Greek Talks Collapse, Default Looms

Both sides in the Greece/creditor negotiations have said they have reached the limits of what they are prepared to give.

Talks on Sunday fell apart after a mere 45 minutes. The immediate impasse is an inability to bridge the gap on what the IMF surgically calls “making the numbers work” or meeting the creditor’s primary surplus target of 1% for this year. Greece had proposed in its 47 page document a target of 0.6%, which it increased to 0.75%. The difference between the two sides the path by which Greece gets to a stringent primary surplus level of 3.5% a year by 2018 is a bit under a €2 billion per year gap. The lenders pushed for more cuts in pensions, higher taxes on energy, and VAT increases, and the Greek side would not budge.

The locus of decision-making is again at the political level. The key date is JUne 18, when the Eurogroup meets. However, ECB chief Mario Draghi is speaking at the EU parliament today at 13:00 GMT, and the ECB also has one of its regularly scheduled two week meetings this Wednesday at which they decide whether or not to increase the ELA.

Even though an IMF default is not a bright white line, June 30 is not just the date when Greece will default absent somehow cinching a deal, but it is also when the bailout will expire unless the Eurozone countries all agree to extend it. The sour mood on both sides makes that seem well-nigh impossible. More former supporters of Greece are siding with the Troika. For instance, Sigmar Gabriel, the head of Germany’s Social Democratic party, which has taken a more sympathetic stance towards Greece, took a much harsher tone in an op-ed in Bild over the weekend. A translation from the Financial Times:

“The game theorists of the Greek government are in the process of gambling away the future of their country…Europe and Germany will not let themselves be blackmailed. And we will not let the exaggerated electoral pledges of a partly-communist government be paid for by German workers and their families.“

The key creditors all appear to have reconciled themselves to loss recognition. One of the fallacies we’ve seen in both media and financial commentary is that a Greek default will trigger a loss. Assuming the creditors don’t have a way to finesse it, what it instead triggers is loss recognition and a wrangle over who absorbs how much of it.

Even though the financial media keeps citing the face amount of Greek debt, that’s not what is at issue. Like a house that someone bought at $200,000 but is now worth $90,000, everyone knows that Greek loans are less than their face amount. As we’ve stressed, they’ve already been cut in economic terms by extensions of maturities and reductions of interest rates. The creditors fully expected to take more economic losses; had Greece gotten through the bailout and gotten its €7.2 billion in bailout funds, it was set to roll right into a new negotiation over debt levels, which the lenders have called the third bailout (with the 2010 and 2012 rescues as the predecessors; confusingly to those without a scorecard, the €7.2 billion “bailout” at issue now is part of the previous deal).

As Tim Worstall explains at Forbes:

Good economics tells us that the Greek debt burden should have had a severe haircut three years ago at the latest. That’s not what happened and yes, that was a mistake. However, now that everyone’s been watching this for years there’s just no possible political manner in which this demand could be accommodated. Because the citizens in those other eurozone countries understand all to well that it is their tax money which has been lent to Greece. And if there’s a haircut then it’s their money that is being lost. Whether this is true or not doesn’t matter: but the Northern Europeans view the Greeks as work shy people who retire very early on indeed. And they simply will not put up with having to pay for that. Again, that’s it’s mostly not true simply does not matter: politics is about what people believe.

There are ways to do this and no one will complain. In fact, it’s already been done. By lowering the interest rate that Greece has to pay, offering capital repayment holidays, extending the terms (some of this debt need not be repaid for 50 years) the net present value of what is owed is rather smaller than the headline amount. Those eurozone citizsens have already lost ther money but it’s been lost to opportunity cost and inflation, not to a haircut that they can actually see. There’s undoubtedly another iteration of that which could be done to lighten the burden again upon Greece. But, Tspiras, for his own domestic political reasons, needs to have that headline cut. The very thing the other eurozone governments cannot give him if they are to keep their own holds on political power.

Now again, remember, the creditors were willing to provide more in the way of covert haircuts; indeed, they fully expected to do that. And many commentators’ assumption was that the political unpalatability of having to financially unsavvy voters know that all that Greek debt that their governments hold has been written down in a big way was a third rail issue. That in turn would mean Greece had a negotiating trump card without having to go the Grexit route (which is remains unpopular with Greek voters). A default would mean loss recognition which would put elected European officials in all sorts of hot water.

We had concrete evidence that ‘fessing up to Greek losses wasn’t the Eurozone leader political death threat Greece believed it to be in May. Remember that Tsipras said Greece would default in mid-May, only a few days later to have Greece borrow against an IMF reserve account to pay the IMF. The creditors did not offer any concessions then to forestall a default.

I thought at the time that the creditors holding their ground meant they had some sort of trick up their sleeve, that they might not have to recognize the losses (as in write them down) even if Greece defaulted on the IMF, which is the most senior creditor. But the willingness to tolerate a Greek default may be the result of something simpler. The creditors have succeeded in moving public opinion in most Eurozone countries even more to their side (witness the Bild op ed), so that if Greece defaults, the elected officials believe they can pin enough of the blame on Greece so as to limit any damage to them personally.*

A Greek default is not a “get out of paying” card. When countries default against mere private lenders, they don’t get away with not paying . The debt gets restructured, as in written down in economic terms to something that the borrower can hopefully meet, and the various lenders scrap among themselves. And remember, official creditors are in a much better position to extract what there is to be had than private lenders.

The ECB may lower the boom on Greece. The creditors, assuming they can reach agreement, may try a last “offer you can’t refuse before the Thursday Eurogroup meeting. The ECB would be the most likely enforcer. Mario Draghi is speaking later today, so he may show a bit of steel. Peter Spiegel of the Financial Times mentions one option we have discussed previously, that of a repeat of a brute force move used successfully against Ireland and more recently Cyprus, to remove the ELA:

…. eurozone negotiators may resort to the “take it or leave it” strategy used on Cyprus at a eurogroup meeting two years ago.

On that occasion, an ECB representative warned that without a deal, the central bank would be forced to cut all emergency funding to Cypriot banks — essentially laying waste the country’s financial system. There have been similar pressures on the ECB in the past week to take the same stance with Athens.

However, my guess is that the ECB will not do this immediately, although it might based on what Greece does in the coming weeks (as in they’d like to be able to pin the blame firmly on Greece). It may well depend on their reading of how much sway Varoufakis and like-minded members of Syriza have on Tsipras. Varoufakis has long been opposed to a Grexit, and has written forcefully that it’s not at all like an Argentina-style mere severing of a currency peg. The viability of the ECB playing the heavy is reinforced by the fact that….

The Left Platform is still pushing for a Grexit.I’m not sure It’s distressing to see the Left Platform, which has a far more acute grasp of the power dynamics of the negotiations that the Syriza mainstream has, to be so out of their depth as to what actions to take in response. While a default is less destructive to the Greek economy, the Ambrose Evans-Pritchard reports that the Left Platform has called for an “Iceland-style default”. Remember, Evans-Pritchard is a Euroskeptic and has regularly taken a Syriza-sympathetic position. Even so, he feels compelled to stress why Greece sin’t at all like Iceland:

Iceland’s internal banking system was rebuilt from scratch under state control with public funds equal to 30pc of GDP, and was shielded by capital controls. The boards were sacked. Some executives were prosecuted….

Iceland gradually recovered and has since racked up impressive growth. Contrary to apocalyptic warnings, a 50pc devaluation proved to be part of the cure. The krona has since strengthened slightly against the euro.

However, Iceland has a very different society and economic structure. Quick stabilisation was possible only because the IMF and the Nordic countries stepped in with a $5bn rescue package.
Greece has already exhausted its IMF quota in the two failed rescues of 2010 and 2012, and is now at daggers drawn with the Fund’s team in Athens.

To put none too fine a point on it, Iceland has a population of a bit over 300,000. A $5 billion rescue package is massive relative to the size of the economy. Iceland also had been through a sustained boom before its bust, so its citizens took a big hit from a starting point of prosperity and a well functioning government (albeit one that was lousy at bank supervision). And it already had its own currency, so it did not face the trauma and disruption of a having to scramble to implement a new one (we have a post coming up shortly on the operational issues of a Grexit**).

The resolution of the Greece/creditor deadlock may also mark Peak Neoliberalism. It’s possible, but only remotely so, that Greece and its creditor overlords will back off from their collision. But as we’ve said for years, Germany is wedded to incompatible goals, namely running large trade surpluses but not financing its trade partners. It is destined to burn them down if it fails to find a new course of action. Greece is also wedded to incompatible goals, namely getting a real break from austerity while staying in the Eurozone.

On the current trajectory, Greece will suffer horribly under a default or Grexit. The creditors have the incentive and the means to make either one more painful than continued austerity so as to force Greek citizens to capitulate and vote in a more compliant government. There is a bloody-minded faction that includes Finland, Latvia, Spain, as well as some ECB governors that is eager to punish Greece and sees that as necessary to preserve the Eurozone. We’ll see soon enough whether these austerity radicals that we call the ultras persuade enough key players to put their plans into action.

But even in a less punitive scenario, a default or Grexit will do very serious damage to an already fragile and deeply depressed economy. Those who assert that Greece will bounce back quickly don’t have an economy this close to being a failed state as a comparable.

Our view has been that the most likely scenario is a default in the Eurozone, and that the authorities have likely underestimated the damage if the impasse ultimately leads to a Grexit. Even if they are correct that financial contagion is contained, political contagion over the next few years is another matter entirely.

But on a bigger frame, no matter how badly things turn out for Greece, the institutions at the core of the European project will emerge with their image badly damaged. The dirty secret has long been that the program of European integration was designed to produce rule by technocrats. Those technocrats, by being captive to bad ideology, have failed to deliver on the basic obligation of government: to provide for the safety and well-being of their populace. In a capitalist society, that means producing enough decently remunerated jobs.

However, even if neoliberalism winds up receding as a result of the brutal Greek negotiations, it’s naive to assume that the exposure of the bankruptcy of neoliberalism means a return to the old European model of more social welfare and (at least in theory) democratic accountability. Ironically, the train wreck we are seeing now can be presented as a prime example of the dangers of democratic rule: a democratically elected government in Greece demanding better treatment from its jailer/creditors, when the most of the debt is held by democratically elected governments who are not willing to give Greece the breaks it wants. And as we’ve stressed from the outset, the fact that the two sides can’t come to agreement is that Syriza’s red line of pensions is also a red line to voters in the states that have provided funding to Greece.

Thus even if the Greek denouement does represent Peak Neoliberalism, that does not mean that social democracy will emerge victorious. It simply means we will grope towards a new political order. Only if citizens are vigilant and engaged do they have a hope of coming out as winners.

* Some observers are placing more stock in a blog post by Olivier Blanchard of the IMF that is warranted, in which he argued both sides need to make concessions. Blanchard is head of the research side, which has no role in the “program” decisions being negotiated with Greece. In fact, for years there has been a noteworthy disconnect between IMF research, which is often anti-austerity, and program design and implementation. While Blanchard does take up the IMF position, that Greece needs more writedowns, that’s not news since even the program team has been calling for that since at least April 24 (at the last Eurogroup meeting). Given a leak in Faz over the weekend, that Lagarde reversed herself on a proposal by Juncker to let Greece fund pensions for the poor by cutting military spending by €400 million, it seems that the IMF is holding fast to its hawkish position. And Blanchard reinforced the notion that Greece would have to cross red lines to get a deal done:

….the Greek government has to offer truly credible measures to reach the lower target budget surplus, and it has to show its commitment to the more limited set of reforms. We believe that even the lower new target cannot be credibly achieved without a comprehensive reform of the VAT – involving a widening of its base – and a further adjustment of pensions. Why insist on pensions? Pensions and wages account for about 75% of primary spending; the other 25% have already been cut to the bone. Pension expenditures account for over 16% of GDP, and transfers from the budget to the pension system are close to 10% of GDP. We believe a reduction of pension expenditures of 1% of GDP (out of 16%) is needed, and that it can be done while protecting the poorest pensioners.

So Blanchard is fully in line with the program team’s position. He’s just trying to put a nicer spin on it.

** I am sure some readers will point to a Wolfgang Munchau piece today, Greece has nothing to lose by saying no to creditors, in which he advocates a Grexit. Munchau is normally a sound columnists, but this article is a marked departure. I’ve pre-debunked some of its assumptions above, such as the notion that Greece can somehow pay private creditors but not official ones, and so they will face enormous losses. That’s not going to happen. Start with the fact that defaulting on the IMF means Greece loses access to trade finance. There are other implements of enforcement that official creditors that private ones don’t. And it ignores, as we and Worstall pointed out, that large losses have alrready been taken in previous restructurings. Moreover, its claim that Greece is “relatively closed” is technically accurate but substantively misleading. Nathan Tankus will discuss the issues regarding trade in his next post on Greece, but the short version is that Greece has a low ration of import value in its exports. One of the implications is that Greece really does use (and by implication, need) its imports in its domestic economy. Think of pharmaceuticals and machine parts as a proxy for Greek imports. When those go up radically in price as a result of a Grexit, it means many already strapped buyers (consumers and businesses) go without. That has knock-on effects (health risks, loss of revenues to already fragile business leading to increased failure rates).

We’ll have more nitty-gritty detail on the operational issues of a Grexit on Tuesday or Wednesday. Stay tuned.

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  1. Swedish Lex

    Default (with or without leaving the euro) does not make the Greek debt go away, clearly. However, one consequence of a default is that the debtor stops paying old (pre-default) debt altogether. I suppose that the negotiations about the old debt of Greece could drag on for a very long time, years.

    The immediate question then becomes how to manage cashflow after default (new debt). I guess the main answer would be a new currency with a new national Central Bank.

    I read somewhere that 75% of the Greek economy is national and 25% related to imports/exports. Tourism counts for a lot and I suppose imports of energy accounts for a big chunk of where hard currency is needed. I guess that here is where Russia, and potentially China come into the picture.

    Also, I read that some on the political left in Greece would like to nationalse the banks. They could be privatised after 5-10 years, probably at a profit to the Greek state.

    I suspect that a defualt would lead to a couple of years of chaos. But it is probably worth it.

    I however much much doubt that the French, the Germans and the Finns will be very pleased when they learn that their respective governments have to recognise billions in losses on loans to Greece. Finland, for instance, is in a tight spot economically and does not “need” X more billion on the wrong side in its accounts. But they dug this hole for themselves. Ironic that hard-working Finns will have to pay for saving Société Générale and Deutsche Bank from going under because of their lunatic lending in Greece.

    1. Yves Smith Post author

      Please see the accompanying post on the operational issues of a Grexit. It addresses the central bank issue. Please see our second footnote for an initial discussion of the trade issue; we’ll have a longer post on this by mid week.

      As much as the loss recognition issue heretofore would have seemed to make the notion of a Greek default impossible, as in the voter reaction you allude to would seem to make this a political non-starter, there has been a stunning absence of calls from elected leaders to pull back from brinksmanship with Greece. That suggests they think they have a way to fudge the losses or that they can bear the political fallout. Not that that will prove to be correct with the fullness of time, mind you, but that seems to be their belief now.

      1. Swedish Lex

        Yes, attempting to take over the Central Bank of Greece or killing it while setting up a new one, should normally be not attempted because of the monumental risks associated with that. But these are extraordinary times and we may well end up there anyway.

        Yes, the Tsipras Government is not very competent (like its predecessors). But the Troika always knew what they had to deal with. And if it is in the enlightened self-interest of the Troika not to kill Greece, then they should have the smarts not to push Greece to or beyond the edge.

        I understand that the Greek economy is closely inter-linked with the global economy, although it may seem not so much so when looked at from 30.000 feet. However, had this been Sweden, not a single Volvo truck or Gripen fighter jet could be manufactured without full access to global markets in every sense. A Swexit would kill the Swedish economy from day one. Greece would appear to be less sensitive to this. But I am looking forward to reading the next post on this issue.

        A Greek default and/or Grexit may well create a humanitarian disaster. Vital parts of the Greek economy and Greek society may stop functioning. At the same time, tens of thousands of Syrian and African refugees arrive in Greece. The EU, having first failed at keeping Greece in the euro (and the EU) would then be faced with having to ship emergency aid to the Greek people. What a circus.

        1. Swedish Lex

          To be clear; Sweden does not have the euro so the question of Swexit is purely hypothetical.

          One of the reasons the Swedes (in a referendum) decided to keep the Krona was to maintain a national central bank with oversight of the Swedish Parliament. Should not come as a surprise that nobody in Swedens suggests introducing the euro.

          Compare with the fate of Finland:

          1. Swedish Lex

            Also, I suppose that the ECB would have to take an actual loss against its (limited, as I recall) equity.

            If so, Draghi might have to send invoices to all euro capitals to ask for new billions to shore up the ECB’s balance sheet.

            Well played, Troika……..

        2. Bill

          A Greek default and/or Grexit may well create a humanitarian disaster.

          You mean it’s not already? What will be a ‘humanitarian’ disaster is Goldman Sachs getting away with gross incompetence!

      2. fajensen

        With regards to political fallout, the “(anti)social (un)democratic” danish government spend the last four years basically taking a huge dump right on top of their core constituents. There is an election campaign on, despite the governments track record, it is a pretty tight race and they might even get back in. Voting does not matter as much as it used to and the politicians know this.

      3. Cugel

        Certainly the Germans think they can point smugly to the lazy, greedy Greeks as bearing 100% of the blame for default, and they also believe that they’ve got everything “contained.”

        But, what they mean by “contained” is that bond markets won’t tank in the next 6 months, that they have some political cover by blaming Greece, and that no other European country will be pulled into the crisis by Greek default in the near term.

        But, it’s all short term thinking. Having a bunch of North African countries as failed states across the Med is one thing, but having Greece under control of a Nazi party like Golden Dawn or ungovernable with a massive refugee crisis is quite another. And since there is certain to be further financial shocks, this crisis is just the beginning.

        Economist Joseph E. Stiglitz was absolutely right in predicting that this looks like the smug elite thinking just before the Lehman crisis in 2008:

        Some in Europe, especially in Germany, seem nonchalant about a Greek exit from the eurozone. The market has, they claim, already “priced in” such a rupture. Some even suggest that it would be good for the monetary union.

        I believe that such views significantly underestimate both the current and future risks involved. A similar degree of complacency was evident in the United States before the collapse of Lehman Brothers in September 2008. The fragility of America’s banks had been known for a long time — at least since the bankruptcy of Bear Stearns the previous March. Yet, given the lack of transparency (owing in part to weak regulation), both markets and policymakers did not fully appreciate the linkages among financial institutions.

        In Europe, we can already see some of the consequences of inadequate regulation and the flawed design of the eurozone itself. We know that the structure of the eurozone encourages divergence, not convergence: as capital and talented people leave crisis-hit economies, these countries become less able to repay their debts. As markets grasp that a vicious downward spiral is structurally embedded in the euro, the consequences for the next crisis become profound. And another crisis is inevitable: it is in the very nature of capitalism.

    2. Bill

      I suspect that a default would lead to a couple of years of chaos. But it is probably worth it.
      I have said this from day one, everyone and his dog know they were broke in 2010, yet the EU insisted on lending them money, they needed their Islands and other Assets, which is what they have been pushing for all along!

      view the Greeks as work shy people who retire very early on indeed.”
      They don’t retire as young as some of our Police/ Fire/ Public bodies, and nowhere near as much Pension. This is why we see our ex-police involved in security companies, especially those from higher up the ladder.

  2. EoinW

    The peak Neo-Liberalism point is intriguing. I think it very unlikely social democracy will reemerge to fill this vacuum because the majority of citizens in the West have handed the management of social democracy to politicians who do not want social democracy. The Greek tragedy may well turn into a horrific humanitarian disaster. Something that should get the attention of all people and condemn neo-liberalism once and for all. Yet with a western media captured by neo-liberalism, how many citizens will even notice the Greek disaster? Perhaps our apathy will allow neo-liberals to continue merrily on their way.

    The one force that has gotten people’s attention over the past two centuries is nationalism. This could be the one thing to challenge Pax Neo-Liberalism. In North America we’ve seen neo-liberals use nationalism as a tool to impose their latest Shock Doctrine. Europe, however, is a powder keg just waiting to explode. Who knows what that will lead to.

    1. susan the other

      We here in the west of the West, Amerika, have tweaked social policy beyond recognition. Witness Obamacare. What we have is asocial policy. Period. And American “nationalism” serves only one purpose – the military. It is interesting to note that the EU was against Greece defunding the military and spending that 400eu to fund pension benefits. Military expenditures are being forced on Greece. That is both political and fiscal – but the EU has no such mandate. I think that little lapse in authority could be used in court. The EU is just another neo-liberal tool. I would love to see peak neoliberalism – but neoliberalism is such a shape shifter it might be impossible.

        1. dbk

          And the submarines of which 2 never arrived, and 2 were defective … and a French-German company which made the 20 helicopters, of which only 11 (or 13?) ever arrived, and only two are operational, and one of them is broken down. The company recently demanded many millions of “service fees” (Huh?); the Min of Def flat out said: No delivery, No service, no payment. The company reps were both shocked and displeased.

        2. Gio Bruno

          Doesn’t most US Dollars spent abroad go to foreign militaries, so they can buy US made equipment? It’s SOP (std. op. proced.).

          1. MaroonBulldog

            I wasn’t aware that U.S. military aid dollars are “spent abroad. ” The loop you Correctly identify shows them being spent in the U.S., and that’s what I thought happened.

        3. German native speaker

          The manufacturer is German, but they built a factory in Greece, so that these tanks could be built in Greece, in order to support domestic (Greek) industry. The tanks had a flaw, and Greece withheld some of the payment, although they built them themselves, sort of.

          What surprised me is that Greece bought more weapons from the US than from Germany, according to Tagesspiegel. But, it could be that German firms may have spent much more lavishly on bribes than anyone else. Some got caught and fined equally lavishly by German courts.

            1. Santi

              If you read carefully the case of Schauble envelope, which is no different from the well known political party corruption cases in France (was it Chirac?), Spain (the judges have documented a dual accounting of the ruling Popular Party coming since there are records, more than 20 years) you should not wonder anymore. I guess Italy and Greece is the same.

              How it works is: companies that want “things done” bribe politicians to get public contracts. With EU funds, typically, less than 25% of the contracts is coming from the local budget, maybe other 25% from the national budget and 50% from distant Europe. As Southern countries have “development targets” there is an obligation to spend in them, not many checks to the books. If you put together 30 years of this you have the guarantee of a corrupt political system…

              This is what Syriza, and the coming Podemos, are taking care of. I guess Italy will keep stagnating and take more time. Don’t know much about Portugal. France seems to sleep, but one never knows with France… ;)

              One could say that we southerners learned the tricks of the trade from those Northern politicians (la grandeur de Chirac, die grosse Schauble…)

              1. Lambert Strether

                Yes, I’ve read that the paragon of German rectitude, Herr Schauble, pushed or rather passed along the envelope….

                What I was looking for was a German-Greek example. (I have a bee in my bonnet about Germans bribing Greeks on public-private partnerships and contracts and privatization, and that being one of the sticking points in negotiations, because neo-liberalism and corruption are so closely intertwined, but I confess I have never seen any examples.)

  3. Santi

    re: Ives comment about Peak Neoliberalism, I think we should take a look to what is going on in Venezuela, Ecuador, Russia and China to get an idea about what a post neoliberal world order will look like. While Russia is mostly neoliberal, the strong ruble management out of the standard dollar/euro channels makes it a good example too. I agree that the old social democracy will not be the model of the future world order.

    1. Cassiodorus

      I don’t think so. First off, the economies of marginal nation-states which are themselves integrated into the neoliberal world economy (even though their budgetary policies may differ from those of the main targets of austerity planning) do not provide us any insight into post-neoliberal economy. Secondly, the Chinese economy is addicted to the consumption of medium-grade coal, which they can’t quit fast enough, and this addiction promises to kill off Chinese growth in a decade or so. See Minqi Li’s “The Rise of China and the Demise of the Capitalist World-System.”

  4. CDT

    As Swedish Lex notes, eventually peeved voters in EU countries might begin to realize this bailout was as much about rescuing foreign banks as it was about helping Greece. Eventually one would think that the EU would realize it is a bad idea to ruin a NATO country.

    1. Larry

      I would think that the other EU voters would know that the bailout was really about recapitilizing banks at this point. Varoufakis elegantly made that point at the recent speech that was highlighted on Naked Capitalism. The voters in the smaller country are perhaps aware of the nature of the bailout, but afraid. An Irish friend of mine reports that his countrymen would rather see Greeks starve than have the Irish themselves under the thumb of the Troika. The fear of expulsion and it’s resultant chaos is quite real in many European countries. And economies are so interdependent for many of these countries, that it will be a disaster if they have to leave the EU. We’re not talking about Russia, China, or even say Brazil. Greece needs to buy things from outside it’s borders to operate as a modern economy.

    2. peter

      Reading the Dutch papers, I can tell you this is not the case. Dutch voters by large see their economy as a single household. It’s them (the Greek) against us (instead of bankers/elite versus ‘the people’).
      In any case, I’ve never seen reported in the mainstream press that the Greek bailout was basically a bank bailout. In order to know that, you have to be on blogs like NC.

      1. Gio Bruno

        National Public Radio did a piece on the Greek Bailout recently (weeks ago) and the financial expert stated explicitly that the “debt” funding was clearly a bank bailout for DeutchBank. He also stated that the original private debt (from foolish bank lending) was being subsidzed by American citizens (Since the Fed is buying DB “paper” through the QE program.).

        Most folks are too busy paying their mortgage, or watching the Kardashian’s, to notice they are being fleeced.

      2. German native speaker

        That surprises me. Because for example, in that very talk show where Mr.Varoufakis first spoke to the German public and which made news because he was treated so unfairly, it was explained by some participant that the money went to the banks and NOT into a black Greek hole. Each time I caught a TV discussion, there is always someone who explains that. If it’s left out in a print article, it will be in the comments.

  5. Jay

    I fail to see what Greek pension terms and labor rules have to do with failed German bank bets on real estate. Other than that the real estate is in Greece. Do you get made whole by the citizens of Monte Carlo when you bet it all on red at the roulette tables there?

    Greek default is inevitable. It would appear that the powers-that-be in Europe realize that there will be consequences for this default, and that all this is a show for their respective domestic consumption, in order to blame it all on the Greeks, when, in fact, it was just a runaround to try to not realize losses on loans that should never have been originated by German and European banks in the first place.

    1. James Levy

      What you say may very well be true but is unmentionable in a world where all responsibility for loan-making has been transferred to the loan-recipient. Everything is couched as, “you took out the loan, you pay it back or else”, never “you were dumb enough to make that loan, you eat the principle.” It’s like the farce around foreign aid. Most US foreign aid has to be spent on US goods and services. You can’t take US aid money and go out into the market place and maximize its value (unless you are Israel). So Americans, who consistently tell pollsters that US foreign aid is a huge swath of the budget and should be cut (when it is less than .1% of the budget and hasn’t gone up in years) neither understand nor recognize that almost all of it flows back here anyway. The Europeans are under the same delusion about the money that was loaned to Greece. Very little of it stayed in Greece. It went to buy goods and services from other Eurozone countries (especially Germany). The popular notion seems to be that the Greeks have those Euros under their mattresses or somehow “squandered” them.

      But just go out and try to fight these popular delusions. I wish you luck.

  6. papicek

    Best piece on Greece I’ve seen thus far on NC. Really well done. It’s the possibilities which matter here rather more than the information, which has been scant, lacking needed nuance, often flat-out wrong and almost uniformly tilted against the Greeks—even before Syriza was elected.

    Right now, what Athens needs is fewer economists (and fewer bankers) and more businessmen. They have all sorts of untapped possibilities: their small refining and chemicals industry should be targeted for expansion into feed-stocks, pharmaceuticals and medical devices. Greece should also be leveraging their geography and begin building themselves into the just-in-time logistics hub for the Mediterranean basin and as the southern gateway to Europe for goods coming through the canal from Asia. It’s a natural and China has already recognized this. That’s just for starters and is why I feel a clean exit is the preferred solution. The transition costs, I feel, are probably trivial compared to the proven benefits of a devalued currency.

    All of which will take investment. But that has been the Southern tier’s problem from the start: the northern bloc has been sucking up all that oxygen. You’ve mentioned this yourself. Well, we’ve gotten to the point where Greece’s indigenous banking system and financial markets are probably toast by now (possibilities are not synonymous with hope and optimism), but this isn’t an insoluble problem either. I don’t know if Syriza can pull all this together. We haven’t seen any executive capacity on their part but that kind of thing hasn’t been called for—as it is very likely about to be. I’ve tweeted at both Varoufakis and Tsipras that this kind of planning should have been initiated a month ago at the latest, because we’ve reached this impasse through the simple dynamic that all parties have thus far stayed in character. As I felt back in January they were bound to.

    Can Syriza reinvent itself? Can it survive? That remains to be seen, though my gut tells me it’ll fragment shortly. That’s okay. When everything settles down, it may very well be that their true place in the scheme of things is as the opposition, keeping the ruling party honest. However, the desperately needed leftward shift has already taken hold, and that may be Syriza’s real legacy. At any rate, nobody can claim that Syriza hasn’t bargained hard on behalf of those who elected them to do exactly that.

    Not too shabby, that. If you feel this pales before the more immediate economic concerns Greece faces, you’ve at least got to credit Syriza with largely sticking to the program they ran on, and they have, so far, succeeded in reaffirming the basic legal and political premises whose lack undermines economic recovery—almost uniformly—throughout the world.

    What can we expect to be hearing in the near future? If things really fall apart, manufactured horror stories of (manufactured) shortages of condoms and toilet paper, because that tilt (even in many local press outlets) towards finance remains our gatekeeper to information coming out of countries like Venezuela and Greece. If you don’t discount everything you read in the coming year by at least 95%, you’re doing this wrong.

    Because people remain in character.

    1. susan the other

      Yes I agree Greece has put up a tough fight. They played it down as much as possible – but you can see it now. I think we can safely expect the negotiations to remain collapsed. And if that happens and Greece defaults either in or out of the EU, clearly the next parade will be all the tanks in Poland and Latvia charging across the border in a neo-blitzkrieg. Because people remain in character!

    2. brazza

      one of the best, I agree … certainly more balanced, and accurate than many. “Germany is wedded to incompatible goals, namely running large trade surpluses but not financing its trade partners. Greece is also wedded to incompatible goals, namely getting a real break from austerity while staying in the Eurozone.” I venture the former is wedded to mercantilism far more viscerally than the latter to the Eurozone. Greece’ spouse is history; Zorba is not going to let his angular, tight-lipped, Nordic nag limit his dancing, and force him to get an office job … although she’s welcome to keep doing the cooking and ironing. And if it should turn out that the old goat actually prepared a new currency throughout these 5 months, all-the-while parading a few troops around Brussels … I swear I will join him on the beach for a week-long party. Yep, tough times ahead, but we’ll deal with that after the hang-over.

      1. MyLessThanPrimeBeef

        “Germany is wedded to incompatible goals, namely running large trade surpluses but not financing its trade partners…”

        That’s what we get with every firm, within a nation, trying to maximize profit, which means, naturally, selling to other countries (i.e. more markets). This unpleasantness is a natural consequence of that.

        Perhaps if Germany controls the ECB completely and feels 100% secure that that particular central bank will always and forever print money for Berlin when Germany needs it, maybe she is free of that contagious anxiety afflicting every non-global reserve currency issuer. That is, perhaps, she will be forever cured of that insatiable urge to accumulate reserves and run trade surpluses, in order to defend against the global reserve currency issuer, as well as the ECB, the relevant case here, for what is happening to Greece today could happen to Germany, should she, one day, not be able to have enough Euros to service her European debts, or dollars for other loans. Subsequently, all non-exceptional nations are in this Darwinian race to out-mercantile each other.

        It’s very similar to the situation involving the 1% nation (that gladly run trade deficits – and throw away jobs – to finance the rest of the world) and the (divided and bickering) 99% nations.

      2. Yves Smith Post author

        I have been saying for years that the Eurozone was going to fracture unless Germany gave up its internally inconsistent goal, which is has no intention of doing, to the point of being regularly attacked by German readers for being anti German. I don’t hew to the convention of needing to be “balanced”. We call out bad German conduct. We’ve been saying for God knows how long that austerity does not work.

        But whether austerity works or not is NOT an issue in how these negotiations will go. It’s not about the long term policy outcomes. It’s about the immediate incentives, power, and ability to maneuver (find allies, use the media effectively) that will determine the outcome. Readers do not like the focus on the raw power dynamics but we have an unusually clear and instructive, if also ugly, example of that at work here.

        1. brazza

          That’s well said, and appreciated. But you can’t get so frustrated with novices of the fine arts, that you fail to see he’s our only horse in the race.

  7. docg

    “One of the fallacies we’ve seen in both media and financial commentary is that a Greek default will trigger a loss. Assuming the creditors don’t have a way to finesse it, what it instead triggers is loss recognition and a wrangle over who absorbs how much of it.”

    Thank you thank you thank you, Yves, for actually stating this truly profound truth. The money has already been lost, and for some time now. What we have now is, in the words of George Bataille: “expenditure without reserve.” Money is being burned in a huge bonfire all over the world and being replaced by indebtedness. To the point that it is the indebtedness that now appears to be the universal source of value. You can actually sell it! But what you can’t do is: acknowledge it. Fascinating!

    This reminds me of the Enron fiasco, where everything depended on how the losses were being perceived — through a very dark and distorted looking glass.

    As far as Greece is concerned, as I’ve said before, the Greeks have nothing to lose, because they are screwed regardless. The decision to hold out indefinitely strikes me as wise. It is Europe that stands to lose and lose big time, if they permit Greece to default. Imo that will never be allowed to happen. Precisely because, as you say, that will force them to acknowledge their (already stupendous) losses — and trigger many more. The game will be over.

    1. ian

      Perhaps a dumb question: how many derivatives are there that would be affected by a Greek default?
      Your mentioning the distinction between losing money and formally recognizing that it has been lost made me wonder.

      1. Bill

        Perhaps a dumb question: how many derivatives are there that would be affected by a Greek default?
        Your mentioning the distinction between losing money and formally recognizing that it has been lost made me wonder.

        The figure has been put of circa $100 trillion!
        Which is why IMF kept finding ‘accounts’ with Greek money in that the Greeks knew nothing about!
        Goldman Sachs and co won’t be happy, but maybe find a way of ‘renaming it’, so it doesn’t ‘register’ as an actual default? Wouldn’t be the first time.

    2. MaroonBulldog

      You can sell debt until it is acknowledged that the debt will never be repaid. Once that happens, you can’t sell it any more.

      That’s not the biggest problem for the financial sector, though. The financial sector’s biggest problem comes when you’ve placed side bets that the debts will be paid, if you cannot cover bets when everyone acknowledges that the debts won’t be paid.

      1. ian

        How is it acknowledged that it will never be repaid?
        Also, are there CDS’s attached to any of the debt that would be triggered?
        Is Greek debt used as collateral?

        I really am curious what the ramifications of a default would be – outside of the loans themselves not being repaid.

        1. MaroonBulldog

          How is it acknowledged that the debt will never be repaid? Well, I don’t know all the ways, but a few come to mind: when a debtor declares bankruptcy, and seeks protection from creditors in the bankruptcy courts, I would think that leads to an acknowledgment. Or when a creditor puts a debtor into involuntary bankruptcy, and the debtor can’t persuade the court to dismiss the case, I would think that also leads to an acknowledgment. When a bankruptcy court discharges a debt, I would think that concludes the matter.

          That’s hardly the whole story, though. Bankruptcy protection is for dividing up assets of debtors who have assets, but who have debts of greater value. It’s not worthwhile to use it to pursue judgment-proof debtors who have no assets.

        2. MaroonBulldog

          I believe that, when the Greek debts were rearranged in 2010, that other European states put themselves on the hook as guarantors–you know, they promised to answer for Greek defaults–so that bank holders of the Greek debts have claims to be made whole by taxpayers in other countries. How’s that for a ramification?

        3. Bill

          “Also, are there CDS’s attached to any of the debt that would be triggered?
          Is Greek debt used as collateral?”

          Yes, Goldman Sachs wrote billions in CDS, after they had ‘cooked’ the books back in 2000.
          Look out skid row!

  8. George Phillies

    As Yves noted correctly, months ago, there was no sign that the solutions spaces overlapped. They didn’t. It is not clear whether either side understood this. EU references to the Greek position as brinksmanship and gaming completely missed the point, if the EU sides believed the\ir own words. With respect to Greek banks and debts, the Greek government may take a position for bankrupt banks on the lines of ‘depositors within insurance limits may have drachmas now, or Euros when we get them’ and ‘we are not defaulting. We are paying off all debts, starting with all internal debts.’

  9. John Yard

    I think there is an other issue I haven’t seen discussed much ? Huge debts have been taken on by governments to support financial institutions. Clearly, if states default on some of that debt, there will be a much greater reluctance in a future recession to bail out the banks and corporations. Without bailouts , there is a real potential for large players to fail in the next panic : the horror !

  10. Oldeguy

    Nearly 20 years ago in his The Future of Capitalism, Lester Thurow expressed his concern that modern Global Capitalism would ultimately prove to be incompatible with Democracy.
    Not only is that proving to be true, but the Narrative of Blame Assignment for this tragedy is already taking shape. Tim Worstall’s column in Forbes would appear to be saying that No, there is no real insoluble impasse here, only gridlock caused by the competing misapprehensions of the Greek and German voting publics. The implication being that if only the Technocrats ( who, unlike the Great Unwashed, actually know what they are doing ) were operating entirely free of politicians responsible to electorates, this whole Scary Mess could be resolved.
    Democracy is on trial here, Folks.

  11. Frenchguy

    “IMF means Greece loses access to trade finance” I hope you will explain the details of that in your further posts. Does the IMF provide guarantees on trade financing? I had guess defaulting on the IMF was the worst thing you could do but I have no idea why that would be in practice…

    I agree that Munchau’s piece was especially bad. Another point, Argentina in 2001 had a few foreign reserves left (around 10 bn$ at the start of 2002, not much but still around 50% of annual imports according to figures I found). Greece has none at the time. Around 1 bn$ in foreign currencies ( while annual imports are roughly 60 bn$. They can only pay a week of imports in hard currency. Maybe Russia will provide some help but I wouldn’t put too much hope on that…

    Finally, the apparently childish behavior of creditors who accept net value but not face value reduction of debt can also be seen in those who refuse to accept wages/pensions reductions in euro but cheer at the prospect of devaluation. Of course, it’s better to reduce (crush) real wages via devaluation but it’s still bad… (and I would guess owner of real capital don’t care which way it’s accomplished)

    1. Calgacus

      “IMF means Greece loses access to trade finance”
      The IMF made similar threats to Argentina when it defaulted. But they proved empty when the IMF, not Argentina backed down back then. There is every reason to expect that the same would happen on Greek default / Grexit – and unlike Greece, Argentina didn’t have the world’s largest merchant shipping fleet, 16.2% of the entire world’s.

  12. TheRicardianBaconite

    “More former supporters of Greece are siding with the Troika. For instance, Sigmar Gabriel, the head of Germany’s Social Democratic party, which has taken a more sympathetic stance towards Greece, took a much harsher tone in an op-ed in Bild over the weekend”

    Which suggests to me, what a bunch of malarkey their “sympathy” was anyway. It was merely a posture ,to be dropped, now that the default is about to hit the fan.

  13. Mattski

    Reactionary public opinion, carefully cultivated by the MSM, carrying the day. Not just a failure of the Greek left, but of progressive parties across Europe to educate their constituents.

    I used to tell friends that the US was the only place where the word neoliberalism–dominant economic philosophy of the last half-century–sparked not even a jot of recognition among the general public. But that is also largely the case, I recently found, among my German liberal cousins, who look with a muddled sympathy on Greece but also scold them for their laziness.

    You would think that calling anyone lazy would ring alarum bells among Germans, but 60 years later. . . My comments about the Marshall Plan and rolling back the threat of socialism equally brought acknowledgement; they are in love with the story of their own re-invention, the cultivation of all that was still good about German-ness (still an utterly essentialist concept) and love to think they earned it all themselves.

    In retrospect it is appalling how little real purchase that Marxism, capital T theory, feminist theory, or poststructuralism have had on the public imagination. All but gone.

  14. Gaylord

    How does this treatment of Greece by the IMF square with its unlimited largess toward Ukraine, and why aren’t Germany’s leaders heeding Syriza’s call for an end to sanctions against Russia? Those sanctions are more harmful to Germany’s workers than a Greek default would be. And why do I hear no further mention of WWII reparations by Germany as part of the negotiations?

    I firmly believe that Syriza has an out, and that is an alliance with Russia. Wait for it…

  15. Mr. G

    The Greek polls show a populace that has completely lost faith in Syriza. As I’ve stated in previous posts…the Greek people are not fooled about the sleights and maneuvers of their government or Europe. No one is going to believe a silly blame game story surrounding a Grexit. Accountability sits in Maximo’s Mansion.

    In politics it is better to retreat and fight another day…than to be defeated having won nothing. This is the only advice Tsiprias should heed at this juncture…

    1. Maju

      Care to provide a link? Without it, it sounds like an intoxication, considering that April polls showed that SYRIZA would just roll over if elections were held last month. For example 47.8% of voting intention (vs 36.3% in the actual January elections) in a Metron poll. Ref.

      1. Yves Smith Post author

        The May polls I have seen show Syriza support v other parties at 33% to 35%, with one outlier at 45%.

        This is the poll he is probably referring to, from June:

        Actually, most Greeks may be ready for Tsipras to bow to the creditors’ demands, according to a Marc poll of 1,001 people conducted this week for Alpha TV. In the survey, 50.2 percent of respondents said Greece should accept the creditors’ plan compared with 37.4 percent who said the prime minister should stand firm.

        1. Mr. G

          Yves has it right. More to the point…the support has been eroding. Additionally if you consider specific questions….like “are you in favor of staying in the euro at any cost?”……the polls end up being 70% in favor of staying in. Here’s a recent link:

          Just my opinion, but I think the support for Syriza as a party is mostly based on the lack of a viable alternative…at the moment.

          1. calpha

            I question these polls. Most are conducted by media groups affiliated with the oligarchs. While most Greeks may want to stay in the Euro, a great many are suffering, and have been for a long time, despite the constant claim that austerity would be successful and bring growth. It has not and the misery has only increased. So is it possible that the people want to stay in the Euro, but only up to a point?

            Polls can be made to reflect a particular opinion.

            1. Mr. G

              With Grexit they will suffer immeasurably more. Imagine the purchasing power of your salary or pension eroded by 50% overnight upon move to Drachma. How would you buy the drugs, food, and gas you need to live? Your Euro denominated mortgage would suck up twice the income you had previously allocated.

              Grexit is certain regime change. Certain.

              1. Peter Mayers

                50% overnight? Do you mean that literally? It can’t happen that fast, can it? The price of imports will spike overnight, to be sure, but it will take quite a while for that price hike to then be propagated through the economy generally, won’t it?

                I’m no expert on the subject, and I’m frankly quite at sea when faced with the sharply contrary predictions made by different experts of what would happen to the Greek economy in the event of a Grexit. I’m certainly open (especially given my limited grasp of the subject) to the claim that the difficulty and turbulence occasioned by a Grexit will be extremely severe. SImply put, I just don’t know, and I don’t possess the competence to set forth an argument on this score against either Yves Smith or Costas Lapavitsas. But I don’t understand, just mechanically speaking, how a Grexit could entail an overnight halving of purchasing power (with regard to imports, yes, but a large part of what Greeks consume must be domestically produced, and thus only subject to the inflationary pressures arising from higher-priced imports in a rather gradual way — except of course in the case of domestically produced goods whose sales price is overwhelmingly determined by the cost of inputs like imported oil or medicines). So, you don’t literally mean 50% overnight, do you?

                1. Calgacus

                  Peter Mayers: You have a much better grasp of the issues than most, including most economists. Whatever the costs of Grexit are, they are finite and rather short-term as Lapavitsas rightly emphasizes. Contrary to Varoufakis’s illogical arguments, Argentina’s default is comparable & the trajectory then was something like 5% loss experienced over about 3 months. Followed by years of robust growth. Its default was also accompanied by exaggeration of the power of international loan sharks like the IMF, prophecies of endless hardship, similarly based on the omnipresent bad economics that obsesses about the foreign sector and fanatically ignores the domestic sector – the heart of any economy.

                  Since Greece has basically balanced trade now, bartering / paying for imports with exports, a claim that import prices must skyrocket in terms of Greek exports, in terms of the resources Greece needs to allocate to obtain the imports, is nothing but money illusion – a phrase that is generally used by bad economics everywhere but in this rare case, where it actually does apply. :-)

                  1. Peter Mayers

                    Calgacus: I thank you for the kind words, and I hope your affirmative estimate of my grasp of economics is correct. And most of all, I hope your affirmative estimate of the Greek people’s prospects in the event of a Grexit is correct!

                    1. Mr. G

                      Another good proxy for valuation of a newly issued drachma can be found in Greek bank deposit flight. Deposits have dropped, since January, by 38%…..and they are still dropping.

                      This is a good proxy because upon issuance of the new currency..the Greek government would confiscate all euro denominated deposits and replace with drachmas. So the decline in deposits is in proportion to the confidence (valuation) of any new currency.

                2. Mr. G

                  At the time that Greece adopted the euro the exchange rate was 1grd = .003 euros.

                  If you believe that Greece will need a monetary base at least equivalent to what it had at that time…..then my 50% erosion in purchasing power is conservative.

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