Negotiation Breakdown Exposes Widening Rift Between Germany and Greece

Michael: Well, when Johnny was first starting out, he was signed to a personal services contract with this big-band leader. And as his career got better and better, he wanted to get out of it. But the band leader wouldn’t let him. Now, Johnny is my father’s godson. So my father went to see this bandleader and offered him $10,000 to let Johnny go, but the bandleader said no. So the next day, my father went back, only this time with Luca Brasi. Within an hour, he had a signed release for a certified check of $1000.

Kay Adams: How did he do that?

Michael: My father made him an offer he couldn’t refuse.

Kay Adams: What was that?

Michael: Luca Brasi held a gun to his head, and my father assured him that either his brains or his signature would be on the contract.

As negotiations between Greece and the various members of the Troika continue, one of the things that has been striking is how, virtually without exception, media stories, financial commentators, and interested and reasonably well informed observers continue to maintain that a deal will get done by the 28th (which is allegedly now by this Friday at the absolute outside given the need for parliamentary approvals. As we’ll discuss, that confidence flies in the face of available evidence, in terms of the trajectory of the talks and the manner in which the latest Eurogroup session fell apart on Monday.

Mind you, I am not saying a “deal” of some sort will not eventually get done. But looks increasingly improbable that an agreement to finesse an extension of the current Eurozone bailout will come together. That does not mean that other options to throw Greece a financial lifeline are foreclosed. But let’s understand where things stand now: based on the current, clear positions of both sides, there is no negotiating solution space. Their bargaining positions do not overlap.

And not only has neither side moved much, the German actions yesterday were tantamount, Mafia-style, to making a less attractive offer than the one tabled by the Eurogroup and rejected by Greece last week. Greece was supposed to get the message that this was an offer that they were in no position to refuse. So while external forces might lead the principals to modify their stances, there is no reason to see the odds favoring getting a deal done.

For a longer-form recap of the events of yesterday, see Paul Mason of Channel 4, Ambrose Evans-Pritchard of the Telegraph, and our posts yesterday (here and here).

The short version is that the Greek side was presented with a memo by EU Commissioner Pierre Moscovici prior to the Eurogroup meeting that it was prepared to sign. Paul Mason explains why:

…the document…said: “The above forms a basis for an extension of the current loan agreement, which could take the form of a (four-month) intermediate programme, as a transitional stage to a new contract for growth for Greece, that will be deliberated and concluded during this period.”

As this is exactly what the Greeks wanted, it explains the shock, and the urgent nature of their briefings to journalists Monday afternoon when it was replaced by a much harder form of words.

The not-trivial problem was that Moscovici was not an authorized emissary of the Eurozone. When the session began, Eurogroup chief Jeroen Dijsselbloem presented a significantly different document that the German press reported was handed to him a mere 15 minutes before the meeting. Ambrose Evans-Pritchard describes why this proposal was unworkable for the Greeks:

The Eurogroup text said “the Greek authorities have indicated that they intend to successfully conclude the programme taking into account the new government’s plans”. A leaked copy showed these words crossed out by Mr Varoufakis, who peppered the paper with angry annotations.

Part of the dispute appears semantic but has political implications. The Greeks want a new arrangement, but that would require a vote in the German, Dutch, Finnish and Slovak parliaments, where patience with Athens is exhausted. The Eurogroup is insisting on an “extension” of the programme, which does not require parliamentary assent.

Yet the clash runs deeper. The text said the Greeks must toe the line on “tax policy, privatisation, labour market reforms, financial sector and pensions”. It said Greece must continue with “fiscal surpluses” imposed by the troika, meaning that Athens would have to raise the primary budget surplus from 1.5pc of GDP in 2014, to 3pc this year and 4.5pc next year.

To put that in context, Dean Baker points out that a 4.0% primary surplus for the US would be $720 billion.

In fairness, the Eurogroup did offer the Greeks a few bones. Ambrose Evans-Pritchard again:

For all the bluster, the Eurogroup text did say the creditors would look “favourably” on a request for a six-month technical extension to Greece’s bail-out, even suggesting that Athens could draw on €11bn set aside for bank recapitalisation.

Swedish Lex, via e-mail, explains who is driving this train:

Until proven differently, I believe Dijsselbloem does exactly what Berlin tells him to do.

Breaking the current deadlock with a compromise like the Moscovici paper would mean changing the way business has been done ever since the crisis started. And Merkel is not for turning.

German officials all along have been saying that they are most Europeans of all and that they are 100% committed to the project. However only on their conditions. Others will have to comply. They do not do nuance. I hope U.S. officials know this.

Because the Twittersphere was fixated on trying to determine whether Varoufakis’ charge, that he’d been baited and switched, was valid or not, a much more serious issue seems to have been ignored: that the terms of last week’s memo were more favorable to Greece than this week’s. That means that the two sides which never had good odds of reaching an agreement, are moving further apart.

For instance, last week’s document was at the 50,00 foot level, with Greece committing to meet its financial obligations but no mention of the primary surplus issue. Virtually all commentators assumed that there would be a compromise on that issue, with the Germans and the other northern bloc countries willing to go to a 3%, perhaps lower. Similarly, that draft finessed the most contentious issue, that of structural reforms, where the Eurogroup wants Greece to stick to the agreed program, while Greece wants to cancel fire-sale privatizations and spend more on social programs and improving employment. This week’s version made clear that Greece will get no breaks on that front.

This recap from the Greek side (hat tip Swedish Lex) is consistent with Varoufakis’ press conference:

Screen shot 2015-02-17 at 7.24.08 AM

So why the undue optimism that a deal will eventually get done? See for instance, a noonish-in-Europe update at the Financial Times:

European financial markets have largely shrugged off a breakdown in talks between the Greek government and its eurozone creditors that has increased the likelihood of the country losing EU financial backing at the end of next week…

Beyond Greece, however, the reaction was muted, with analysts expressing some optimism that Greece’s government would yet find a way of working with its international creditors.

Perhaps they assume, mob-style, that Greece will have to relent in the face of the German show of force. But Syriza is now boxed in. Its approval ratings are at 81%. What are the other reasons for these sunny readings?

First, it is in the nature of negotiations, particularly ones that get media play, to maintain the appearance that they are gaining momentum until they fall completely apart. Recall that our reader Jim Haygood had to go to 1991 to find an example of talks where one of the principals effectively said in a press conference right afterwards that they had failed. A recent example of insistently upbeat messaging in the face of reality was the TransPacific Partnership negotiations last year, when the Obama Administration kept insisting that, no, really, all the countries were going to agree by year end, even in the face of leaks that showed significant opposition on many critical sections of treaty language.

Second, we have an added feature with these negotiations which we’ll call negative reflexivity. Remember this section of insightful FT Alpahville post from economist and former IMF staffer Peter Doyle:

On the one hand, in an incredible reversal of practice during the global financial crisis—when central banks were at pains to conceal which institutions were receiving their emergency assistance for fear of compounding the adverse signals and therefore the crisis—the ECB has brazenly publicized exactly which Greek banks depend on its help and how much. And it has overtly warned it would withdraw that help. In this way, the central bank is overtly threatening to blow up the Greek banking system, in order to make the euro work. Walter Bagehot, the nineteenth-century father of lenders of last resorts, would be dumbfounded.

On the other hand, Syriza would like nothing better now than to see the yields on Spanish, Portuguese, or Italian sovereign debt relative to Germany jump, signalling broader market disquiet—that Grexit may be imminent and that the rump eurozone would be badly destabilized by it—so forcing ECB retreat. So Syriza, in league with Podemos in Spain and prevailing anti-euro Italian political forces, is openly threatening to blow up its own exchange rate regime, the euro, in order to make it work. The many fathers of exchange regime credibility would be as dumbfounded as Bagehot.

What does this mean in practical terms? Any hint of bond market contagion will strengthen Syriza’s hand. One of Germany’s key assumptions, which Germany officials have stated explicitly, is that they think Greece no longer poses any contagion risk. In a narrow financial sense, they might be right in the short term, but many observers, including the Obama and the US Treasury, believe that one Eurozone exit would pave the way for others, and thus an eventual breakup.

But the importance of containing contagion risk and offsetting Yanis Varoufakis’ pounding on the message that austerity is a death trap for all periphery countries greatly ups the ante for Troika officials to keep reassuring their contacts, particularly those in the financial services business, that Greece will be brought to heel, whether they believe that or not. This is indirectly confirmed by my contacts who are in the loop with Treasury. Treasury was convinced that the Germans were going to be reasonable, as in moderate their demands. As events transpired, they did the reverse. If the Germans feel no compunction to be within hailing distance of truthful with the US government,* they most certainly don’t with mere private sector contacts.

Peter Spiegel of the Financial Times, who despite a big miscue on Twitter Monday where he suggested the Moscovici memo never existed, has been one of the most accurate media tea leaf readers on the state of play in Brussels. His assessment as of last weekend, meaning before the Monday rupture, was that the odds of a bailout extension (even if prettied up) were declining, and the more likely source for financial relief for Greece was the IMF.

The updates on the Guardian live blog are tending to the upbeat, with the French (who have been useless so far) saying that the differences are really semantic, and the Greeks saying a deal is possible. But Sky News reports that George Osborne asked what Greece would do if a deal fell through.

But there are signs on other fronts that are much less encouraging. For instance, German Finance Minister Wolfgang Schäuble just had a press conference and it confirmed that Germany is not inclined to cut Greece any slack:

Similarly, Rob Parenteau sent this sighting in ekathimerini from Jan Kregel, titled ECB can veto bank appointments:

The European Central Bank (ECB) has issued a terse warning to Greek banks, and particularly to the government in Athens, via its Single Supervisory Mechanism (SSM), over plans to overhaul lenders’ management. In a letter to Greek banks, the SSM stressed that any changes to their management can be implemented only after receiving the SSM’s approval.

The letter emphasized that all candidates for the top position in each bank would have to go through an interview before the SSM can give its approval.

The letter reached the banks a few hours before a scheduled board meeting at National Bank, which was expected to address the issue of management changes. The meeting did not take place after all, with National Bank sources attributing the postponement to technical reasons rather than to the letter.

Sources, however, said that it was the government’s insistence to move ahead with changes in National’s administration – though it does not have the right to do so according to recapitalization rules and the bank’s current share structure – that provoked the ECB’s reaction.

One of the names said to be slated for the top spot at National is former Economy Minister Louka Katseli, with Giorgos Michelis as chief executive. The ECB is said to have certain objections toward Katseli.

This incident suggests that a far more basic struggle is underway, that is not reflected in a straightforward manner in Greece’s talks with the Troika. The Greek government and its creditors appear to have fundamentally different views of what Greece’s powers are. In effect, the position of its various lenders is that Greece has traded away significant, if not most, of its sovereignity in return for bailout money. And its creditors have set up a debtcropper system in which Greece can never free itself of its obligations. Put it another way, Greece has been reduced to a subject of various largely unaccountable Eurozone level authorities, with none of the benefits of being a member of a true federal union, the most important being the recipient of fiscal transfers. Greece, by contrast, takes the view that it is still a state and has rights that cannot be taken away.

If this is the underlying nature of the disagreement, with the negotiation spats a mere symptom, there is not much reason for hope for an agreement, save a capitulation by Syriza. Greece is effectively demanding a change in the shadow constitutional order, that of the various terms imposed by the rescue agreements that the other periphery states treat as binding and irrevocable. Changes in constitutional orders are messy at best and generally come about via coups or wars.

So how does this play out if Greece does not relent? We’ll discuss that more in future posts, but the short form is that Greece will go past February 28 with no bailout. Despite the bludgeoning of the Greek government by the ECB two weeks ago, even the pessimistically-inclined Ambrose Evans-Pritchard does not think it likely that the ECB will pull the ELA and crater Greece’s banking system. That would be a move too far for an unelected body. But they could escalate the pressure on Greek banks by imposing conditions on the ELA in their upcoming meeting this Wednesday. That would take a 2/3 vote of the governing board, which rotates and at this upcoming session has a particularly Greece-hostile mix.

So if Greece still has the ELA but no tarted-up extension of its current program, it will run out of money in the absence of a new rescue or a debt haircut. That means a default. Evans-Pritchard outlines the parameters:

Greece must repay €22.5bn this year, starting with €4bn owed to the International Monetary Fund over the next six weeks. The crunch comes in June, July and August, when it has to pay back €11.4bn, mostly to the European Central Bank.

The longer Greece can hold on, the more it can use its access to media and particularly Varoufakis’ new found celebrity status, to rally anti-austerity parties to pressure incumbent governments. We’ve said from virtually the outset that Greece could never win this fight on its own, that it needed the support of allies that could pressure the Troika to take a more just and sustainable course of action.

What might change things between now and Friday? The ECB could impose some nasty conditions to force Syriza to knuckle under. Mr. Market could in theory apply pressure, which seems highly unlikely unless the US were to uncharteristically talk up the risk. And the US could amp up the pressure in a big way on Germany. Even though Greece is unlikely to get help from Russia any time soon, Germany seems perfectly willing to turn Greece into a failed state to make a point. Indeed, that might be a preferred outcome, pour decourager les autres. That would also mean Germany would be indifferent to how it came about, Grexit or no Grexit (which as we will also discuss is less likely than most observers assume for legal and a ton of practical reasons) as long as Greece is visibly worse off for having continued to defy the Troika.

But a failed state creates the perfect circumstances for Russia to intervene. First, Turkey, a more important ally than Greece would be, would normally be hugely unhappy with Russia cozying up to Greece but might feel differently if Russia would stabilize a neighbor that was falling apart. Second, it would be far cheaper to help Greece post default than now, and oil prices are almost certain to be higher later, making the relative cost lower too. Third, Russia could legitimately present itself as playing a constructive, humanitarian role after the Eurozone, abetted by the US, allowed a crisis to compound.

Treasury and Obama are supposedly concerned about these risks, but their actions to date fall well short of what is necessary to force the Germans out of their vengeful, reckless posture.

Oh and as of this hour, #Grexit is second on the Trends list on Twitter.

* Since the German press has reported that the new memo was presented to Djisselbloem 15 minutes before the Eurogroup meeting, it appears this was intended as a gambit to increase pressure on Varoufakis, since Monday was presented at the last day for him to reach an agreement. The Germans may have been concerned that Treasury was also communicating with the Greeks, and had made clear they favored the Greek position. Thus the Germans may have felt the need to mislead the US to have their feint work.

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  1. steviefinn

    Turn Greece into a failed state to make a point – as France in particular did to Germany at Versailles in 1918. Schaueble should have been imprisoned 14 years ago for corruption, rather than bringing his own brand of vicious intransigence to this end of the beginning, of an evolution into a much bigger mess.

    1. Left in Wisconsin

      What doesn’t make sense, and what Varoufakis has exactly right, is that making Greece submit doesn’t solve the problem. Eventually there will need to be a big write down, either by negotiations or some other much less desirable means. So, while making Greece heel could well frighten less committed outer-EU politicians than YV into toeing the ECB line, it wouldn’t be any kind of long-term solution, as least as I understand the definition of “solution.”

        1. Doug Terpstra

          No, contrary to the implication in your question (and the EC’s scornful premise), this is not a feckless government grasping for the dole to squander on indolent consumption. Writedowns stop the terminal vicious austerity cycle that has been conclusively proven to be explicitly counterproductive, evidenced by more than twelve quarters of dramatically failed GDP and employment projections, leading to sharp contraction and outright depression with a 25% unemployment rate, a ~40% increase in suicides and no realistic prospects for improvement under current brutal strictures. This would halt the Troika’s fire-sale raid on Greece’s remaining commonwealth, looting its essential productive assets, seaports, airports, and prime tourist assets, a bailout of predatory Euro and WS banks, while giving Greece maneuvering room to prime the demand-side pump with the first New Deal-type program in eighty years. If you’re really interested read more of the detailed diagnosis and prognosis FinMin Varoufakis has written for Greece’s economic rehab.

          OTOH, it is the Troika’s debt-treadmill solution, more debt to cure unsustainable debt that fits Einstein’s definition of insanity, for its stated goal, stabilizatio, it is a categorical failure. Greece has continually deteriorated, and staying the course eventally leads to a failed state. Austerity is a manifest failure, unless the real goal is looting the best assets of subjugated nation and the management of a non-democratic plantation economy. It seems pretty obvious that that is the real goal.

          That said, put in bid for me on one of those idyllic mediterranean islands with a white-sand beach, a small harbor for my yacht, and of course astaff of suitably subservient staff.

          1. Greg T

            It depends on how you look at it. The EU knows the Greek debt is unpayable. In this case, the debt is nothing other than a bludgeon to impose imperial control over Greece. The policy favors the narrowest of sectors in the Eurozone, and these sectors could care less about anything other than making sure income flows baThis policy stops whenck to them. If the payments stop, they can buy valuble Greek assets on the cheap. Sort of a surreptitious invasion.

            1. Doug Terpstra

              Yup, the now classic Shock Doctrine of disaster capitalism. Send in the economic hit men, co-opt a corrupted elite, load up on unpayable self-serving, unproductive debt, make the economy scream, and then auction off the commonwealth. If the auction fails, send in the CIA jackals; if the jackals fail, send in the humanitarian troops. That’s what Greece may look forward to. The MOTU don’t give up. Keep Putin’s number on speed-dial, Alexis.

              1. wbgonne

                Well said. One note: Why in the world would the plucrats give up? They haven’t lost a battle in 40 years. Hell, they aren’t even challenged. And if Syriza capitulates, the MOTU are on track for another banner year.

              2. Greg T

                The European oligarchs insisting on austerity have created a bit of a problem for themselves. If they offer Greece a deal, other peripheral countries will expect the same. This is the contagion they most fear: popular revulsion spreading across Europe like pestilence.

                The wolf must now remove the mask. Greece is to be smashed as a deterrent to other upstarts. EU headquarters in Brussels should now post a sign, ” abandon hope, all he who enter here. “

      1. hunkerdown

        Systems that don’t actually work for anyone tend not to get much time and energy from anyone. Therefore, when you see a running system that continues running, despite that it doesn’t appear to make sense in light of some nominal objective, it’s far more likely that the nominal objective is a pretext for an actual objective that *is* being met for someone.

  2. George Phillies

    If the ECB tries to cut ELA, contrary to the function of central banks, the Greek government might decide to order the Greek Central bank to ignore the ECB and expand ELA. They might also issue “Tax Anticipation Notes” that Greeks can always use to pay their taxes, meaning that they are automatically self-funding, especially if partial payment with these notes is made mandatory.

    As in 1914, German stupidity appears to be preparing to blow up Europe. This time, we also have German economic stupidity, in which the Germans insist on running huge trade surpluses, thereby wrecking in time the Eurozone.

    1. hunkerdown

      Nah, just cultural incompatibility. Somehow, the knowledge that people who respond to roughly the same cues can orchestrate their free activities with less friction than otherwise became unfashionable or lost once bourgeois society co-opted the civil rights project into the “anti-racism” project, a vehicle for their own forced disalienation.

      Besides, what the bloody hell is the point of the ECB if CENTURIES of cultural wisdom have taught us never to lend to family if we can’t afford to lose principal?

  3. plantman

    Yves says: “In effect, the position of its various lenders is that Greece has traded away significant, if not most, of its sovereignty in return for bailout money. And its creditors have set up a debtcropper system in which Greece can never free itself of its obligations. Put it another way, Greece has been reduced to a subject of various largely unaccountable Eurozone level authorities, with none of the benefits of being a member of a true federal union, the most important being the recipient of fiscal transfers.”

    But this is the argument many have been making on this site for ages only to be shot down by Yves who thinks leaving the euro is a mistake. Now she says there’s nothing ahead but slavery and poverty.

    What gives?

    The author of an earlier article makes the same claim in different terms when he says: “Some used to claim that the EU was a progressive ethical project of civilisation based on liberal market principles, standards of democratic governance and the rule of law. Others used to claim that the EU was an anti-democratic imperialist project of international finance capital under the hegemony of Germany….Given what has been going on in Greece, I wonder which one?”

    We all know that there will be considerable pain for Greece if it leaves the euro, but what choice do they have if, under the present oligarchical system, the future holds nothing but a “debtcropper” existence for themselves and their children.

    Greece must leave the euro.

    1. timbers

      I also noticed those lines you quote, and agree Greece must leave the EU.

      It is possible as Yves says, that buying time will give Greece allies to pressure Germany for better policies in the future and avoid the pain of an exit from EU, but is also possible things will not change and only get worse, triggering an event more horrific and beyond calculations. Like Golden Dawn, WW3, Ukraine/US/Russia situation. And just how much better would the policies of a flexible Germany be within EU, if EU remains committed to it’s overall course? Either way, it’s much speculation and hard to know.

    2. Yves Smith Post author

      With all due respect, if Greece hangs in, there is a chance that the external environment changes. By contrast, if Greece leave the Eurozone, it is assured another large ratchet down in its already terrible economic condition. Greece is on the verge of social breakdown. It is not clear how much more pain it can take. What happens when you start getting food riots, for instance?

      Readers for the most part have a very unrealistic picture of what a Grexit means. Yanis Varoufakis has looked at it in gory detail for years and rejects it firmly. This is not a case of six to nine months of worse pain and a trajectory upward. I need to write a post on the legal issues, but the short form is that a departure from the Eurozone, under Eurozone arrangements, also means an exit from the EU. That means a loss of important subsidies particularly in agriculture, rendering one of its few successful export sectors uncompetitive, and further damage to exports off all sorts by being outside the EU internal trade zone. So Greece is faced with an immediate ratchet down by virtue of disruption of a Eurozone exit, and a further slide by virtue of knock-on damage from being out of the EU. A Grexit virtually assures that Greece becomes a failed state.

      Continuing to fight the Troika as long as possible leaves open the possibility of external events pressuring the Troika to retreat on some of its positions.

      Put it another way: Greece can stay in the Eurozone and risk the downside of living as an amputee. Or it can leave and face the near certainty of societal slow suicide. Its options are terrible unless it can use its profile to marshall support from other countries.

      1. Carlos Fandango

        The way you put it Yves, Yanis will just say his piece to deaf ears then he will have to give up and go with the consensus…… which will be the same old austerity.

        If as you say Grexit is worse than the existing pogrom, it’s game over already ….. Greece will suffer until Germany decides it’s time for the periphery to succeed. Until then we can all whistle up our own backsides.

      2. MartyH

        Given the focus Yanis V has given to this challenge, I think we can have hope that he sees some paths to some form of sensible approach. Clearly, he has been steadfast in hoping to avoid the Grexit option and has given everyone a chance to examine his thoughts in depth. Ilargi’s piece, I thought, captured the challenge in a way that cuts through the coded talk of the Troika/ECB/etc. The other Greek Story of this morning starts out:

        Can the Syriza government in Greece maintain an impossible triangle: (1) stay in power, (2) reverse austerity, and (3) stay in the euro? It will all depend on whether the European Union sees itself as a progressive ethical project of civilisation based on liberal market principles or as an anti-democratic imperialist project of international finance capital.

        Probably the most concise statement of the challenge. Of course, my statement implies that I accept his framing.

      3. lolcar

        With all due respect to Mr. Varoufakis and his analysis of the costs of Grexit, if you have 25% unemployment with a budget primary surplus of 1.5%, what’s the unemployment rate going to be at 4.5% ? I doubt he factored such unreasonable intransigence into his calculations.

        1. timbers

          Why not make the requirement be 4.5% unemployment instead of budget surplus? What’s it all about, anyways?

          1. Yves Smith Post author

            The Germans labor under the delusion that the will get their loans paid back. They believe requiring a primary surplus means Greece will have the funds to pay principal. They obviously could care less if Greece suffers to do that. They refuse to see that high unemployment levels mean low tax receipts and economic contraction, both of which are anti Greece solvency as a borrower.

            1. Kyle


              “They refuse to see that high unemployment levels mean low tax receipts and economic contraction, both of which are anti Greece solvency as a borrower.”

              Or, these effects are in line with their real objective. All of this is following historical patterns. I can’t believe that the bankers involved aren’t aware of what their policies create. There were similar patterns in the build-up to the ’20’s stock market bubble and crash and the immediate aftermath. Wars were excellent means of getting high return on capital and look at what we have now…endless conflict. It’s as if knowledge is being passed along generation to generation on how to fleece the sheep.

          2. rollotomasi

            “timbers” might be onto something. Correct me if I’m wrong, but it seems all the repayment benchmarks, existing and being negotiated, are based on alleviating the creditors’ grievances without regard to the current state of Greece’s economy. Tsipris should have Varoufakis establish benchmarks from Greece’s economic standpoint – that x unemployment rate and y GDP means z debt payment.

            Simple to be sure and the hosts and many commenters could come up with much more appropriate examples, plus don’t know how realistic that would be politically; but it seems that the whole playing field is about the creditors getting well and not Greece’s citizens. No one will benefit long-term without a more balanced playing field, and perhaps bringing into the discussion concrete measures from Greece’s perspective might help nudge that along politically.

          1. mpr

            Yes, this is a very important point, which has been mostly missed in the analyses one sees in the media. Excellent coverage btw.

          2. Breton

            Greece is finished, done…no matter what happens next or eventually.
            When the Cash stops….
            This is not at all about “Greece”, per se.

            The EU and Troika are talking about what’s next.
            There is much more in play than little Greece.

      4. Bill J

        My principal disagreement here is in the implication that Greece under the present Eurozone structure is not somehow already a failed state. What is a state without sovereignty? There can be no dispute that a Grexit will be painful but ultimately there is no squaring this circle. Greece’s present course is unsustainable and delaying matters will not fundamentally change this fact. The Trioka is emphatic that Greece consume the poison that it euphemistically calls “medicine” but some insist that the latter’s refusal to do so makes it the irresponsible party.

        1. Yves Smith Post author

          See my comment above. A default does not mean a Grexit. And you are simply refusing to acknowledge that a Grexit will NOT make matters any better for Greece.

      5. Jackrabbit

        Greece faces the same situation that everyone faces under the crony neolib framework where cashflows trump human dignity. In this regard, their struggle has wide ramifications. At what point does one throw up their hands and scream: “f*ck it! I’m not going to live like this”?

        IMO, Greece could not simply leave the Eurozone, they needed to negotiate and try to be reasonable. It is certainly better for the Greeks and the EU if a deal could be reached. Greece has also won much sympathy for their approach (in contrast to the harshness of the other side).

        BUT I would not rule out Grexit. As hard as it may be for Greece, it is difficult for any self-respecting people to accept what is demanded of the Greeks. And the allies/sympathy that the Greeks now have plus the overwhelming support of the Greek government by the Greek people are important ‘assets’ that Greece carries into the breach (if it comes to that).

        @Yves Looking forward to your future posts that explain the choices facing Greece.

        H O P

      6. Cugel

        It’s blindingly obvious that Germany is not thinking ahead. They have analyzed the short term fallout and decided they can destroy Greece without much pain to themselves. Greece falls apart and they say over and over again “This is what happens when countries refuse our help. We tried to warn them!” But, the medium to long term, which only means a year or two, still is unsustainable because Austerity is still a death spiral. Their policies still don’t work. The economies of those countries can only spiral down and down. Greece is just the first to collapse.

        They can keep insisting that the sky is yellow and the sun is blue for a while but what are they going to do with Italy, Portugal, France, and Spain? The spectacle of EU arrogance and cruelty is not going to make any of their policies more successful. And as the wheels fall off the cart, it’s quite inevitable that blow-back will damage them very badly.

        1. NotTimothyGeithner

          Germany is under coalition government. Merkel might seem important on the world stage, but at home, she is weaker than most outsiders realize. The Social Dems like most of the nominal left are at best ineffectual, and the German right will never go for any kind of bailout in Greece.

          1. Oregoncharles

            Correct. Merkel LOST the last election in Germany. If you count the SD, the left controls the parliament. The ONLY reason Merkel is PM is that the SD won’t form a coalition with Die Linke, nor vice versa. Given their experience, the Greens might not, either. (As a Green, I have a very dire view of coalitions with right-wing parties.)

            But what happens if SD comes begging – or simply drops out of the coalition? Merkel is no longer PM, and there could be a left-wing government in Germany overnight. Or a snap election. this may explain Merkel’s rather extreme positions – her situation is really very shaky.

            The bigger picture: The negotiations make it ever clearer that the Eurozone is in fact the German empire, as if they WON WWII. That’s a very dangerous position for Germany to be in, the real reason Britain and Norway aren’t in the Euro and the underlying reason the National Front (right-wing populist) in France has promised to dump the Euro, as has Podemos. France and Spain leave – no Euro, or it’s explicitly just a rump Deutschmark. And it might take the EU with it.

            I gather the consequences for the world economy would be nasty. If you’re investing, you might want to stick with only the hardest assets – precious metals, I suppose, or something actually productive and indispensable. (Note: these considerations are NOT reflected in the precious metals markets.)

            1. john bougearel

              Maybe late to this thread, but in the fwiw dept, I found this thread worth noting from the Eurozone meeting on Monday:

              “An SPD politician from Merkels’ social-democrat coalition suggested s that Prime Minister Alexis Tsipras should replace Finance Minister Yanis Varoufakis as he apparently creates lots of confusion, German politicians cannot understand. SPD executive board member, Joachim Poß, wrote in an e-mail for his party colleagues:

              “Greek Finance Minister Varoufakis has best demonstrated with his performance until now, that he is not up to the demands of such an office… Prime Minister Tsipras should consider to replace Mr Varoufakis with a political experienced, realistic-efficient person.”(Handelsblatt)

              The way this is translated from Handelsblatt, you would think that YV had been on trial this past week. That
              a Eurozone verdict and had actually been pronounced and that Yanis Varoufakis had been found lacking the skill set needed to satisfy the “demands” of his office.

              The way these technocrats operate is that democratically elected officials by the people of Greece are to be co-opted to serve the EU technocrats, against the express will of the people of Greece that elected the new gov’t, precisely to not be co-opted.

              And, let it not go unobserved that the Troika just gave UV a 21 day job review and found him unfit for the office he had been hired for. As if he was a mere instrument and puppet of the Troika. Leaves a rather disgusting taste in my mouth.

              But oh well. I hope YV sticks to his red lines and that external financing of some means becomes available, along with Rob Parenteau’s idea about floating those Tax Anticipation Notes, TANs. Given just enough rope in time, TANs and external financing may be possible.

            2. Ben Johannson

              I expect a massive revaluation of the USD in event of an EMU breakup as there’s nowhere else to absorb those quantities of capital. Great for smart speculators, bad for American businesses and workers.

          2. Santi

            Heiner Flassbeck makes the point that the cause of the Euro crisis is the wage cuts of Germany. Someone has to explain the German workers that they should be earning more money to solve the Euro crisis (and this is as true as it gets, however counterintuitive it looks). The problem is that we all have been contaminated by the neoliberal thinking and think that their competitivity is the right thing to do… :(

      7. washunate

        I hear you, but that’s the paradox of negotiating, isn’t it? If one’s strategy is constrained to only allowing comfortable outcomes, then your negotiating partners can completely ignore the uncomfortable outcomes. In other words, they can foist all the costs of ‘a deal’ onto you because you are willing to pay any price to make a deal happen. You have to be willing to walk away in order to get a fair deal. You have to be willing to blow things up in order to continue working with others as equals rather than subordinate. Painfulness of an outcome isn’t a weakness in negotiations. It’s a strength. We feel so strongly about our human dignity that we’re willing to endure X, Y, and Z if you don’t give us a fair deal…

        I say all this because I strongly support the idea of Europe. I think that idea can only survive if the individual member states enter into agreements willingly, as equal and sovereign partners, without coercion and deception. An illegitimate bailout poses a far greater long-term threat to a united Europe than a legitimate Grexit.

        That’s why we’re talking about all this now. Because a decade of bailouts, of covering up financial fraud, is making things worse, not better.

      8. Andrea1

        …but the short form is that a departure from the Eurozone, under Eurozone arrangements, also means an exit from the EU. – Yves

        (Thx to Yves and collaborators for covering this matter in detail and so well.)

        Maybe so as a result of struggles and fights, but there are no legal or institutional practices that lead inevitably to this outcome.

        The European Union, 28 member states (and the EMU Economic and monetary Union, it’s complicated, see poor wiki below) and the Eurozone, that is only 19 of these 28 that participate in the Euro as a currency, are separate entities, legally, institutionally, and in practice.

        Britain, Sweden, Romania, Poland, for example, aren’t part of the Eurozone while being part of the European Union. Some countries are in a grey area, for various reasons (Monaco, Andorra, Montenegro…)

        There are also other accords and treaties that tie European countries together. E.g. AELE (free trade), NATO, and bi-lateral accords that are quite strict, making some European countries that are not in the European Union bound to it to some high degree (e.g. Norway, Switzerland.)

        For all these reasons, a “Grexit” is not a blanket be-all-or-nothing deal. Returning to the drachma (local currency, no matter how that is accomplished) does not de jure or de facto mean quitting or being booted out of the European Union. Nor does it preclude anything about mulitple other ‘unions’, ‘treaties’, etc.

        1. Yves Smith Post author

          There are legal analyses (the only ones done, BTW) that say the reverse. I have yet to write them up. Moreover, Varoufakis is clearly of the same view, and he’s looked into this matter independently. He discusses the cost of the loss of EU subsidies as one of the costs of a Grexit. If you could leave the Eurozone without being forced to leave the EU, those subsidies would stay in place or conceivably be worth more (as in if they stayed denominate in Euros, which seems logical, so they’d be worth more in drachma terms).

          The Greeks themselves have no desire to leave the Euro because they understand it will lead to an immediate increase in the cost of critical imports, like energy and pharmaceuticals, and won’t do much for their exports (in that Greece has a not very competitive export mix, and unlike a manufacturing nation, can’t ramp up production of what it does export).

          Readers are treating Grexit like a magic bullet. It isn’t and you need to understand that Varoufakis has sound reasons for rejecting it as an option.

          1. Calgacus

            Andrea1: You are of course right.

            Yves:There are legal analyses (the only ones done, BTW) that say the reverse.
            I recently posted a link to a contrary one, by Jens Dammann in the Texas Journal of International Law. People here are not reading Athanassiou correctly either.

            Readers are treating Grexit like a magic bullet. It isn’t and you need to understand that Varoufakis has sound reasons for rejecting it as an option.

            Some sound ones, but some very unsound ones. It is important to not become less nuanced than Varoufakis, and therefore slide into mischaracterizing the Greek position.

            1. Yves Smith Post author

              No one in Europe is going to take an analysis by a scholar in a second (maybe even third) tier journal like the Texas Journal of International Law over ones by the ECB and British government. And he’s at the University of Texas, similarly a no-status player in that field.

              I have to tell you all sorts of academics write contrarian papers. I can name dozens I’ve read on derivatives, mortgages, and banking that were complete rubbish. I’ll give it a look but the fact that it was published only in a journal where odds are high that he had pull is not encouraging at all.

            2. Calgacus

              I disagree. Only 4th rate Europeans will care what journal something is printed in, not in what it says. On points like “irrevocable” – Athanassiou etc are clearly wrong, Dammann right. So much so that it is hard not to suspect tendentiousness. But Athanassiou et al aren’t saying what many seem to think. (p. 23):

              As one commentator has observed, ‘[A]s a practical matter if a
              Member State were determined to withdraw, the EEC has no sanctions that can be applied to compel lawful compliance with the Treaty. Thus, from this point of view, it really is of no consequence whether a legal right of withdrawal exists’65.

              So when he says “illegal” – think Wallace Shawn saying “Inconceivable!” in The Princess Bride (since just I saw it on late nite TV). More seriously, I recall a paper by Quincy Wright? in the AJIL? in the 70s totting up the times that the USA had used its military legally in the past few decades. I believe the occasion was the most recent, Ford’s evacuation from South Vietnam. The author counted them on the fingers of one hand. “Illegal” doesn’t mean can’t or won’t happen.

          2. Andrea1

            Yves I’m sure you are right, and I perfectly understand that Yanis V. does not wish, etc. and for sure Grexit is not a magic bullet.

            Still I thought I’d throw that out there, in the sense that there are no precedents (and not even many, as I understand it) rules / procedures laid down.

            The EU is faced here with a new, uncharted situation. One of its characteristics was to be inherently expansionist. That has now come to an end (or at least a long pause, but imho end) what with Greece and Ukraine, where the West’s project, strongly insigated and supported by Merkel, has now come apart.

      9. gordon

        This is beginning to remind me of Egypt after 1875, the institution of foreign control, the crushing of the Arabi revolt and the Veiled Protectorate.

      10. Ede Wolf

        Why should Greece leave the EU if it leaves the Euro? Because it’s stated in a treaty somewhere?
        As if treaties weren’t anything else but pieces of paper in the EU right now.

        So Syriza does not want internal adjustment of prices (austerity), and it does not want external adjustment of prices (currency devaluation with a new Drachma).

        That leaves the status quo: Getting subsidized by poorer countries and countries with higher tax loads.

        And all this because Varoufakis is such a smooth talker?

        I personally want to see Greece leave the Euro, and then get some kind of EU Marshal plan to avoid the worst in the transition phase, with clearly scheduled milestones to self sufficiency. From there on they have to keep their house in order on their own.

        Keeping Greece in the Euro is like having a spoilt child in arms reach of the candy jar. They will never stop extorting.

    3. Carlos Fandango

      We are told the Syriza strategy is to seek reform from within the Eurozone. For this to work, Greece has to stay resolute whilst waiting for potential support from Spain, Italy et al. Yves is making all the right noises to support this admirable strategy. Germany’s counter to this strategy would be to pummel Greece into submission before they can link arms with other supporters.

      We don’t know which countries are firmly behind the German stance and which are wavering. The whole Germanic ordoliberal edifice would collapse around their lederhosen if austerity was reversed and Eurozone economic activity picked up significantly. Through this prism Greece cannot be allowed to succeed, they must toe the austerity line or auf wiedersehen and fail (shouldn’t be too hard according to Yanis). After a suitable regime change it’s back to German European dominance plan A.

      As for plucky Syriza, if a Euro exit becomes a reality it’s back to the polls or risk a military coup. No doubt the generals can’t even clip their hedges without bumping into an operative from one state or another. If against all the odds Syriza squeeze some concessions within the Eurozone or survive a Grexit and turn Greece around…..There is hope for us all.

      I wonder what odds Paddy Power would give?

      1. susan the other

        A military coup in the making explains it all. Really. The Germans would rather let Greece exit and suffer a military coup on its own with no help from the EU which does not want another European-wide war… (and who would benefit most – strategically – from a coup? … I can think of a couple of countries). Yesterday I thought Varoufakis’ offhand comment that there would be no war was a little strange, now it makes more sense. Germany’s stubborn insistence on Greece keeping with the troika “program” could be seen as evidence that Germany is resigned to cutting off an arm to save the rest of the EU. Greece, as usual, is caught in the middle. It has always been a first line of western defense against Russia, yet now it is friendly with Russia. That both the US Treasury Dept and the Fed were in Greece (still are?) but there was no mention of it in the press is too telling. This thing is taking an ominous turn. Merkel, more than all the other EU leaders combined, does not want another war. Her sadness and determination are both quite visible. And Schaeuble really looks scared to death. So maybe it is this bad.

        1. hemeantwell

          My sense of the current situation is that the Syriza government, with an approval rating of 80% and in a coalition with a right-wing party that is at least receptive to a Grexit, doesn’t have to worry about a coup. Instead, it will have to worry about a slow degrading of its support, which will be most likely if it makes a crappy compromise with the Troika. The recent track record of the parties now in opposition, however, will hardly put them in a position to make dramatic claims that Syriza somehow failed to do a proper polka with Merkel. That said, I hope in the event of a compromise that the Communists and the other groupings to the left of Syriza don’t move too quickly to radicalize the situation, a move that might lead to divisions within Syriza and reinvigorate the opposition.

        2. Breton

          Susan is right, in my view.
          It IS that bad.
          Why else are they wasting so much time and energy on little Greece which is already “finished”?


      2. ruben

        There is no hope of finding support from other euro countries. Spain will be governed by a coalition of PSOE and PP because Podemos cannot grow fast enough, Italy will also remain under establishment parties control as it is right now. The biggest issue here is not to allow the outsider Greek gov’t obtain a major victory, lest in other euro countries, Spain from the Left, France and Germany from the Right, establishment parties will lose control of their countries as well.

        1. Oregoncharles

          The anti-Euro party in France is right-wing, but in Germany it’s Die Linke – “The Left.”

          Merkel’s majority is actually very shaky; if the Social Democrats decide to be center-left and join the Greens and Die Linke (if the latter will have them – wouldn’t recommend it, personally), she’s out on her tail, one reason she’s looking worried. That,. and she’s about to wreck the Euro and possibly the EU.

          So the opposition in Germany is from the Left, and actually very strong. Haven’t heard recent poll numbers, mind you.

          1. hemeantwell

            I agree. In the medium term there’s probably plenty of hope in getting support, and that is likely leading to the hard line from the Troika, trying to strangle the threat in its infancy. This is especially true if Germany continues to blunder along with the US in the confrontation with Russia, which will have strong negative economic fallout in Germany and in the Eurozone generally. It seems pretty clear that Syriza is trying to gain time to grow in its regional political influence, not to bring about a Modest Proposal-guided Enlightenment of the Troika. Domestically, I think they’ve got the Greek right nullified for now, they are nationalist leftists, not the supposed Soviet cat’s paw of the 60s.

            1. Ruben

              You have it backwards. It is not about Syriza getting support, it’s about not allowing that a Syriza’s victory leads to the loss of Spain to Podemos, then further establishment loses down the road, not allowing that Syriza’s example supported the transformation of the European political landscape. That’s why I’m very pessimistic about the outcome of the Greek struggle against the European establishment.

          2. Andrea1

            France and Russia.
            Many have come out against ‘sanctions/‘war’ on Russia’, ‘support for Kiev Gvmt’, ‘arming Ukr. army’, and so forth, with for sure different slants etc. but basically a similar message. Either since forever or recently.

            1) Marine Le Pen. – The FN in France let’s make it short has 16-30% of the vote.

            2) Jean-Luc Mélenchon, leader of the Left Front. Committed members! – and that counts, members are active – and 5+ .. % of vote.


            3) Sarkozy. He is the now once again President of the main Right Party (UMP) in opposition to Hollande’s Socialist party. A sleazy opportunist and fantastical yet convincing liar, an extreme atlanticist, he got F back into NATO for ex. not to mention smashing Lybia. Now after a post-prez career that flopped he is back au bercail, home, with Carlita and the bambino and will do anything to oppose the Socialists. He also needs emulate Le Pen to steal votes from her, done that all his life.

            4) Corporate and business interests, which in F are sometimes more or less Public-Private partnerships, badly damaged already with the war-ships story, and furious. Employment is also affected though Unions and the like have not been vociferous. It they do become so, no need to guess on what side.

            5) Several minor figures, parties, from the Communists (natch) to Nationalists of the ‘New Republic’ type. For ex. Francois Asselineau, UPR, Popular Republican Union- right wing sovereignity, he claims he is further left than Hollande, and more radical re. the EU than Le Pen. (link.) Plus many like J.P. Chevènement; followers of de Gaulle; as well as various military types.


            6) Anti-zionists fringe, anti-US imperialism, nationalists, who have no pol. power but a HUGE following. Alain Soral is perhaps top of the list here. Are being repressed.

            7) Other. Obscure forces (?) Also some so-called ‘supremo intellectuals’ like Jaques Attali.
            “Russia must be our ally!” (link in F)


            8) Bloggers, some have a tremendous following and are rumbling to act, confusedly.

            Oh man, that is massive opposition. The Socialists, as being the present Gvmt. control the media but many signs show that is splintering.

      3. Ulysses

        “For this to work, Greece has to stay resolute whilst waiting for potential support from Spain, Italy et al.”

        Yes! Apart from the ever-growing strength of the anti-austerity Podemos, I don’t know how deep the popular support for Greek resistance is in Spain. In Italy this support gets stronger every day. Any report, of ECB or EU confrontations with Syriza, provokes this kind of response from Italian news commenters– like “Sly Neko:”

        “Quello che sta facendo la Ue è un vero e proprio ricatto, un crimine verso l’umanità. Vanno messi in galera”

        “What the EU is doing is a real extortion, a crime against humanity. The Eurocrats should be thrown in prison!”

        This is starting to become a winter of discontent with the EU, austerity, and the ruling classes for the peoples of Europe.

    4. Rosario

      I would agree, though I’m reading less into the particulars of the legal and financial implications of a Grexit and more into Greece’s role as an EU colony. When India gained independence in 1947 it was a catastrophe, millions died from ethnic conflict, displacement, and famine all of which were rooted in British colonial policy prior to independence (divide and rule, land removal, economic restructuring, debt peonage, etc.). Today we see certain EU states attempting to establish the same exploitative relationship with Greece. When understanding Greece’s problem in this light neither option is palatable but remaining a debt colony sets a terrible precedent for the future of the EU and the rest of the world. No one doubts a Grexit would be painful, but such is the cost for breaking chains.

    5. Ben Johannson

      In effect, the position of its various lenders is that Greece has traded away significant, if not most, of its sovereignty in return for bailout money.

      That quote from ekathimerini suggests the SSM was specifically targeted at Greece, which isn’t really true. The ECB does not take the position that Greece has traded away most of its sovereignty for a bailout, it takes the position that Greece traded its sovereignty the moment it joined the European Monetary Union. So long as it was a “good” boy and complied with expectations this was kept behind the scenes; once Greece became Europe’s bad boy the leather belt was taken from the closet and put on display.

  4. Jim Haygood

    Seems like a cultural conflict playing out in the background of a contractual conflict. Germans want to stick with the existing programme because it’s procedurally easier and holds to the principle of sanctity of contracts. Culturally it’s about orderliness.

    Greeks want a complete break with a failed program. This morning Tsipras is declaring ‘we won’t be treated as a colony,’ with decades of bitter experience underlying that remark.

    Feels like the end of the evening at a taverna, where we all (happy and surly drunks alike) dance round the tables smashing crockery. Opa!

    1. gordon

      Given the totally different treatment being given to indebted Greece and indebted Ukraine, I don’t think “sanctity of contracts” has anything to do with it. There is no principle at stake here; it’s just power.

      1. Ruben

        You are right. At this point, the struggle against Syriza is the struggle of European establishment parties against European fringe parties that are become mainstream by virtue of previous management errors (i.e. austerity) of establishment parties.

        So even if the European establishment parties agree to the economically reasonable demands of the Greeks, this has to be construed as a capitulation by Syriza.

        The maneuver has already started in Spain, where the danger of losing control of the State machinery by establishment parties is more imminent. Today’s headline of El Pais was Capitulation by Syriza, but when you read the content, actually nothing has changed, it’s the same impasse as it was yesterday.

    1. Oregoncharles

      Verrrry interesting. Beginning of the end?

      As I’ve been saying, the great danger for Germany is that they’ll wind up isolated and to obviously Nazi-like. As most people are forgetting, Merkel’s government depends on a coalition. The SD can pull the plug any time they care to.
      If she’s worried, she damn well should be.

  5. Dino Reno

    Germany has hardened its position to spite the U.S. and send it a message that its meddling in European affairs is no longer appreciated, evidence the Ukraine fiasco. Obama is losing Europe now in more ways than one.
    His typical whipsaw tactics have infuriated the Germans, first costing them profitable relations with Russia, sparking a war in Europe, and now undermining their Euro project as defined by Germany. Treasury may be right to advise a climbdown to a more reasonable negotiating position, but Germany has blood in its eyes, seeing the entire Greek State under eminent domain. Greece needs to tank Mr. Market 10% plus to get a deal. Big ask, but still doable. Mohammad El-Erian said today it would be a “liquidity event.” Everything is fine, until it isn’t.

    1. timbers

      “Obama is losing Europe now in more ways than one. His typical whipsaw tactics have infuriated the Germans, first costing them profitable relations with Russia, sparking a war in Europe, and now undermining their Euro project as defined by Germany.”

      Agreed. Let’s hope Germany shows the same spine against Obama’s warmongering in Ukraine against Russia as they routinely do in EU finance. I’m not sure they will, but hope they do.

    2. Yves Smith Post author

      The problem is the US is using its considerable power poorly. All we’d have to do is threaten to pull the currency swaps lines to the ECB, which it is not using but cares about very much, and the conversation would change.

      The fact is that Germany is a military protectorate of the US. We spend enormous amounts on providing a security umbrella in Europe. If we were to tell them to carry their weight, you’d see European budgets go haywire.

      We’ve always been willing and largely able to push Japan, another US military protectorate, around. We’ve shown our closet racist side in being much more deferential to Germany when they are pretty much in the same position.

      1. Mark P.

        Thank you, Yves. Very much to the point.

        The U.S. could lean much more strongly on Merkel and the Germans. In 2008 Deutsche Bank, the Germans and the EU economy would have been dead without the money Paulson and Geithner fed them under the table.

        On this score, your coverage of the Boies-led suit on behalf of Hank Greenberg and AIG threw some needed light on the sums the Fed sent the European banks via the AIG nexus. Up on Senate Hill, when Geithner talked about the U.S. TBTFs being instruments of U.S. geopolitical power, he was in fact being truthful.

        It’s not fair or just, but in much the same way as Nixon and Kissinger closing the gold window in 1971 only served to enhance American clout (as M. Hudson and Y. Varoufakis have diagnosed) the GFC has (so far) served to further enhance U.S. hegemony and I don’t think there’s been enough attention paid to that. So if anything more that’s informative emerges from the Greenberg-AIG suit, your analysis would be doing a great service.

      2. EmilianoZ

        We’ve always been willing and largely able to push Japan, another US military protectorate, around. We’ve shown our closet racist side in being much more deferential to Germany when they are pretty much in the same position.

        Simone de Beauvoir’s “Les Mandarins” describes the French intelligentsia shortly after the liberation of Paris (1944). The main characters seem mostly based on herself, Sartre and Camus. At some point the 3 of them are cycling somewhere in the south of France when they hear the news of the atomic bomb on Hiroshima. The 3 of them are dumbfounded. Then the character that’s supposed to be Sartre says that the US would never do such a thing to Nazi Germany because it’s a white nation but has no compunction doing it to a yellow nation.

        The way the Greeks are treated, they’re probably considered half-white (half middle-eastern?).

        1. NV

          Regarding your statement as to how Greeks are considered in Germany, I would like to comment that traveling in Germany taught me 1) that non-Aryan does not mean what Americans mean by nonwhite; and 2) how it is that African-Americans have high blood pressure problems (whereas Africans don’t, or not to the extent). I noted that no one needed to know my ethnicity, visual inspection was enough to condemn me.

      3. RMO

        Change that to “wasting enormous amounts” and the consequence of telling to “carry their own weight” being every sane European collapsing in hysterical laughter at the idea that pulling the US military out of Europe would result in the ghost of Zhukof rampaging across the land and that paragraph would be somewhat accurate…

        1. vidimi

          indeed. britain, france, italy, denmark even, are some of the biggest military spenders around. remove the united states and the EU would still, as a block, have more than enough firepower to fend for itself.

    3. gordon

      I don’t know about “currency swaps lines”, but I’d guess that the Germans would go easy on Greece if they were promised a free hand in Ukraine. Trouble is, Ukraine looks as though it’s already promised to Monsanto, Cargill etc.

  6. Cassiodorus

    “Despite the bludgeoning of the Greek government by the ECB two weeks ago, even the pessimistically-inclined Ambrose Evans-Pritchard does not think it likely that the ECB will pull the ELA and crater Greece’s banking system. That would be a move too far for an unelected body.”

    Should we not imagine that people who have behaved like sociopaths in the past will not continue to do so?

    1. hunkerdown

      There are limits to how much a bunch of schoolboys in long trousers can do in secret without becoming laughingstocks.

    2. Yves Smith Post author

      If they pull the ELA on Greece, they would be sending the message that no depositor in a debtor country can view his deposits as safe. That is the way to create bank runs, perhaps not immediately but say if another anti-austerity or anti-Eurozone party is voted in. Bank runs = contagion risk, and the ECB’s credibility rests entirely on having tamped that down. So they’d want to do that only one the orders of the political classes so they can say the bad results were not their fault, they were (reluctantly) complying with directives.

      Shorter: it would be self destructive for the ECB to pull the ELA.

      1. Gary Orton

        In fact, YV has said as much, telegraphing his moves:

        If I were the Greek prime minister I would declare that I would never going to get out of the Eurozone. “If you want to throw me out, go ahead and do it. Do your worst. Switch off ELA support to the banks and let everything go to hell. But I’m not getting out of the Eurozone. I’m also not going to fire 4,000 public sector workers in December. I’m not going to redeem the ECB for the bonds that it’s holding. And I’m not going to be talking to the Troika until and unless we have a European Union and Council in which we sit down and discuss reasonably and rationally what needs to be done. Now if you want to dismantle the Eurozone in the process by unilaterally discontinuing ELA support to my banks go ahead. If you want to get out of the euro yourselves, be my guest.”

        1. Yves Smith Post author

          Draghi by all accounts, confirmed by his history at the ECB, is cautious and deliberate. He’s made an art form of using optics in place of action. The ECB may be as hopelessly neoliberal as the rest of the Troika, but they have fought for years against contagion and bank runs. The last aggressive action by the board (and it was really aggressive) was designed to pressure the Greek government while keeping the bank support in place. And remember, the ECB unilaterally increased the cap on Greece’s ELA last week when the negotiations broke down. That was widely seen as a move to calm markets and depositors.

          If the ECB were to want to kneecap Greece, they would be unlikely to pull the ELA. That is way too crude and leaves blood on their hands. The most likely mechanism would be to make the ELA conditional, and use that to force compliance: “You break this rule, and bye bye ELA”. Then they could say that the loss of the ELA was the fault of the Greek government. That would take a 2/3 vote of the board.

          1. Cassiodorus

            I still wouldn’t put insanity past these people. They’re already trying hard here to show the world that with enough pressure they can squeeze blood from turnips.

  7. mark

    Presenting a country with a different deal than the one offered a few days before. NIce stuff.

    The E.U. is a lout.

    Did they think he wouldn’t read it?

    Thanks, this is all very interesting, and for the most part not that hard to follow as you lay it out.

  8. guest

    But a failed state creates the perfect circumstances for Russia to intervene.

    Intervention by Russia in a EU failed state with some meddling by Turkey would create the perfect circumstances for the USA to intervene in turn — for instance by unleashing the Greek military against the Greek government (to save Europe from the Russian bear, save Greece from the Turks, save the Greek people from itself). It would not be the first coup in Greece, by far not.

  9. Santi

    Varoufakis said yesterday that they would reach an agreement on Wednesday, while Djisselbloem and other people from the commission say once an again that Greece needs to accept the extension by next Friday. I’m puzzled by this dissonance… I can explain it either because he knows there is something going on between different forces in the Commission/ECB or because he highly prefers a reaction of the markets on Wednesday than on Friday after the close of the markets and they will stage the break tomorrow. Any clues?

    1. Yves Smith Post author

      The only day the Eurogroup can conceivably meet is Friday so I have no idea where Varoufakis gets Wednesday.

      And the Greeks are not backing down.

      Greece is refusing to bow to pressure from its creditors and seek an extension of its bailout programme, without new measures to address its humanitarian crisis and help its economy grow.

      Prime minister Alexis Tsipras told MPs a few minutes ago that his government will not be rushed into a deal, and will not be forced to compromise. Instead, it will implement the programme it was elected to deliver.

      1. William C

        One of the amazing things with EU negotiations is how fast the goalposts can be moved if TPTB want. As Yanis has just found out (if he had not already been told).

    2. financial matters

      I thought that was interesting also.

      I thought Varoufakis laid out his (Syriza’s) position very well.

      He said he was not playing game theory and not bluffing but just presenting the position that the current structure is not working and they were elected to change this structure. He made it clear that democracy can change the facts on the ground. He made it clear that he (Syriza) has been given a mandate to restructure a program that it not working. He also made it clear that he is a firm believer in the idea of Europe as a democracy and that he wants to be a member of this democracy. I think this position is clearly stated and also allows him a lot of negotiation space.

  10. Plutokun

    Thank you Yves, for by far the most lucid overview available of the ‘negotiations’. It is very clear that there is a chasm between Germany and Greece, and there is no real compromise available. The Germans seem to have convinced themselves that Grexit is both inevitable and containable – I’m astonished the bond markets seem very calm about this.

    I haven’t followed all the discussions recently as I’ve been very busy – but I’m wondering if one option for Syriza has been seriously contemplated – that they declare that if Europe does not accept the democratic mandate of the Greek people, they will simply dissolve themselves as a political party, call elections, and not run – leaving the possibility of someone like Golden Dawn taking power (or at best, a very weakened version of the two main traditional parties). Its possible of course that its a bluff that might be called, but it does seem that it would be one way of making clear to the Troika that they’ve actually been very fortunate in having an adversary like Syriza, who by any reasonable standards are moderate pro-Europeans. The possibility of facing neo-nazi’s in the next round of negotiation might well be too unpalatable even for the Germans.

    1. hunkerdown

      For one thing, militant authoritarians and aristocrats share a long-term vision of society, consisting of exploited and exploiters, each taking the latter role as their historically vested right, and no strangers to forging alliances of convenience against imminent threats. For another, Syriza is unique among political parties of the world in that they take results more seriously than the illusion of business; GD would seem to take a bad deal with good graft and good optics, e.g. staying in the austerity program under the condition Germany pays war reparations (which, as in Argentina under the military government, disappears forgotten from the books in short order…). As a purely symbolic matter, European officials would embrace the opportunity to congratulate themselves for being seen putting the screws to neo-Nazi Others instead of people like themselves (and Greece vs. NATO would be over in seconds).

      For those reasons, I suspect the Troika might almost rather deal with GD but for a good cover drama.

  11. Plantman

    Conditions WILL be unbearable if greece leaves the euro, I don,t deny that.

    More important, Syriza has no mandate to leave the euro….Their soaring public approval ratings suggest that they are doing precisely what the people want them to do. I just have a hard time reconciling the fact that the EU…in the words of a previous article…is an “anti-democratic imperialist project of international finance capital under the hegemony of Germany”.

    Will that ever change?
    It,s hard to see how.

    1. Jim Haygood

      ‘[Syriza’s] soaring public approval ratings suggest that they are doing precisely what the people want them to do.’

      As best one can discern, Greeks want to keep the euro and jettison the austerity.

      But this deal does not seem to be on offer.

    2. hunkerdown

      How many regional unions throughout Western history have not been anti-democratic imperailist projects? Remember, slave labor made the demos possible.

  12. gallam

    I may have missed this from an earlier discussion, but what is to stop Greece defaulting, printing its own Euros for its banking system, and then continuing to use the Euro? If necessary they could just print some other country’s serial letter on their Euros – an X rather than a Y might be appropriate.

    1. Bill J

      Counterfeiting will not help them out of this mess. Greece will have to eventually reissue their own sovereign currency with all that this implies (i.e tax obligations in reissued currency).

    2. hunkerdown

      Hah, reminds me of the time in junior high when I was sentenced to copy a few pages of the glossary in my history text — and delivered photocopies to the teacher the next morning, duly, as promised.

      Anyway, there are a couple of articles in the EZ agreement that regulate legal tender and so forbid the unauthorized printing of Euros per se. Besides, that would nakedly qualify as counterfeiting, especially with Germany’s “signature” forged on them, which would almost certainly constitute an act of war. (Though, if they really wanted, they might be well-advised to order several tens of millions of “€” from North Korea and keep them in a vault somewhere.)

      1. gallam

        Thanks for the reply. I’m not really sure how the Germans would respond to this particular act of war. They wouldn’t consider sending the tanks in, surely? I do wonder if the Greeks are using the presence of their printing press as a threat point in the discussion. After all, according to Nash, in any cooperative negotiation the parties are incentivised to make the disagreement as disagreeable as possible for the other party. Introducing the possibility of counterfeit or Greek Euros might well fit the bill.

        It all depends on whether or not you view this as a negotiation I suppose. Personally, I agree with the article. I don’t think there is any real negotiation taking place.

        1. Ben Johannson

          Greece would be severed from the international financial system if it illegally produced euros. That’s enough to damage its economy for at least another generation.

        2. hunkerdown

          Not tanks, but a proportional response to counterfeiting Euros would certainly require (and mobilize) more than the Troika — not just the ECB but every Euro issuer could claim damage from such a Trojan horse. When one of your houseguests — “family” may not properly describe Northern sentiment towards them — has been using your credit card without your permission, what do you do?

          As Ben notes, the “full faith and credit” of the Greek state would be in shambles if they were to do so (the Euro too, if they went about two or three orders larger). As Lisbon treaty signatories, they did promise the banksters they wouldn’t compete with them. I had originally thought on just keeping some aside for emergencies, but now that Ben mentions it, the hit to counterparty trust doesn’t make such small quantities worth considering. Several billion, maybe, if you really wanted to poop the party on the way out, but any non-Lisbon printing they do would probably better be drachma for moral defensibility.

  13. otto

    There’s an elephant in the room named Golden Dawn. Syriza has already made clear in several statements that they fear its further rise, while Troika (et al) has paid no heed to the angle.

    1. susan the other

      In view of Ukraine, we should now ask if the US State Dept has funded Golden Dawn too. This makes Varoufakis’ willingness to stick his neck out understandable. Why would an internationally recognized economics professor like Varoufakis get involved? Did the Fed/UST go to Greece to confer with Golden Dawn. My wheels are spinning. Probably the same cheeseball came up with the names “golden dawn” and “odyssey dawn.”

      1. hunkerdown

        “Morning in America” was a well-known Reaganism. So it goes way back.

        Absolutely right it’s worth asking. Though, if that were that case, would that imply the US-Germany tussle isn’t what it appears? In turn, is the spat just a head-fake and both of them are quite happy with Golden Dawn running Greece (any bastard, as long as it’s the ancien regime’s bastards), or is there a very genuine disagreement as to who should be running GD and how?

      2. kimsarah

        In view that the US supports and props up opposition groups throughout the world without acknowledging it, and without the mainstream media even bothering to address it, it makes it difficult for me to believe anything our government tells us. At most, I take what they say with a huge grain of salt. That’s why I come to sites like this for legitimate reporting, which of course our government wants to take down.

  14. Jose

    If the ECB tries to cut ELA, contrary to the function of central banks, the Greek government might decide to order the Greek Central bank to ignore the ECB and expand ELA.


    The Greek government could also get direct loans from the country’s commercial banks and then use the newly created euro deposits to either pay bills internally or pay debt held abroad.

    Of course, the ECB could react by cutting off the Bank of Greece from the TARGET2 system and then euro deposits wouldn’t be transferable abroad. But again, that would be an expulsion of Greece from the eurozone – an illegal and unconstitutional measure that the unelected ECB governors would likely refrain from adopting.

    If Greece keeps its nerve it may well prevail in this battle. And it’s a good sign to observe prominent U.S. liberals like Krugman coming out in support of Greece’s refusal to raise its primary surplus target.

  15. dbk

    I just can’t decide whether Germany believed Greece would blink/back down/surrender, whatever, or whether they knew they wouldn’t and were determined to throw Greece under the bus ab initio.
    Perhaps they had reckoned Varoufakis et al. were at heart just a bunch of guys like them who happened not to wear ties. Now they’re catching on, and are beside themselves. And that episode of the substituted memo – could they possibly have thought Varoufakis wouldn’t, like, read it? (Fool me once, shame on you; fool me twice, shame on me – cf. “Varkiza”).
    Greek news is providing comprehensive coverage of the full-bore attack on Varoufakis/Syriza – the virulence of the attacks is truly unbelievable. This behavior just strengthens the Greek government’s resolve, which anybody with even the slightest understanding of the Greek left would have expected.
    Paul Mason is providing good on-the-ground English-language coverage of the situation. He’ll be interviewed at 4.30 pm NY time by a Greek station; the whole country is waiting to hear what he’ll say.

  16. docg

    Love your Luca Brasi story, Yves. But in this case, the shoe is on the wrong foot (if you’ll pardon the mixed metaphor — actually “the gun is in the wrong hand” would work better). It’s Greece that wants out of the contract, not the troika. And it’s Greece that should be holding the revolver, assuming it wants out of that contract badly enough — which we can assume it does.

    The problem is that Tsipris and Varoufakis aren’t really tough guys and probably wouldn’t even know where to find a gun assuming they knew how to use one, which clearly they don’t. The gun is there. It’s better known as the European working class, which is just sitting there, waiting to be organized. A general strike throughout Europe (including Germany) would do the trick, I feel sure. That’s the gun that needs to be held against the heads of the European ruling class, the threat of class warfare. It’s the ONLY threat that will get through to them. But the working class these days is hopelessly unorganized, in almost total disarray. So the troika is going to win this particular battle, Greece is going to cave — the handwriting is on the wall.

    But this will be a Pyrrhic victory — to invoke an old Greek saw. Greece is destined to default whether its leaders want that or not. And that will be the beginning of the end for the all powerful status quo — in Europe and everywhere else.

  17. Matt Pappalardo

    Ms. Smith,

    Quick correction: Paul Mason is no longer with the BBC, and is instead employed by Channel 4 News. They are not affiliated.

  18. craazyman

    anybody have a Ouija Board?

    I tried Nostradamus but all I could find with this quatrain, it was the closest thing topic-wise but it’s hard to decode. Could be good news or bad news!:

    The shadow of the realm of Bratwurst untrue,
    It will make Ouzo and chicken gyros bitter fruits:
    sleepless scribes confuse courtiers admonishments
    The King of Orléans will visit Bordeaux on holiday

    1. craazyboy

      My bet it goes on for a little while so all meeting participants can call their brokers in London and trade on press leaks. Then there is the [codename] SGIP problem where all the other unhappy Austerities want a piece of EU butt.

      My Ouija Board disappeared, which kinda scares me, but I’m trying not dwell on that too much lately.

      Ya, that Nostradamus dude is hard to argue with, but hard to figure out what he’s saying too. I’d look at the tension between bratwurst and chicken gyro. The bratwurst is a sign of continuity. Until recently, there was no such thing as a chicken gyro. They were lamb and beef, and quite yummy too. Chicken, however, is a sign of Economic Substitution, and the downward kind. This I would say portends a bad outcome for Greece, tho Nostradamus probably knows better than anyone that economics is not an exact science – and he is advising caution with all that other double talk of his.

      On the bright side, we know from the teachings of Dr. Tremens – Money Wave Theory, and our cursory observations of the Greek economy, that chickens can create Drachmas!

  19. Lune

    Yves, do you have any idea how much of Greek debt at this point is held in private hands (i.e. large financial institutions esp. German)? If nearly all of Greek debt is held by the ECB and IMF (and other supranational public institutions), then it becomes much easier for Germany to accept or even force a Grexit since the losses will be shared by all Euro members. But if a significant chunk of debt is still held by German banks then potentially those banks become a lobbying force for avoiding default at all costs. I’m also curious how much CDS has been written on Greek debt, and who stands to benefit vs lose on a credit event. These financial players have significant impact on politicians after all…

    Also, I’m absolutely dumbfounded by Germany’s stance at this point. It appears to be run more by thoughts of vengeance on a scale of the Treaty of Versailles than a rational assessment of desired outcomes. If they think that forcing Greece into a generational depression bordering on their own Weimar experience will bring other periphery countries to heel, I think they’re sadly mistaken. In contrast, if I was Spain or Italy, I would be looking to exit even quicker before the Troika turns their tender eye to me!

    Furthermore, there’s a disconnect between what you (and Varoufakis) believe are the consequences of a Grexit vs. what Germany believes. If Germany believed that an exit would truly be that harsh for Greece, then the best discouragement of Spain and Italy doing the same would be to let Greece exit and fend for themselves in the wilderness for 20 years. Logically speaking, if a prime motivation for Germany’s otherwise irrational approach is to discourage others from disobeying the Troika, then Germany must believe that the conditions for Greece upon exiting the Euro are *better* than the consequences for Greece while staying within it (hence why Germany doesn’t want them to leave and serve as an example). Ironically, Varoufakis believes the opposite, which is why he’s continuing to negotiate at all. I’m not sure which position is correct, just pointing out that Germany’s negotiating stance implies much less severe consequences for Greece of an exit than the Greeks themselves believe.

    Consider this analogy: the reason why slave owners used to whip slaves who attempted to escape was, as you would say, pour decourager les autres. But this was only because life outside the plantation was better than life inside and both the slaves and their owners knew it. Otherwise, the example of the hardships of the slaves who managed to escape (if they were truly worse off) would serve as enough discouragement for the others. No need to whip anyone or even try to prevent people from escaping. No one would try. And the point of the physical violence was to raise the costs of an unsuccessful escape attempt so high that it outweighed the benefits of a successful escape attempt (adjusting for probabilities of success). So if Germany is “whipping” Greece as bad as it seems to be, that must imply they believe life outside the EU might actually be better for Greece and the rest of the periphery and they must artificially raise the costs of a calculated escape attempt. Sorry for the distasteful analogy but in this situation, I think it’s apt.

    1. Yves Smith Post author

      That figure is in the other post on Greece up today. Under 20% of the Greek debt is private.

      The reason for the German belief being different that the Greek is:

      1. The Germans have evidence that there is no market contagion, unlike 2010-2012. Spreads in other periphery country bonds are not rising along with Greece’s.

      2. The Greeks (and the US) believe there will be political contagion, that if Greece exits, other countries will eventually follow. Germany and the northern countries believe that they can turn Greece into a demonstration project, whether it does a Grexit or merely continues to defy the Troika, that the cost of that defiance will be so high that no one will dare follow.

      3. Schauble is a religious fanatic about austerity. The Economist has called him Ayatollah Austerity. He and Merkel have repeatedly stressed the importance of obeying rules, a core German value, and have demonized the Greeks as lazy profligates. They are in the classic Upton Sinclair position of “It is difficult to make a man understand something when his salary depends on not understanding it.”

      1. Erick

        Another reason that the Germans won’t budge is that they know Varoufakis won’t pull the plug. Varoufakis has been confronted for years with evidence that staying in the Euro is worse than Grexit (sorry Yves, but even pro-EU groups had to admit this) but on his blog he has maintained that he is committed to the European Project and its values. That he would not be swayed by other arguments.
        So anyone dealing with him will know that his analysis of Grexit has been coloured by this commitment.
        If Greece wants to stay in the EU and the Euro, there is no negotiation it must comply, for the purpose of the Euro has always been to lead to this moment, the dissolution of the nation-state.
        I really need to brush up on the interviews and saying of Jean Monnet for a lot of what is going on is according to what he planned.

        1. Yves Smith Post author

          I suggest you look in more detail at the case of Greece. There have been studies for years that show that Greece has an export mix that is will not benefit anywhere near as much as the textbook accounts depict from a currency devaluation. This has been confirmed empirically by Dani Rodrik, who is a highly-regarded development economist and no neoliberal, in a recent Project Syndicate column. In it, he describes how Greece has considerably lowered its wage rates, which has a similar impact to a currency depreciation, and has not gotten anywhere near the export benefit that you’d expect. And as we discussed, it’s not clear how much of a benefit it will get in the agriculture sector, since Greece will lose EU agriculture subsidies, while its competitors will continue to benefit from them.

          Oh, and citizens will have the right to sue the Greek government for the loss of their EU citizenship. All of the establishment parties that Syriza turfed out are sure to pile on that one.

          Moreover, you ignore the acute distress that Greece is in now. Do you seriously think it can take the economic blow of six months to a year of higher import costs (the so-called J curve effect), particularly of energy and pharmaceuticals, before it gets any export benefit (it takes a time for foreign buyers to rearrange their lives), the internal dislocation of the effort to introduce the drachma which will take months, the legal chaos of what happens to contracts now in Euros, and probably most important, the high probability of a banking system collapse? And it will also get much less trade benefit by virtue of being outside the EU. Please show me a Grexit analysis that incorporates these issues. I have yet to see any, which suggests the proponents you cite have not done this homework and are operating on lofty generalizations that break down here. And that’s before you get to the risk that troubles Varoufakis the most, that a Grexit triggers a Eurozone dissolution, which every single financial analyst who has ever looked at this agrees will cause a Great Depression in Europe. Greece, which is already in a Great Depression, will be pulled into an abyss.

          It is really easy for people who don’t have to live with the consequences to suggest simple-sounding but massively risky actions to deal with complex and thorny problems.

          Greece gets many of the benefits of a Grexit with vastly less risk by defaulting, if it comes to that.

          1. steve

            OK, suppose they default. How does the Greek government fund its operations after defaulting? Syriza proposes a stimulus program, how can they do this without massive deficit spending? Is anyone prepared to loan the government money indefinitely?

            Syriza isn’t going to stay in power for very long if they can’t keep their promises about ending austerity and putting the population back to work.

            In short, can Greece be the first country ever to successfully run an economic stimulus program without being monetarily sovereign? Even FDR couldn’t do that–he had to get the country off the gold standard and then blow up the London Economic Conference to ensure that the dollar wasn’t pegged to foreign currencies before the New Deal could really get going.

            The instant Syriza’s support dips, the powers that be will instigate a coup, just like in Ukraine. I think it would be very naive to believe they aren’t preparing the coup forces right now against that moment. Syriza need to stay very popular if they want to stay in power. And to do that, they need the freedom to deficit spend without limit. But how can they do that while having to borrow?

            1. Carlos Fandango

              I’m starting to think Greece has few options in the current geo-political climate. Outside the Euro they are sovereign again (maybe happier) but economic toast.

              Trans national corporations conduct most of the worlds trade facilitated by finance capital, supported by a captive media and of course the mighty military and intelligence forces of the USA. If you’re not with them you’re against them.

              The USA and Euro/ Israeli lickspittles regularly bring down bigger fish than Greece with impunity. Current hit list: Venezuela, Argentina, Hungary, Russia, Syria, Iran to name a few ….. China next.

  20. Noonan

    “If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.”
    J. Paul Getty

    1. MyLessThanPrimeBeef

      Today’s banks can just create more money or have a rich uncle-central-banker.

      It’s a problems-free brave new world.

  21. Tom

    There are a lot of unknowns here. Hollande and Merkel were in Moscow and talked to Putin without any of their officials or even interpreters present. Which means most likely that they were not sure of their own people. At the same time Obama let it be known that he doesn´t appreaciate the European approach to Greece. That sort of forebearance towards a country like Greece is strange coming from the US. Did the Grexit play a role in the negotiations? Was there a quid pro quo? I suspect there was and we will soon find out. Namely Putin got more or less what he wanted and the US won´t like that. Could that be to the benefit of Greece?

    1. MyLessThanPrimeBeef

      Follow the money.

      I suspect lots of Wall Street derivatives are Putin-negative and these financial MWD also might blow if Greece debt extension does not follow a certain path, upsetting many imperial patricians.

  22. Doug Terpstra

    I’d love to know if there are any backchannel discussions on the lifeline offered by Russia. Game theory would preclude public dislosure, but it’s an intriguing prospect.

  23. ambrit

    I am of two minds on this one. The cynical underdog supporter in me would dearly love to see the Russians ride to the Greeks’ rescue, like the Cossacks of old riding over the hill just in time to save the brave settler wagon train from the marauding Turkemen oxmen careening round the circled wagons and raising H—.
    The other, more sobersided aspect of me fears a repeat of the 1946 Greek Civil War. That, by strange coincidence, was between a faction backed by Britain and America and a faction backed by Soviet Russia and Yugoslavia.
    No good choices, or, more accurately, no easy choices.

  24. Petey

    “Schauble is a religious fanatic about austerity. The Economist has called him Ayatollah Austerity. He and Merkel have repeatedly stressed the importance of obeying rules”

    Since I keep going back to WWI analogies, as always, the question is just who is the German General Staff in this scenario.

    Or put another way, who is the decider on whether or not to go to war?

    – If it’s Schauble, then of course we have a general European war.

    – If it’s Merkel, then ¯\_(ツ)_/¯

    – If it’s European Institutional forces that are, in this particular scenario, able to resist Germany and its Quislings, then we have Varoufakis and Schauble shaking hands for the cameras after signing a piece of paper.

    But I don’t know who is the German General Staff here, so it’s a fascinating game with incredibly serious real-world consequences. And as always, it’s impossible to tell during good brinksmanship if war is about to break out, or if a piece of paper is about to be signed…


    The Frances Coppola piece in Forbes is worth reading, IMHO.

  25. participant-observer-observed

    Don’t miss Amy Goodman’s interview with Pablos Iglesias, political science professor and Podemos party secretary general in Spain, which has 5 seats in the European Parliament.

    Please note his linkage of austerity with death of democratic process.

    I would also like to take this opportunity to encourage NC community to consider taking up for debate a factor I have yet to hear in the EU currency discourse, namely that:

    Not all national assets are equal in the EU, and therefore the value of the raw, natural (land) capital backstops to the Euro are NON-LINEAR! (Evidenced by GSach’s attempt to do a parcel-wide fire-sale in Greece last year?)

    I.e., Spain, Italy, and Greece are coastal nations, while Germany (and Luxemburg, Austria etc) are landlocked countries.

    With hostilities broiling on the eastern and southeastern fronts, Greece, Italy, and Spain can recover their own currency values easily just by Euro-external unilateral trade in real estate and tourism alone, it would seem!

    I would love to see some discourse on how this is a mistaken (and admittedly naive) presumption.

  26. George Summers

    Unless the political situation in Western Europe changes truly radically Germany is not at all landlocked. It has direct access to the Baltic and access thought the Kiel Canal to the North Sea. However, the canal is limited in size and can’t host the newer ships, afaik.

  27. john bougearel

    Maybe late to this thread, but in the fwiw dept, I found this thread worth noting from the Eurozone meeting on Monday:

    “An SPD politician from Merkels’ social-democrat coalition suggested s that Prime Minister Alexis Tsipras should replace Finance Minister Yanis Varoufakis as he apparently creates lots of confusion, German politicians cannot understand. SPD executive board member, Joachim Poß, wrote in an e-mail for his party colleagues:

    “Greek Finance Minister Varoufakis has best demonstrated with his performance until now, that he is not up to the demands of such an office… Prime Minister Tsipras should consider to replace Mr Varoufakis with a political experienced, realistic-efficient person.”(Handelsblatt)

    The way this is translated from Handelsblatt, you would think that YV had been on trial this past week. That
    a Eurozone verdict and had actually been pronounced and that Yanis Varoufakis had been found lacking the skill set needed to satisfy the “demands” of his office.

    The way these technocrats operate is that democratically elected officials by the people of Greece are to be co-opted to serve the EU technocrats, against the express will of the people of Greece that elected the new gov’t, precisely to not be co-opted.

    And, let it not go unobserved that the Troika just gave UV a 21 day job review and found him unfit for the office he had been hired for. As if he was a mere instrument and puppet of the Troika. Leaves a rather disgusting taste in my mouth.

    But oh well. I hope YV sticks to his red lines and that external financing of some means becomes available, along with Rob Parenteau’s idea about floating those Tax Anticipation Notes, TANs. Given just enough rope in time, TANs and external financing may be possible.

  28. Sanctuary

    Given that the Ukraine ceasefire is a joke and not holding, I fully expect a Russian offer will be made to Greece at the 11th hour. It may not seem related but it is. The fact that it is not holding means the Russian government is telling the EU and the US that it has no faith in negotiations and no interest in avoiding conflict. The Europeans were hoping this ceasefire would hold so that they could avoid extending sanctions and keep the US from sending direct lethal aid to Ukraine. Now, further US intervention is assured.

    More importantly, because of German intransigence with Greece, Putin now has a perfect opening to answer US intervention by being the White Knight that saves a NATO member from death and destruction perpetrated by its supposed allies. For a handful of billions, he can keep the Greek government funded for the next 4 months while it keeps pressing its point with the Troika and increases volatility within European financial markets. He can foster greater disunity within the organization and keep the EU from placing any further sanctions on Russia, further underscoring the fecklessness of both NATO and the EU. Meanwhile, because Syriza will still be around and still be holding to its demands, other anti-austerity parties will increase in strength and further undermine the Troika and the turncoat governments that threw their populations under the bus for the sake of Troika policies. The EU intelligentsia/elite will be too busy with all of this dissension and infighting to be interested in meddling in Russia’s “near abroad”.

    You’re telling me Putin won’t put $4 billion into a guaranteed scheme that removes Europe from his Ukraine equation while also hobbling NATO from within? That’s not a gift, that’s an investment and one the Germans should have to answer for.

    1. lolcar

      Strategic victory for Putin requires rapprochement with Germany and in the long-term a German/Russian partnership that makes the US irrelevant in Europe. At that stage, NATO might as well disband. So it doesn’t make much sense to me to try and use the situation in Greece to kick Europe in the teeth.

      1. ambrit

        Try NATO without America and, (possibly,) Britain. When you reframe the equation using Continental Europe as a power centre, it starts to make more sense. Putin doesn’t need strategic victory to accomplish Russias’ objectives. All he need do is deny America her strategic goals.

    2. Yves Smith Post author

      No, no no. Much cheaper and cleaner for Russia to intervene, if it does, when things are even worse in Greece. It has nada to gain by an 11th hour rescue. Plus it really pissed off its much more important ally Better to pick up the pieces later, particularly if Russia can sell the idea to Turkey that an unstable Greece is no good for them either.

      In finance terms, you NEVER invest in a company pre-bankruptcy unless you are worried about competition in the bankruptcy. There is no competition here. Russia has no reason to move quickly, and oil will be much higher later too.

      1. Sanctuary

        Oh, I meant 11th hour as in the last hour possible before Greece has to surrender because it is out of money, not Feb 28th. Everyone agrees the Greeks could last at least a few weeks past the 28th. I think it will be after the 28th and that may well be an unspoken understanding between Greece and Russia. It would explain why Greece doesn’t appear to care about these arbitrary deadlines set within the past 2 weeks and why it doesn’t seem to care about the 28th either.

        Also, I think Turkey wouldn’t care if Russia gave Greece a few billion dollars to get through the next few months. That’s a short term gambit. The Greeks would still be hamstrung economically and given the turmoil his aid would inflict upon the EU, I think Turkey would enjoy that given the shabby treatment it received from them.

  29. Carlos Fandango

    On the subject of default vs Grexit.

    If Greece default as opposed to exit the euro they are still dependent on the goodwill of the Eurozone comptrollers to operate effectively. I’m fairly sure onerous conditionality will be demanded. If they do not meet the conditions imposed, the ultimate sanction would be exclusion from all ECB support. In which case Greece could try to soldier on using the Euro unofficially (in which case the Greek banks would fail) or Grexit.

    Default ups the political ante considerably, which may scare up a little more support to relax austerity. However, the glorious Titans of the financial world (who are the real power behind austerity policies) will not be sufficiently frightened to loosen the noose. Heck, they laugh and scoff at poor little Greece. Only widespread democratic pushback across Europe or threats to their financial hegemony through a Euro break up can change the status quo.

    Not that I would dare personally ask Greeks (or anyone else) to make a sacrifice. I haven’t yet thought this through fully, but a heroic Greek sacrifice might be the best way to loosen the vice like plutocrat/corporate/financier grip on power, saving us all (the 99.9%) ultimately at relatively low cost to humankind. It boils down to changing power structures by evolution or revolution. If the Greeks don’t do something significant now, the cost of revolutionary change may be much higher in the future with millions of lives lost.

    Third way socialist evolutionary policies have been doing sod all to help us for 20 years…. Could a Grexit be the day the world changed or default and compromise, merely a temporary respite from Greek suffering?

    Then again if we believe the tide has properly turned against neoliberalism, Greece just need to hang in until they are floated by rising water. I’m genuinely scared the US and Euro plutocrats already have too much political power, military might and means of suppression to keep control for the foreseeable future. If we don’t act soon it will too late.

    1. Yves Smith Post author

      It is admittedly hard to game out a default, but anything that Greece can do to keep the clock running longer and make the Troika the aggressors increases the odds of shifting the political calculus in EU countries in their favor. So that is a big reason to favor a default alone. Plus Greece can say they were left with no choice, they told the Troika repeatedly they were insolvent, the Troika knew there was no way they could pay the debt, but the Troika refused to operate in a sensible manner.

      A default means losses to all the taxpayers in the Eurogroup countries that hold bonds. The desire to avoid the appearance of losses, when anyone with an operating brain cell knows those bonds are not money good and should be written down, is a big driver of the political pushback. That is a big reason that the Eurogroup has so summarily rejected a restructuring.

      Once they default, the value of the bonds is arguably zero. Greece can then say we aren’t paying a dime unless you give us a better deal. The governments will need to minimize losses to reduce taxpayer backlash. Getting Greece to pay something then becomes a priority.

      1. lolcar

        I like to think of those bonds as the accounting record of all the BMWs that Germany has sold to Greece over the last 10 years. Now if they want to cash them in and buy the entire Greek olive crop for the next 30 or 40 years, fine. Thousands of unemployed Greeks would no doubt get to work planting trees and picking olives. The Greek economy would recover and Germany could be repaid in full. Otherwise, defaulting on the bonds is just the long overdue formal recognition of losses to the German people that were actually incurred when they accepted lower wages than their productivity deserved, in order to become the “export powerhouse” of Europe.

      2. Carlos Fandango

        Bear with, because I’m bored, stuck at home and on crutches at the mo’…

        If the taxpayers in any particular country were feeling aggrieved at the loss of Greek bond holdings. A solution could be for the ECB to buy all the defaulted bonds at par (print money) then write the bonds off, not sure if the ECB capitalization rules (or neolib politics) would allow that. The German taxpayers need not feel on the hook for the so called reckless Greeks as they could be given a credit against future tax liabilities. Although I’m sure this is overly simplistic solution, already rejected for one reason or another. It seems creating money by fiat for the benefit of the masses is generally frowned upon.

        Of course it’s all just fantastical playing with numbers on computers, hurting no one and nobody would notice a thing immediately on the street. Greece would have a slight breather and XXX Bn of tax credits would have been created allowing the hero creditor countries to run smaller surpluses (or larger deficits) than otherwise. Of course there is an element of seigniorage on the Euro, as less tax might be collected for the same issuance of Euro. If spread over 10 years it would be a splash in an ocean of money and compensated for by increased GDP.

        Of course this would have to be repeated for all the struggling countries, but it would smooth things over to the next crisis at least. Then again I’m not the Kaiser of Europe so what do I know…

        “If only everybody would stick to the damn rules gott dammit.” Says Wolfgang.

  30. dbk

    Paul Mason’s interview on Greek television was very comprehensive. In addition to all the information we’ve learned from Yves’ excellent posts, a few more points he made:
    – the Greek side is providing more information than the Eurogroup is accustomed to doing; thus, for reporters, there is a notable “information asymmetry” at the moment
    – without revealing anything specific, he did note that the various draft memos came from different sources; he left it to be understood that the source who revealed the Moscovici draft was sympathetic to the Greeks.
    – surprisingly (to me, anyway), he said that his impression is that Merkel is working towards a viable compromise, and that Greece’s greatest opponent among EU leaders is Rajoy
    – since negotiations began, the Euro-side has systematically been employing “bait-and-switch” on the Greeks, viz., a preliminary agreement being replaced by harder language in succeeding drafts. So the “switched” memo was not in fact a surprise, but in the vein of “more of the same”.
    – if no “agreement/deal” is reached by Friday, then the mechanics of the EU funding system will start to work, inevitably, against Greece (nc readers know this)
    – Mason covered the MOU negotiations of 2011 and 2012, and the Cyprus meltdown in 2013; he said these negotiations are the toughest he’s ever witnessed.

    He later tweeted that “there is nothing so serious as this … political discussion on British tv.” The program was good, but it was a pretty standard-format, standard-content, standard-level. Greek news is all-politics-and-hard-news, all the time, and its political talk shows are similar. Very well-informed journalists, tought questions, lots of content, all sides presented.

    1. ambrit

      When I see the essential inanity of what passes for political ‘reporting’ on American television, I’m uneasily reminded that U.K. television has now become Americas’ political information source.

    2. William C

      Interesting. Thank you. And thank you to Yves for continuing excellent coverage.

      On one point, for Friday I suggest you can probably read Sunday. Contrary to popular belief European politicians and officials can – and do- work weekends if they have to.

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