche Banks of this world’ and $2.7 trillion exposure to the Eurozone as a whole. Hence, Timmy G’s recent exhortations to the Europeans to act.

      This sucker really could go down this time.

    2. vlade

      The trouble is, if you leave euro, you leave EU. There’s no good way to leave euro and stay in EU (legally, it’s the same I believe, unless you have an exception, like UK/Danes/Swedes).

      1. Swedish Lex

        There are no Treaty provisions about leaving the euro. The marriage was supposed to last forever. Any euro exits would thus have to be invented from a legal point of view. But nothing says that a state will have to leave the EU if it drops out of the euro. UBS recently wrote a Report about the cost of breaking up the euro zone. Their conclusion, in a Report that otherwise was good, was that a state exiting the euro for different reasons would have to leave the EU too. I disagree there. It would be in everybody’s interest to keep the former euro states as members of the EU.

        1. William C

          Is it perhaps a question of legal opinion? I assume, Swedish Lex, you are a lawyer? I am not so have no view myself but did hear Martin Wolff claim on British television that to leave the Eurozone Greece would have to leave the EU (FT legal opinion?). It would be an extraordinary but perhaps feasible outcome if Greece were to leave the eurozone but to argue it was still in the EU while other Member States argued that it was not.

  2. SidFinster

    Europeans are funny animals. I remember a discussion between a Belgian, an Israeli, and my feline self regarding international relations.

    The Belgian insisted that EU treaties and something called “international law” prohibits one country from invading another, and therefore that this could never happen.

    The Israeli and I were a bit mystified, as what good is “international law” or an EU treaty without the means of enforcement. Otherwise, if you have enough firepower, just roll the tanks and present the world with a fait accompli.

    Ironic that in August 1914, the German Foreign Ministry described a treaty guaranteeing the neutrality of Belgium (of all places) as “a mere scrap of paper.” The Germans proceeded to overrun Belgium.

    Of course, the Germans and Europeans themselves learned how hardball can turn out the hard way, when they stepped to the Soviet Union.

    Germany received an ass-beating of Biblical proportions for its pains, a whupping so comprehensive in its scope that Europe, the continent that brought us imperialism and nationalism, was neutered forever.

    1. bmeisen

      The US simply has the advantage that somewhat unified invaders killed off virtually all of the natives and pillaged till the cows came home, whereas in Europe the natives tried to kill each other off and pillage, did some of both back and forth for centuries until enough was enough and they to try to live together in peace. It’s not a neutering, it’s tiptoeing.

    2. eeek a mouse

      If international law is pointless, how come the Rome Statute scares America so much? They not only failed to ratify, they un-signed it before committing criminal aggression. They threatened African countries with aid cutoffs if they didn’t vote against the treaty. They pushed weak allies into bilateral agreements to undermine the treaty. America panics at the mere mention of the International Criminal Court. Here’s a nice empirical test: Russia should refer ICC war crimes or aggression charges against Obama or Bush (they’re equivalent as perps) in the UNSC. See how the US reacts. With their perfect impunity, they should laugh, right?

      1. Nathanael

        Because the International Criminal Court has hundreds of countries willing and ready to enforce its rulings.

        Many of which are really tired of the US’s illegal behavior, but don’t feel comfortable dealing with it *on their own*.

        At this point, the US’s refusal to join the ICC is being tolerated essentially out of politeness and hope that the US will come around. Some day, the ICC will simply declare that it has universal jurisdiction and that it is tired of tolerating this outlaw state.

  3. amadeus

    Actually there is no need for Greece to hurry to print enough paper ccy overnight. A lot of payments can pe carried on with debut/credit cards and, in case of need, with paper euros. But probably the euros are going to be preserved by people, because, if there is no immediate euro break-up, they are going to appreciate substantially over the new greek ccy.

    1. stanber

      You have obviously not been to Greece;-) Try paying with a credit/debit card in most places and you will find they are not accepted. The don’t seem to keen on declaring income – it’s an ingrained attitude as opposed to a reaction to the contemporary financial situation.

  4. Brick

    Well I am not sure you have really considered all of the consequences. First if Greece went back to the drachma most probably Greeks would move their savings into Swiss banks. What you then have to deal with is a bank run in Greece. Once Greece exits and poeple see what happens, you then get an expectation that other countries will do the same. Suddenly you have bank runs in Portugal and Ireland as well, forcing the issue. Possibly Spain and Italy will have to consider their options and suddenly you get some serious doubts about whether the euro can survive. Markets will test this and it will cost core europe a great deal of money to forestall the bank runs and preventing the collapse of the rest of the euro area. You can then expect ratings downgrades for Germany and France and more elevating borrowing costs. This most likely would result in resentment against Greece with other european corporations pulling out of Greece and curtailing trade with Greece. Greece has one very good assets in that it can trade with the rest of europe easily and an exit from the euro places that in jeopardy. This I think is why there is a reluctance to leave the euro.

    John Hempton has some good thoughts on this.


    Defaulting or haircuts on sovereign debt are a different matter and I fully expect that to happen. The problem is that even with defaults and bank bailouts you still have no real permanent mechanism for the transfer of money to the likes of Greece. Further down the road you need to bail out the banks again as low growth and borrowing in Greece cause another default. Germany mean while does not want to take responsibility for peripheral debt and so rejects the idea of eurobonds which would be a better mechanism to sort out the fundamental problems. If of course there was a way to have eurobonds and limit the exposure of Germany to the perceived wastefull spending ways of the peripheral europe they might consider it. If anybody thinks europe has not considered a number of options around this then they need to read the following release by the european pariliament.


    Seems to me the proposed solution offers a solution, but then there would be policians who would definately be voted out of power. Political ambition trumps the wellfare of the people, now where does that remind me of.

    1. Yves Smith Post author


      With all due respect, you did not read the post very carefully.

      First, I said, per Norris, that it was essential that this be done as a coup de foudre, either over a weekend (per Norris) or with a bank holiday. “Bank holiday” means no transactions, remember?

      The drachma conversion would have happen before citizens could move their money out. (And in case you missed it, there has been a lot of capital flight anyhow, so the hottest money is already gone). This is tricky and both Norris and I acknowledge that.

      Second, I did mention that the consequences to the rest of the Eurozone would be disastrous. I didn’t go into the details because I was more interested in the Greek negotiating leverage. Norris DID spell it out and he read and references Hempton.

      1. Bruce

        Once they leave the eurozone, all leverage is lost. I think they have been playing it quite well- take the euros, sign some austerity papers, do not implement ( at least that’s what I read for their civil service). There have been no privatizations, tax receipts are only up marginally, the whole country is in passive civil disobedience mode. The troika is now wise to this so that is why disbursement is delayed. Greece is not going to change their position of all talk and no action, so maybe they will get a few more handouts before the spigot is turned off.

      2. Brick

        OK so I have gone back and re-read what you said and Flloyd’s article and I guess there were nuances I missed. I think you are right that Greece has some leverage, could escape the euro, and the consequences for the rest of the euro area might not be good. In theory a new curency and effective devaluation should help to put Greece into a recovery at some point in the future. The point I was trying to get across is that I am worried that negative sentiment from the rest of the euro area through trade may combat the benefits. I think it makes the choice of whether Greece uses its leverage more difficult.So I would agree with your conclusion but humbly suggest that the long run might be a very long time.

        1. steve from virginia

          Greece is not Argentina: the Greeks import all of their petroleum from the Middle East paid for with euros. What happens after a Greek default?

          The Greek sovereign deficit is just about the same is their trade deficit which is largely energy and junk to burn the energy in.

          Argentina was and still is an oil exporting state which enjoyed a trade surplus (it could sell oil for dollars), it still does. Forget about Argentina, none of the PIIGS are like Argentina at all. The reason comparisons are made between European countries and Argentina or Iceland is because analysts ignore energy and never consider it. Meanwhile the entire EU crisis is about the current high costs of energy that have ripped the euro-denominated credit markets to shreds.

          The only way for Greece to gain euros will be to buy them in currency black markets at severe and ongoing discounts drachma to euros. Greek racketeers will also sell whores, guns, heroin and import African and Middle Eastern ‘visitors’ (terrorists) to the continent in order to gain ‘hot’ euros. These euros will be swapped for fuel which will be sold also on black markets for impossibly high prices. The drachma will be rendered worthless and crime will rule the country. Ditto for all the other PIIGS and any other European country without a reserve currency like Poland or Hungary.

          After hyperinflation cycles and military violence that turns the country into Northern Mexico, the Greeks will be put back on the euro while gasoline sells in Athens for $50 per gallon. Meanwhile, the Mighty (stupid) German auto industry will collapse — no customers.

          All of this is energy conservation by other means.

          Without euros, Greece has nothing to trade for petroleum. End of story …

  5. bmeisen

    Yves got me thinking yesterday:

    The Turks rattle their scimitars and the Greek colonels jump to attention, storm the parlliament and impose martial law. Whereupon the EU expels Greece – for political reasons! It wasn’t the Euro’s fault. There is no inherent economic problem, it is a flaw in Greek democracy.

    Of course the colonels for patriotic reasons close the banks and impose brutal economic controls. A bank run is prevented and the ECB is off the hook: it wasn’t the Euro, it was the Greeks. To prevent complete chaos the EU sends food and medical supplies and warns the Turks from doing anything really threatening.

    1. Lyman Alpha Blob


      With the US and Greece both slashing and burning their social contracts because there’s supposedly no money, I’d been wondering why the US thought it prudent to finance Greece’s purchase of 400 Abrams tanks: http://www.defencegreece.com/index.php/2011/10/the-u-s-approved-to-grant-400-m1a1-abrams-to-greece

      I’m sure all the protesters there will be overjoyed knowing that when these tanks chase them out of Syntagma, at least they won’t have to pay for them when the country defaults….

  6. Bruce

    The NYT for some reason holds up Argentina as a model, so I guess none of them have been there. Yves you might want to go as well.

    The situation now is far, far worse than pre-default. Argentina has the best GDP numbers only because they are lying about inflation, which is running close to 30% per annum. In fact the government has threatened independent economists with criminal prosecution for publishing real inflation numbers. Food is hyper expensive now (it never was before), and Bloomberg had a story last year on how Argentines are “saving” by buying consumer hard goods like plasma tv.

    On a real basis GDP is sharply negative and I would expect peso to
    devalue again sharply after the Kirchner election. Argentina exports soybeans and meat and that’s about it., so of course they are doing better on that basis, but that is due to high international prices, not Argentine policies.

    You and Krugman and the rest of the NYT should speak with some Argentines to get a sense of how bad it is getting there. It is not a model for any county, especially Greece which has no real food or energy exports That at least is my impression, would love to hear others

    1. Oliver

      Hi Bruce

      These comparisons are indeed interesting. Krugman likes to compare Iceland and Ireland, and I know that the MMT friendly folks like to show Argentina as a good example, because they did a lot of consulting work and helped on social programs there (the Jefes program e.g.). How does activity in Argentina compare with say Brazil on such things as foreign debt / export dependency, social indicators (straification), real growth, industrial growth vs. financialization, asset bubbles etc? My guess would be that what’s showing up as high CPI in Argentina has its counterpart in a housing bubble in Brazil. Same same, but different distributional impacts (in favour of Argentinians, I’d say). But maybe you have some facts? Anybody?

    2. Diego Méndez

      AFAIK, inflation is very high in Argetina (20%), but the economy is growing very fast (according to independent estimates). As you point out, the problem is Argentina only exports food and meat and their prices have exploded, but they may come down.

      I think the world (and especially so South America) should come to terms with the fact that growing is hard. You won’t create healthy economies if you don’t pursue policies for more equality, better education and infrastructure and more accountability, i.e. if you don’t turn Scandinavian.

      This necessarily comes at a high cost: much higher taxation for long years before the Scandinavian model works its magic and you grow healthily.

      This applies to Southern Europe, but also to the United States. Greece may default on its debt, but it will get back to square 1 if these policies are not implemented. (By the way, creating a digital-only drachma currency and prohibiting physical money would help a lot.)

      1. Romeo Fayette

        “I think the world (and especially so South America) should come to terms with the fact that growing is hard. You won’t create healthy economies if you don’t pursue policies for more equality, better education and infrastructure and more accountability, i.e. if you don’t turn Scandinavian.”

  7. Philip Pilkington

    “The biggest operational challenge Norris anticipates would be how to print enough currency in secret, since a move like this would need to be announced over a weekend.”

    Definitely the big problem. That and people doing a bank run to take out their savings etc. in Euros instead of waiting on the devalued neo-Drachma.

    “He also bizarrely says the Greek government would need to balance its budget.”

    Obviously he didn’t look very hard at the Argentinian example…

    P.S. Honohan is a traitor and I want to see his head on a pike on the road into Dublin City Centre…

    1. toxymoron

      Can anyone make a comparison with Malaysia a few years back that imposed money controls to avoid all of its money leaving the country?

  8. Oliver

    He also bizarrely says the Greek government would need to balance its budget. Huh?

    I’ve heard Mosler say the same thing. I think the idea is that it wouldn’t be able to borrow in the markets for a while after a default and so would be forced to run a balanced budget.

    1. Oliver

      can’t find the mosler post. seemed strange to me when i read it in any case. maybe i misunderstood it.

    2. reslez

      [I]t wouldn’t be able to borrow in the markets for a while after a default and so would be forced to run a balanced budget

      A sentence like this is a headscratcher for MMTers.

      Let’s say Greece brings back the drachma. No drachmas exist until Greece waves a magic wand and prints them or magically converts some bank accounts to drachmas. No one has drachmas until Greece creates them, so who exactly will they be borrowing drachmas from? And why in the world will they need to borrow drachmas when they obviously can create however many they need?

      If you’re worried about inflation, let me remind you the question was whether Greece would be “forced” to borrow. And certainly, bringing back the drachma in itself will be far more consequential in terms of inflation than whether the government re-loses its senses and decides to borrow drachmas.

  9. Romeo Fayette

    I’ve long considered the EMU dissolution as the ultimate (proximate) outcome of this. Rather than Argentina, I’ve cited ERM I (Black Wednesday) as an analogue. UK & Italy on this side, Germany on that. Storyline is very similar.
    At this point, I do not consider the economic synergies of a currency bloc worth the cost of bailout–long or short term–particularly for Germany. Further, wouldn’t Germany suffer brutal inflation in a bailout scenario?
    Many are quick to point out that the EMU is more of a political/existential union, but given the intra & inter-national contempt that’s brewing, I sincerely doubt the efficacy of the EMU toward any of its goals.

  10. /L

    devaluation worked, as it often does. Argentine exports became competitive thanks to lower costs, and the economy rebounded.

    It sounds like just another platitude. So the export was uncompetitive and devaluation fixed that. Well a negative foreign balance has two main components, import and export, goods and services and capital leaving or entering the country. Argentina’s big problem was extensive imports and a poor domestic market.

    Argentinas export in constant US dollars and as percent of GDP
    Current account and trade balance
    GNI growth and unemployment

    In 1999 there was a minor drop in export in constant US dollars otherwise the export in constant dollars did grow just as much during the Memes period. What the devaluation really did was to curb “excessive” imports and economic policies that engorged and boosted domestic economy and employment. Just as UNCTAD have tried to say in its latest reports, export led growth is a poor road to generate employment, countries must focus more on its domestic economies.

    It’s an bizarre world where countries’ economies sole existence is to be exporters.

    devaluation works in raw material dependent 3:e world countries, in countries higher up in the value chin i’s another story. As one can see in the Argentina graph and other countries export in constant dollars is pretty inelastic. Usually it means boosted profits (at the expense of local workers living standard) a not necessarily larger market shares for the export industry.

    Greec needs to break lose so it can like Argentina gear its economic policy to the domestic market, it will come with an cost of much more expensive imports.

    One major thing in the Greek economy is its role as shipping nation. Buying ships is often an dominant factor in Greece current account, alas they change money for real capital in ships. Since late 2008 the Baltic Dry Index have been in rock bottom hurting Greece shipping industry.

  11. yoganmahew

    The changeover to the euro took some years of preparation of banking systems. These are supposed to be reversed over a weekend? What a load of old cobblers.

    Argentina is an entirely different case. Pretty much all that happened was an FX revaluation. The peso had not disappeared, it did not change internally, salaries were still paid in pesos and goods were still bought with them.

    Oh and you are still misrepresenting what happened in Ireland. “The Irish government had not engaged in deficit spending; the problem was it had a boatload of bust banks.” This is almost nonsense. Both the government and the bank’s troubles stem from the property bubble – a bubble encouraged by the bought government that guaranteed the banks. The government was spending revenues that only existed because of the massive increase in private sector debt. It’s easy to have a government in surplus when you have a massive credit bubble. When the tide of debt goes out, not just the banks were left exposed.

    You might also want to look at the timing of Mr. Honohan’s appointment to the Central Bank, at who agreed to the guarantee, NAMA, and what the state of the Irish banks was when the IMF were called in – there was a massive bank run ongoing. Taoiseach Cowen and Finance Minister Lenihan had attempted to spoof the markets for two years by that point; with the deficit showing no signs of budging, spoof time had run out.

    1. Yves Smith Post author

      You seem to have missed my comment on Iceland, that it let its CENTRAL BANK fail which means its entire banking system. It had six months of real distress, but pretty much everyone agrees they came out way ahead in the long run.

      They could have let the banks go. The idea that they are better off socializing bank debts that are simply unsupportable for an economy of that size is absurd. And the ECB most decidedly did not want the Irish banks to fail, it would have blown back on some Eurobanks. So the threat to let them fail also represented considerable bargaining leverage. Remember, the Irish were willing to accept a bailout of the banks, not having the state on the hook.

  12. Ming

    To Yves and Fellow bloggers:

    I fully agree with this blog post, but I do feel there is a very important question to ask…what are the critical imports that Greece needs to keep operating as a country, and why would an export nation be willing to accept the ‘new drachma’ in exchange for it’s products. Conversely, what important exports does Greece have so that it can earn Forex? I can understand how Argentina can devalue and/or issue a new currency. It is a large country with natural resources; I do not understand how a very small country with minimal natural resources or Internal capabilities (I.e valuable technology, high quality or very unique production capability, etc), could credibly entice another country to engage in trade with it.

    1. pebird

      Depends to what extent they would restructure their Euro debt. “We can’t import, we don’t pay.”

      You need some strong political leadership for that to happen. The lack of which is the reason the Greeks will not leave the EU.

  13. Pat

    Sure, Greece could go back the drachma but the consequences would be severe. So it’s better to continue along the present course of theoretical austerity but practical non-compliance. Even the Greek Left wants to stay in the Eurozone for as long as possible – so what does that tell you?

    First there would be an enormous bank run, followed by devaluation and severe inflation, so that the buying power / standard of living would be maybe 50-60% of what it is now. Unlike Iceland and Argentina, which can live off their exports, Greece is mainly a service economy plus shipping, both of which sectors allow for tax evasion. In fact, Greece will never prosper until they completely reverse their culture of tax evasion. They need to institute a system of strict compliance and a program to repatriate and claw back a large amount of the roughly 200 billion Euros held by Greeks abroad. The Germans have figured out a system to identify and tax money hidden by Germans abroad – so why can’t the Greeks?

  14. Maria

    “[I]t only takes a very few, in its case, one, critically placed quislings to sell out a country.”

    Exactly! That’s the point many other articles miss. Greece could do this or that, threaten this or that, but it won’t because the top leaders, especially the Prime Minister, look out for the interests of Merkel and other leaders rather than those of their own people. What the Prime Minister’s motives are is anyone’s guess. It is a shame that the country is in the hands of people who are throwing it off a cliff.

  15. Maria

    The harm to the people’s self-respect, which comes from its government implying that the Greeks are lazy, and from having foreign entities call the shots, may be worse than any economic pain. The people do not trust anything that the government says, and they are shocked by no allegation of corruption that is made against the government. I think they could much more easily put up with pain, following a return to the drachma, if they trusted that a new government was acting for the benefit of the country rather than the creditors.

  16. Rodger Malcolm Mitchell

    Amazing how the Europeans try to patch up that Rube Goldberg machine known as the euro. But no matter how many patches they apply, they don’t seem to understand the fundamental problem. The European nations voluntarily surrendered the single, most valuable asset any nation can have: Its Monetary Sovereignty (http://rodgermmitchell.wordpress.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/).

    Without Monetary Sovereignty, they must rely on the EU to give (not lend) them an unending supply of euros. I predicted these problems way back on June 5, 2005, in a speech at the UMKC (http://rodgermmitchell.wordpress.com/2010/05/12/the-meteorology-of-economics-speech-at-umkc/), when I said, “Because of the Euro, no euro nation can control its own money supply. The Euro is the worst economic idea since the recession-era, Smoot-Hawley Tariff. The economies of European nations are doomed by the euro.”

    Rodger Malcolm Mitchell

  17. Keating Willcox

    Easy solution.

    Greek government creates a Drachma certificate based on a basket of Greek commodities and certificates of local business and medical services. Local farmers and businesses sign up to be paid in these certificates, and all sovereign debts are paid with these certificates. Business booms, debts get paid, banks and investors take a sensible haircut. Greeks may not like credit cards but will be willing to work for them. Greek country can print as many of these certificates as they need.

    Where is the hole? By the way, Ireland cold still walk away from those bad deals…

  18. kaj

    It is good to see that there is now a recognition on this blog that 1/ tax cheating by the wealthy and 2/ clientism and nepotism in the form of hiring excessive number of public employees is one of the root causes of Greece’s troubles.

    In a sunny country, there is no R&D into solar, a country surrounded by water, no wind energy, hot zones, without thermal, etc. No innovation, just tourism and trade with the Levant. The Greeks just like the Italians are by and large very creative people; just that there has been no effort by the State to create new, hyper-competitive, industry that thrives on international competition as they have done in Israel, and that employs new graduates. The state– both parties — has preferred to waste money on useless employment to collect votes.

    Mercifully and rightly, the Euro is falling against the Dollar and it may help some of these nations to partially right themselves despite the criminal idiocy of taking on bank-debt. It is difficult to have much hope though; Euro is a lost cause.

  19. craazyman

    Here’s a dumb question but this is work-related so I’m not compromising my utility function.

    Why not just bring back the drachma and keep the euro too? Greece can accept the drachma for taxes (should any be paid), giving it a value.

    And all the folks rioting or sitting at home drinking and smoking no-filter cigarettes can use the drachma to creatively cooperate with each other instead, which should produce an economic boom.

    This might make the drachma actually worth something and it might make Greece’s euro debts worth more too. Why can’t a country have two currencies? Greece is like two countries — the rich who have a currency in the euro. And the poor, who have no currency at all. So it’s really one currency per country, if you think about it.

    The poor need a currency that lubricates their social cooperation, and then they won’t be poor anymore after a while.

  20. dbk

    @kaj: In a sunny country, there is no R&D into solar, a country surrounded by water, no wind energy, hot zones, without thermal, etc.

    There’s been a tremendous amount of R&D into solar, lots of wind energy innovation. The official plan of the Hellenic Ministry of Development calls for Greece to become Europe’s major solar energy exporter over the next two decades. Also of note in regard to energy: Greece/Cyprus are sitting on one of the world’s major remaining seams of natural gas in the southeastern Mediterranean; Western Greece lies atop around 40 billion euros worth of (relatively-easily) exploitable non-metallic ores.

  21. rotter

    “Unfortunately, the example of Ireland shows that it only takes a very few, in its case, one, critically placed quislings to sell out a country”

    And, unfortunately again, thats why they sometimes need to be rooted out by the people.

  22. Susan the other

    Currency is an imperative for life in a world of time. There is currency in commerce, currency in ideas, currency in justice… if justice is blocked it is called a miscarriage of justice. I would submit the most currency to be found will be in kindness. Today we have no currency anywhere.

    And all I can think of is an old movie, For King and Country. It is set in WW1 in a filthy army camp. Tents are holdling back the rain and you feel certain that shit is running in rivultets right through the tent. Inside, a tribunal bench is set up with 3 chairs for 3 judges. In front of the bench is a chair wherein sits a deserter who is blilndfolded and his hands are tied behind his back. One of the justices whose compassion is formed by her devotion to the state is questioning him. He apologizes for his abject cowardice, etc. There is no forgiveness for him. And he is promptly sentenced to death. … I forget the actual scene and the lines; it has been 50 years since I saw it. But I will never forget the feeling I was left with.

    1. Mark P.

      Yes, I remember this film. Good, largely-forgotten movie directed by Joseph Losey in 1964, with a great cast led by Tom Courtenay, Dirk Bogarde, and Leo McKern.

      The full scenario is even more depressing: the deserter has been one of those vast numbers of hapless British proles who volunteered at WWI’s start, was the only survivor of his company at Passchaendaele, and afterwards had started to walk home — his simple mind shredded — after everyone else in his unit was killed. After he’s judged and shot for desertion, he’s still alive and has to be shot again through the mouth.


      I think your point is apposite. Watching the responses of politicians and financial policymakers around the world I am beginning to feel as I did watching the paralyzed Japanese response post-Fukushima. Though we aren’t anywhere near the murderous stage, extreme global fracture is potentially imminent.

      Almost all the other commenters here are considering Greece only in the context of Europe. They do not reckon on the exposure of Wall Street to the big French and German banks exposure.

      Just Morgan Stanley, for instance, may lose as much as $30 billion if some French and German banks fail, according to the Federal Financial Institutions Examination Council, which tracks all cross-border exposure of major banks. $30 billion is roughly $2 billion more than Morgan Stanley’s current assets. Still, Morgan claims its exposure to French banks is zero.

      Presumably, Morgan has taken out insurance against its loans to European banks. The TBTFs in the U.S. hold 85 percent (maybe at a minimum) of each others’ counterparty risks in derivatives: this is the core of the MAD-style deterrent the banks used against the U.S. as a whole in 2008.

      So Bernanke and the other central bankers will run the printing presses and recapitalize/bail out the banksters again. This time, though, that will happen in a politically charged, perhaps impossible, context. That’s because:

      [1] As Yves details in her thread on California AG Kamila Harris today, a vast shitstorm of mortgage and foreclosure-related fraud litigation is also headed towards the TBTFs.

      [2] Occupy Wall Street is finally providing a focus for average U.S. citizens to express their opposition to the looting by the financial overclass.

      [3] Simultaneously, the traditional Republicans have co-opted the Tea Party, but at a cost they haven’t begun to reckon with.

      Specifically, the U.S. ‘Super-Committee’ to resolve the debt crisis has a November 23 deadline to vote on a plan for $1.5 trillion in deficit reductions, which
      they’ll then have to present to the Congress and the President on Dec 2. All this to avoid triggering ‘automatic cuts’ of $1.2 trillion in 2013.

      Of course, November will be the real kick-off for the 2012 presidential elections. Of course, the politics of that will massively factor in to the pols’ games. Tea Party congress members may re-enact the same tactics they used over the debt ceiling debate.

      [4] All this in a larger context where the reaction of most of us — the 99 percent — is increasingly ‘burn it all down’ since we assume that it’s the super-wealthy — the 1 percent — who’ll be stripped when the current financial system comes down, not us. We believe — reasonably enough — in the possibility of a better system after this one’s collapse.

      To bring all this back around to that scene in ‘King and Country’ we may instead find ourselves occupying the role of that hapless British prole ground up by WWI, which was also the collapse of the global system of its time

      1. Mark P.

        From the WSJ —

        ‘U.S. Bank Exposure to Europe Could Be $640 Billion, Per Congressional Paper’

        — or it could be more, as you’ll find when you read the article itself….


        ‘“Given that U.S. banks have an estimated loan exposure to German and French banks in excess of $1.2 trillion and direct exposure to the PIIGS valued at $641 billion, a collapse of a major European bank could produce similar problems in U.S. institutions”….

        ‘The CRS figure is based on data provided by a Federal Reserve unit, the Federal Financial Institutions Examination Council, to the Bank of International Settlements.

        ‘The research service papers note their figure is only a rough guess. It includes two types of assets, direct holdings such as loans, and “other potential exposures” such as derivative contracts, guarantees and credit commitments. Analysts say the estimate could be much higher or lower because it’s hard to quantify exactly “other potential exposures.” For example, a bank could hold two different derivative contracts that effectively cancel each other out.

        ‘The CRS says, however… other factors that could cause a dramatic reassessment.

        ‘“Depending on the exposure of non-bank financial institutions and exposure through secondary channels, U.S. exposure to Greece and other euro-zone countries could be considerably higher,” the CRS said.

        ‘The estimate doesn’t include U.S. bank exposure to European bank portfolios that include assets in the weak member countries. Also, it doesn’t account for euro-zone assets held by money market, pension, and insurance funds.’

  23. Moneta

    Is it me or is the word “orderly” being thrown around just like “contained” was not so long ago?

  24. Eric

    clueless article. Leaving the euro means Greece pays a high price: a bank run, bankrupt banks, citizens loosing their savings and from what is left, the value will be halved or more. And what do they get in return? They are supposed to export more. What exactly? Much better to let the other euro countries pay the bill: default on debt, and let the ECB and other countries recapitalize the Greek banks. No sane Greek government will leave the euro voluntarily. The level of civil disobedience only helps the Greek government convincing the other euro countries the situation is hopless, and default on debt is the only way out.
    I agree the situation in the eurozone is serious. But from what I read, many Americans really don’t have any understanding of the EU and their proposed solutions are insane. The only exception is Rogoff. He understands it’s a debt crisis, and somehow the debts need to be written off. all the other proposals are irrelevant.

  25. Mark P.

    “King Loses Faith in Europe as Bank of England Responds to Region’s ‘Virus’”


    Bank of England Governor Mervyn King has lost faith in European governments’ ability to resolve the region’s debt crisis.

    The central bank yesterday announced its biggest stimulus since the depths of the recession, citing “vulnerabilities” related to the euro-area turmoil. King said the move, the first loosening of U.K. monetary policy since 2009, was a response to what may be the worst financial crisis ever.

    “It’s pretty much a vote of no confidence in European officials,” said Richard Barwell, an economist at Royal Bank of Scotland Group Plc and a former Bank of England official. “Either the virus is already in the U.K. so they had to respond, or they don’t believe the problem will be sorted out. I lean toward the second because of how much they’ve done.”

  26. liverish

    Some good points in the post but a pity to smear Honohan based on one hostile commentator’s unsupported conjectures about his loyalties.

    Before he became Governor, Honohan was on record favouring burden-sharing with bondholders and there’s no evidence that he changed his mind.

    No evidence either for the breathtaking claim that he sided with the ECB against Ireland in the bailout discussions; that notion is dismissed by informed people in Dublin.

    By the way, it’s money borrowed from the ECB that has been used to repay the bondholders. Watch this space.

    1. Nathanael

      “there’s no evidence that he changed his mind. ”

      Uh, “yeah right” about sums it up. The evidence is that *bondholders have not been required to take a haircut*.

  27. Bob Grimes

    I make no pretence of understanding monetary matters in relation to various Countries, but as a travelling guy who has worked all over Europe, the old USSR, Turkey and the Middle East, my experiences with Greece have been expensive and dismal, I have met many good,hard working Greeks, but also many many more who think Europe owes them a living, for free, they will not work, they take pride in cheating the Government, not paying taxes(only for mugs)and going on strike at the slightest excuse. Civil servants, mamy are corrupt, I have paid bribes to Customs officials, its an accepted part of the Greek game and is built into the price of the job, been stopped for `alleged speeding`but a backhander see`s you on your way(only foreigners) not locals
    , been in resturants and been grossly overcharged until the
    English/Greek friend I was with spoke up in Greek, it has been a country on the take, now foreigners are not giving anymore, and they do not know what to do, I am not speaking of holiday resorts but industrial centres, I suggest that the rank and file and their Unions, stop striking and start working, crack down on their corrupt civil servants, and elect some honest people to run the country, its a beautiful country fron Igoumenitsa to Gevgellia and Alexandria, and on into Turkey, they need to get their pride back, and the work ethic again, and if they do they can do anything, lions led by donkeys, they proved that when the Greek Government hired a big name U.S Bank to fudge its admission entry to join the E.U., I hope that Bank is hurting right now, Cowboys, fudge anything for money, Obama forgets that when he blames Europe for the ills that beset America, Just thinking out loud.


    Bob Grimes

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