Satyajit Das: My Big Fat Greek Crisis

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Yves here. Das published this post in February and I thought it would be useful to reprise it for three reasons. First, it has held up well to the passage of time. Second, for latecomers to the Greek saga, it summarizes the background, the stances of the parties, and key economic and financial considerations. Third, the section starting “Controlled Warfare” (about 2/3 of the way through the post) summarizes the consequences to the lenders of a Grexit. Those risks are why almost no one thought we’d wind up where we are now, with two sides issuing ultimatums a mere two days before a possible Greek default, and why most of the financial media still believes a deal will get done.

By Satyajit Das, a former banker and author of Extreme Money and Traders Guns & Money

Not since the era of Aeschylus, Sophocles and Euripides has Greek drama enjoyed such popularity.

Audiences are riveted by provocative dialogue (“immoral beggar”; “fiscal water boarding”), tested themes (a Greek David versus a German and European Union (“EU”) Goliath), modish pop science (game theory) and sex (a Greek Finance Minister who attracts attention in equal measure for his economics as his appearance and sartorial choice). Financial markets watch passively, firmly convinced that the theatrical action on stage is entirely fiction.

Moral Plays…

The Syriza led government claims the moral high ground. The human cost of Greek austerity is unarguable: an economy which has shrunk by a quarter, 25% unemployment, over 50% youth unemployment, large cuts to income and social benefits, reductions in essential services like healthcare etc. But this ignores earlier actions at the heart of current problems. Greece has been on a long borrowing binge that fuelled consumption and government spending.

Greece resents the humiliating loss of sovereignty to the interfering Troika. But a financially distressed borrower cannot expect its creditors to leave it unsupervised and with full freedom of action.

The EU, led by the Germans, is also convinced of its moral position. Agreements must be honoured, particularly since two assistance packages have been provided. Germany refuses to acknowledge that its large savings and trade surpluses contributed to the excess borrowing and spending in Greece. Lenders were recklessly indifferent to risk in making loans. Bailouts benefitted banks, particularly from Germany and France, with less that 10% of the €240 billion bailout going to Greece. Europe refuses to accept that it allowed Greece to fudge its way into the Euro. It cannot countenance that a single currency without full political and financial integration was a bad idea.

Confusingly, the Greek want to write off debt but also want to continue as members of the EU and the Euro. No one here has clean hands.


The initial action has focused on a temporary extension to the existing bailout which expires on 28 February 2015 to allow time for fuller negotiations. Greece sought a bridging loan but not an extension of the existing arrangements with its deeply resented conditions.

Syriza did not want to be associated with the measures of previous governments which are blamed for Greece’s economic slump. It sought to stop asset sales, increase the minimum wage and some pensions, rehire dismissed public servants and reverse some labour reforms. But such changes to existing arrangements unlike an extension would require parliamentary approval in Germany, the Netherlands, Finland and Slovakia, with uncertain outcomes.

After several iterations, on Friday 20 February 2015, Greece and its creditors agreed to possibly agree to a tentative four-month extension of Greece’s existing bailout program but only if certain conditions were met. The extension commits Greece to completion of a review by the Troika as well as continuation of austerity programs and existing reform measures. There is no debt relief.

In return for conditional funding from existing programs, the Greek government has been forced into an embarrassing somersault in its position. Greece’s finance minister sought to portray the deal as mutually beneficial and allowing Greece greater freedom of action. The German Finance Minister was closer to the mark when he gloated that the Greek would have a difficult time explaining the deal to their voters. The problem has been resolved for somewhere between a few days and 4 months.

Getting Real…

Greece’s debt is not the immediate issue. Interest expense excluding deferred interest is around 2.6% of gross domestic product. This compares to 5% for Italy and Portugal and 3.3% for Spain. The interest rate on loans from the European Financial Stability Fund which make up 45% of its debt is around 1.50%.

Greek debt is generally long term with an average maturity of over 16 years. Some bailout loans mature in 2053. Greece has around €22.5 billion of debt repayments this year, primarily €4 billion owed to the International Monetary Fund (“IMF”) in March 2015 and €11.4bn owed mainly to the European Central Bank (“ECB”) in June, July and August 2015.

However, Greece is unlikely to be ever able to pay back its current borrowings. No amount of semantics and pettifoggery can disguise that fact which has not changed since the start of the crisis. What cannot be paid back will not be paid back.

The real short term concerns are capital flight, the banking system and Greece’s current cash needs.
Total capital flight is estimated as €25 billion since December 2014 (about 8% of GDP). Withdrawal of deposits from banks is running at around €2 billion a week but accelerating. Greek banks are dependent on funding from the ECB to meet these outflows. The banks also rely on ECB funds to purchase Treasury Bills needed to finance day to day government operations. The Greek government’s insistence in public statements that the country has a solvency not a short term cash flow problem is awkward, even if it is true. Theoretically, the ECB cannot finance Greek banks if they are insolvent, which would deepen the crisis.

On 4 February 2015, the ECB stopped accepting Greek government debt as collateral in its monetary policy operations, eliminating Greek bank access to cheap loans. At the same time, the ECB agreed to provide increased funding access to Greek banks through its Emergency Liquidity Assistance (“ELA”) program at higher interest rates. Withdrawal of the ELA assistance (currently near its cap of €65 billion) would precipitate a collapse of the banking system.

Greece also needs €30 to 50 billion this year for normal operations and to repay maturing debt. In effect, it needs new funding without which any bridging arrangement would lead nowhere.

This short term cash requirement and the ECB’s tactical manoeuvring, effectively acting as the EU’s enforcers, may explain the embarrassing and politically risky back down on the temporary extension.

Under The Skin…

The effects of austerity and the shrinkage of the economy are one problem. Greece fundamentally suffers from a lack of revenue.

Tax collections fell in anticipation of a Syriza victory expected to reduce tax liabilities. The present government has resolved to tackle tax avoidance and improve revenue collection. While desirable, in a world of mobile capital, it is difficult to see this having any short term impact. The Greek government expects to raise more than €5.5 billion from tax reforms and better enforcement. But it also plans to write off over €70 billion in unpaid penalties against taxpayers.

Greece is internationally uncompetitive. Even in tourism in which it enjoys advantages, it struggles to compete with Turkey and other Mediterranean resort destinations. In part, this is the result of the Euro cost base which compares unfavourably to the weak Turkish Lira.

Since the commencement of the Greek crisis, internal devaluation, mainly through lower wages, has reduced costs by around 15%. But this has not resulted in a significant increase in exports. The correction of Greece’s current account deficit reflects the collapse of imports due to a shrinking domestic economy rather than higher exports.

Outside of tourism and some agricultural produce, Greece simply does not have much to export. Higher energy costs (driven by excise taxes and electricity rates) and (in recent times) lack of bank credit reduce competitiveness. Weak global demand is unhelpful to Greek export prospects. As a result, Greek goods exports are 17% of GDP, much lower than Germany (38%), Portugal (29%) and Malta (37%). Only Cyprus at 13% within the Euro-zone is lower.

Extensions and debt negotiations do not deal with the problem that Greece has insufficient revenue to meet its spending commitments. They merely defer the problems.

No Good Options…

Greece’s choices are fairly clear.

In the first option, the EU makes allowances. Maturities of borrowings, especially near term commitments, are extended. There are concessions on interest rates. Existing debt may be replaced with securities without maturity and a coupon linked to growth, so called Keynes-style Bisque bonds. The required primary budget surplus is reduced, perhaps with some new investment from the EU to boost activity. The ECB continues to support the liquidity needs of the Greek banks. The hated Troika becomes the ‘institutions’ to remove the odious association with the past.

Despite the reduction in the economic value of the debt outstanding, the EU and lenders avoid a politically difficult explicit debt write down. Syriza can claim to have fulfilled its mandate to stand up to the EU and Germany and reclaim Hellenic sovereignty and pride.

In reality, little changes. Professor Stephen Lubben has pointed out that the Bisque bonds are similar to securities used by the original J.P. Morgan to restructure insolvent American railroads in the Gilded Age. Many of these restructurings failed as the borrowers were left with unsustainable debt levels and were unable to obtain new financing.

Under this scenario, Greece and the EU are back at the negotiating table, within 6 to 12 months, confronting the same issues.

In the second option, Greece defaults on its debt but stays in the Euro, an option originally favoured by the current Greek Finance Minister when he was a mortal academic. It is not clear how a defaulted nation can remain within the Euro other than the fortuitous absence of an ejection mechanism.

Greek banks collapse if the ECB decides to withdraw funding. Capital flight accelerates, forcing implementation of capital controls. The Greek government is left with no obvious source of funding of its operations, other than a parallel currency or IOUs used during some government shutdowns in the US. Greece’s competitive position is unchanged as it purports to use the Euro. The EU and lenders incur immediate substantial losses on their loans.

In the third option, Greece defaults and leaves the Euro, replacing the common currency with new Drachmas. It defaults or its equivalent, repaying nominal debt in the new weak currency. Domestic banks have to be supported by the Greek central bank. There is short term chaos. Activity in Greece collapses. The EU and lenders face the same problem as in the second option. In addition, the Euro is destabilised.
The third option allows Greece to regain control of its currency, money supply and interest rates. Sharp devaluation of the new Drachma improves competitiveness, for example in tourism. The ability of the central bank to create and control money supply helps restore liquidity to the banking system and provides a mechanism for financing the government.

A cheap new Drachma, if appropriately managed, may reverse capital flight, as the threat of a loss of purchasing power is reduced. A devalued currency may help attract inflows of funds looking for bargains. In time, Greece regains access to capital markets as Russia did after its 1998 default.

Greece regains economic sovereignty but at the cost of reduced living standards as import prices sky-rocket and international purchasing power is diminished. But after the initial dislocation, and with the implementation of correct policies, a strong recovery may ensue.

The fourth option entails Greece caving in to EU demands, continuing with the mandated bailout terms and adjustment program, that is austerity. Syriza may be able to manage the backlash against its concession on the short term extension. But continuing failure may result in internal and electoral problems, triggering a collapse of the governing coalition. In turn, new elections take place.

Syria may return with a specific mandate to default and leave the Euro. Alternatively, disillusioned with the main parties and now Syriza, Greeks ay turn to the fascist, rabidly anti-Europe and anti-Euro Golden Dawn party. Civil disorder and societal breakdown may occur. A reversion to military rule which only ceased in 1974 cannot be ruled out. The underlying economic problems remain.

Controlled Warfare…

Given the effects of existing policies, Greeks are unlikely to be threatened by continued or further hardships. They may be willing to bear pain and make great sacrifices provided there is longer term hope for themselves and the country.

EU and German negotiating stance that a Greek default and exit from the Euro (“Grexit”) is manageable is akin to Dr. Strangelove’s belief in survivable thermo nuclear war.

With around 85% of Greek debt owed to official lenders, Grexit would immediately trigger significant losses on bilateral government loans, ECB holding of bonds, the loans made by bailout funds and under the TARGET settlement system. The total amount at risk is around €256 billion. The exposure of Germany, France, Italy, Spain, the Netherlands and Finland are €73, €55, €48, €33, €15 and €5 billion respectively.

Losses would convert off-balance sheet contingent guarantees into actual cash outflows. If Greece defaults, the EFSF, for example, will require each guarantor to make fiscal appropriations to cover any deficiency. The ECB may need to be recapitalised. The potential losses are significant relative to individual countries resources and budgets, especially for Spain, Portugal, Ireland, France and Italy which face their own financial problems. Covering shortfalls would make it more difficult for all nations to meet their EU mandated budget and debt targets.

The political cost would be greater, as the voters realise that the true implications of the bailouts and their exposure to losses were not fully disclosed by their politicians and technocratic elite.

Grexit would trigger capital flight from other vulnerable nations. Depositors would not place reliance on weak governments, an unfunded deposit insurance scheme and potential ECB support. Access to money markets for nations suspected of being exposed would fall. Borrowing costs for these countries would increase.
The Euro would become volatile, driven by speculation of its future composition and value dynamics. If the assumption is that the Euro becomes the new Deutschemark for a smaller Euro-Zone group, then it might appreciate sharply, reducing German export competitiveness.

The effect on the real economy and trade is difficult to forecast. Volatility and uncertainty would be bad for investment and consumption.

Flow On…

The effect on European domestic politics may be significant. Even though it is not part of the single currency, the current problems impact upon the UK elections and the prospects of Euro-sceptic parties such as UKIP. In France, Germany and Finland, it provides impetus to nationalist anti-Euro parties such as Front National, AfD and the True Finns.

In Spain, Podemos, which has similar positions on some issues as Syriza, are leading the two major parties in polls for an election later in 2015. Developments in Greece are also relevant to anti-austerity advocates in Portugal, Ireland, France and Italy.

Once Greece defaults and/or leaves the Euro, it would be difficult to stop speculation about other peripheral nations, undermining the entire basis for the common currency. Even without a full Grexit, any concessions to Greece would result in other countries such as Ireland, Portugal, Spain, Italy and France seeking relaxation on budgets and reform. Debt and fiscal sustainability within the Euro-zone would become unachievable.

There are now no more good options left for Greece. Whatever the outcome, the unwillingness of Europe to face reality means that problems will fester, dooming the continent to prolonged stagnation or worse.

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  1. financial matters

    I think there is a fifth option. Both the US and Tsipras want to continue the Euro project. I don’t think this is really a currency crisis but a governing crisis. The US, UK and Australia are not really using their sovereign currencies to benefit the 99%.

    The fifth option though would require an abandonment of neoliberal policies and a focus on gainful employment.

    Syriza has people from the Levy Institute who could institute such a plan. This would take political leadership from the EC to put citizens’ welfare over financial institutions’ welfare. But in the long run it could produce a more stable economy by directing investment to productive areas like alternate energy.

    That’s what makes this such an interesting crossroads. We have a manufactured financial crisis which could be an opportunity to change direction and use money in the productive sense of a relationship to improve general conditions.

    1. susan the other

      I know. It’s almost funny. Tax avoidance in a world of “mobile capital” kills tax collections, aka governments. Hence it also kills creditors who are invented and supported by those same “governments”. Ha.

    2. Synoia

      The fifth option though would require an abandonment of neoliberal policies and a focus on gainful employment.

      Abrupt change is a feature of chaotic systems. However both the timing of the abrupt change and the conditions of the system after the abrupt change (strange attractor, tipping point, etc) are completely unpredictable.

      However, the Germans are giving a good demonstration of their stubbornness, and why great wars happen when Germany becomes unified.

    3. Yves Smith Post author

      But the problem is the US officialdom is also wedded to neoliberalism and protecting financial markets over workers. Push comes to shove, that makes them allies of the Eurocrats, even though that is to the detriment of the Euro project.

      1. financial matters

        Yes definitely. These extend and pretend policies may be leading to a breaking point. As I think Tsipras was alluding to in his Le Monde oped, hopefully that will break toward sanity.

        Putting people back to work, using resources to address climate change and inequality.

  2. Gabriel

    I’ve been trying to get a better handle on Greece’s export profile, simply because the exports/GDP a tricky measure, especially when you’re comparing countries with differently-sized internal markets. So, for the benefit of anyone who’s interested:

    Greece pre-crisis (2006)
    Greece in 2013

    In general, I’ve been carrying around a kind of half-assumption that I’ve seen elsewhere, derived I think largely from the immediate precedent of my own country of Argentina. This says that well, yes, you *can* do the unthinkable and leave a common currency (currency board, peg, etc.), but only if you’re sitting on a mountain of soy the Chinese want to buy.
    In a European context, this kind of thing fits nicely into the German fixation of seeing net-exports/GDP as a kind of national equivalent of a business’s ROA (net profit/assets), so that a powerful export-led recovery seems the only way to redeem exiting a currency zone. However, I’d welcome any suggestions about other ways to look at possible benefits of leaving simultaneously a harsh austerity regime and a fairly highly-priced currency, independently of cheaper exports.

    On a completely different subject, *if* default-event happens this week, when do people think internal capital controls (bank holidays, limited withdrawals, currency controls, actually the kind of regime actually still partially in place in Argentina since 2001-2) will be implemented? Can’t see how even the most partial Grexit would work otherwise.

    PS. Thinking, while writing this comment, about the small Greek internal market reminded me of Mark Blyth’s remark, “Europe is about to basically fall apart by trying to teach a tiny little country the size of Alabama a lesson in moral hazards”.

    1. William C

      IIRC the export mix for Greece is hardly encouraging for those who think issuing their own currency and devaluing will be the magic solution to Greek problems. Principal earners are tourism, refined petroleum products and exports of agricultural produce (wine and olives). Maybe I am missing something but my thinking here is: olives and wine you have a lead time of decades from planting the stock to producing substantial quantities (so a j-curve with a 20 year downslope before the upturn arrives?); petroleum refining presumably also has a major lag between increased demand and expanding the productive capacity unless there is substantial unused refining capacity waiting to kick in (seems doubtful but I could be wrong); tourism – would a substantial devaluation help here? – by my crude calculation, if you had a fifty per cent devaluation you would presumably need to double the number of tourists to maintain foriegn currency earnings – are you going to get twice as many tourists wanting to go to beaches now with double the number of bodies on them? Does the infrastructure exist to cope with them?

      Greece is heavily dependent on imports for goods which are pretty much necessities in the modern world – e.g. medicine – which they cannot easily produce at home so elasticities are likely to be very low there. So not much give on the import side unless they just do without.

      Sorry to be gloomy about Greece’s prospects but it strikes me as a country with limited prospects for earning its way out of the hole by drachma issue and devaluation. Which is why I think default is more likely than Grexit.

      What have I got wrong?

      1. Jackrabbit

        Greece will not choose to exit after a default. Post-default, the ECB may pull support for Greek banks. That would force GRexit. There has been some talk (from the Greek side) about a managed GRexit whereby banks support would remain for a short time so that Greece has a chance to prepare for GRexit.

      2. tegnost

        My feeling is that any rational explanation, or seeking a rational explanation misses the point. For instance, to say that in 20 years time, there will be wine views the situation from a human perspective where your life span, lets call it 80 yrs just for fun, after 25% of you life has gone by seems an unrealistic time frame for your human budget. Rational for a corporation is completely different, the Goldmanite who writes the deal to own the wine, the nat gas, and the tourist potential of the islands gets paid today, and in 20 yrs someone wonders about how goldman ended up with all that stuff, it’s literally too late. they have been paid and spent the dough. This is in my mind where all the nc reporting on the p.e. industry, the finance sector and “the institutions” brings it all together with the TPP and TTIP. So lets do a quick backwards engineering project, starting with TPP and working back to the wine, nat gas and islands. First, the TPP to my way of thinking is the Magna Carta for corps over states. So far i hazard most people don’t know what Goldman et al are up to (nc readers not likely being the majority), but as the end game draws near where they actually seal the deal they need their own enforcement mechanism(ISDS). I see the greek situation in this light, austerity is being used as a club to cow greece into giving up, ala chicago parking meters, the future income and indeed their future as well because the banksters will say “sure you shouldn’t have sold it to us but you did, now back to the salt mine you (fill in the blank with your favorite belittling and demeaning term).
        Regular readers of nc are no doubt aware that we are sources of income for our “betters”, for instance i am now required by law to give the insurance industry 1200 bucks a year, and have 5000 deductible, so those long delayed trips to the dentist are completely off the table, as are any trips to the doctor for health care. This is the end game, yes its ridiculous to pay so much for nothing, greece needs to pay for the money that has ALREADY BEEN GIVEN to the french and german banksters. They want the same thing from everyone and they need the TPP/TTIP in order to get it. They want to own the parking revenue, the education system (half million dollar student loans to doctors ensure high medical cost is one particular win/win they have devised under the” 20 years ago we did this and now you’re complaining but its too late, because in anticipation of the population saying f this onerous debt they changed bankruptcy law to protect their ill gotten gains), they want the islands, the nat gas… they want it all.TPP/TTIP are just the next step in the power grab. It will be interesting to see it all play out, the above article seems to portray a dynamic situation and unfortunately hoping the greeks stick it to the banksters is akin to hoping for likely hardships for those same people, I still must point out that in my own human life, after, like lots of of other (citizens/consumers/humans…what do you call yourself?) the GFC wiped me out and i am no longer interested in participating in all that nonsense because unlike goldman(unfortunately) my life will end and I’m enjoying it as a human. Others who choose to do the same may find that comforts they thought they could never do without are not missed, and there may be a number of things in life they value more than making sure the boss is happy, or having a shiny car, or buying at great sacrifice a house that gets clawed back by medicaid and sold to an immortal bank for a fraction of what you spent your life paying for it. Cue Hilsenrath on why aren’t you guys giving us the money back that we loaned you by making gas cheaper? Hopefully this comment is not too rambly, I have pointed out to yves in email that i don’t comment much for the same reason many others don’t, i’m not expert in much, but am curious and daily read nc first, after looking at the weather i will admit…I also worry about yves and lamberts health in service to all of us and when i see yves up still up at 8:30 am i feel a lecture coming on, and lambert needs easy access to waders so i’ll try to be more consistent paying for the invaluable product contained herein. Icidentally, Lambert i was skeptical at first but you have proven yourself to me and you also seem to take a load off yves which, what was that about 8:30 am again? I’m curious what others think about the TPP/TTIP as being similar to the Magna Carta, a thought i’ve been pondering lately as i root around in the mud (landscaper). One last thing, i’m a washington voter and both my senators, both of whom i voted for, Sen patty Murray and Sen Maria Cantwell voted for fast track. I wonder if they realize how myself and other workers like me who have voted democrat for life are planning on never voting that slate again as we have been sold.

        1. thoughtful person

          ” the TPP [/TTIP] to my way of thinking is the Magna Carta for corps over states.”

          Yes, I think this could well prove to be true, and have been thinking along these lines myself. Corporations (the big ones) have long been multi-national, and now the sovereignty of the nation state that begot many of them is now withering away – so much that it is becoming quite visible who is ‘pulling the strings’ (in my mind, the owners and management of the corps, AKA the 0.01%), and how little say the voters or citizens have. Still, the best laid plans can go awry, and hubris is something that even can affect ‘histories actors’ as some like to think of themselves. The Magna Carta was a document that spelled the end of absolute monarchy and the rise of the concept of human rights. The TPP/TPIP and other similar corp over state agreements may someday be looked back on as a kind of Magna Carta – if their proponents are successful in bringing into visible being a kind of new feudalism of corps over all.

          The situation in Greece should be instructive in how these things may play out on a larger scale. The coming 12 months should give us some indication…

      3. alex morfesis

        I was against moving to the drachma

        but based on the antics of the three stooges(traikia) there is no question, they intend to see the greek population remain weak for at least five more years. The question becomes, what are the potentialities of a restructuring of the greek economy outside the eurozone…not just outside the euro…Turkey is the largest Nato tank group and it is not and will never be allowed to enter the euro. So there is no reason to argue greece will not remain in Nato. So beyond that question, what can the greek Syriza government do to stabilize greece for the next 25 years ?

        As to your question on increased capacity…from my experience the grape/wine harvest and olive harvest are hardly at 100%…in some places it is less than 25%…no financial incentive for the average greek to work in agriculture (not that it is any different in america)…perhaps could expand the draft and create an FDR works program to maximize harvest capacities (yes it sounds like a work camp, but…), or the country could move upmarket, since it does not much market directly globally the “greek” brand…also, there was no grape juice in greece (which made me very very angry) since the idea of selling grape juice seems odd to the greek business mind (i tried to induce a few small bottlers to think about it when I lived there…no interest)…as to the eurozone agricultural subsidies, the average german farmer gets much more money from farm subsidies than does the average small greek farmer by maybe a factor of 5 (other than a few large corporate farmers who get big checks, the myth of the fat greek farmer buying a new car with the subsidies is a joke)

        as to petroleum refinery, it has about 30% available capacity(beyond the downtime for maintenance) that could kick into play…

        As to tourism, except for 21 islands (with populations over 10K “mykonos has 10k”), the other 140 plus inhabited islands (and over 1500 uninhabited) sit mostly fallow, and in all but a dozen islands, there is almost no off season marketing done…so yes, Greece could triple its tourism and the infrastructure, other than the usual mad crush of july and august, would hold up just fine. Ithaki island, where my family is from, is the size of manhattan or hong kong island, but has all of 3 thousand regular residents, one half in the main city vathi, and the rest spread out in a few villages. There are dozens of isolated beaches one can have all to oneself….and the island used to hold 10 thousand inhabitants before WW2 and the greek civil war made a mess of things..

        so the question now becomes not one of negotiating from the pain the german economy will suffer if greece is not around to push down the euro, but one of what is good for greece long term.

        forgetting the idea of trusting the chinese or russians with a dead bric bouncing neo IMF scenario since Syriza knows better, the question is does the global economy see the possibility of batman and robin(Stournaras and Varoufakis) carrying the greek drachma back into the market. I don’t get the impression they actually want to be the ones to make the nearly impossible happen, but, realistically, it would appear, that MUTI was really just put up as a front by the Schauble faction in the CDU to stay in power after the Shrieber bribe issues came out. He conveniently stayed away in Canada long enough for people to become distracted by those awful greeks…and now he is under “house arrest” in Kaufering since the courts were kind enough to throw out his conviction, and well, he is just to old and sickly to sit in a real german version of klubfed for more than 6 months…

        it seems the choices are, stay in an abusive relationship for the children (but you know in your heart of hearts he is going to start beating them soon) or go live with your crazy aunt flo who will drive you bonkers reminding you of the three seconds she worked on broadway as some understudy on a play that no one remembers and put up with the diner owner trying to get a tight grip on your private parts when you ask him for an extra shift…

        no easy answers, but realitically, walking away from the abuse and learning to be a little afraid of life, is probably the only answer

        1. William C

          Thank you for this, which I found very interesting.

          The sad thing is that to date the effect of recent reductions in Greek costs has been to reduce imports rather than boost exports. Of course things could be different in the future but it would be terrible if balance of payments adjustment just came through import reduction (read further falls in living standards).

        2. Gabriel

          Allow me to second William C’s thanks–unused capacity excellent point that I really ought to have remembered from my argie days (a lot of idle manufacturing started up once we weren’t priced out of Brazil).

      4. Calgacus

        William C:What have I got wrong?

        “by my crude calculation, if you had a fifty per cent devaluation you would presumably need to double the number of tourists to maintain foreign currency earnings”

        is completely wrong. As I have said before in similar contexts, this is a rare real-world sighting of “money illusion”, which is about as common as carrier pigeons. In the first place, “devaluation” is a very misleading, useless & untrue concept that presupposes a crazy Procrustean “valuation” of domestic currency in foreign terms to begin with. Such a point of view very easily leads to mistakes. It is very like using heliocentric rather than geocentric coordinates to plan a trip to the supermarket.

        Essentially, fifty or any percent “devaluation” will not change the number of tourists needed to earn foreign currency at all. Tourism is naturally priced in the buyers’ foreign terms, Euros or dollars. There is no reason that this price declines. So if there is “devaluation”, the local currency price charged to tourists can skyrocket – while the foreign currency Euro/dollar price declines a bit. The hotel or resort owner can often amass more market share and local currency, the state more foreign currency, while charging the individual tourists less in their currency. All three can win!

    2. suossantdouze

      Perhaps you can break away from a common currency if you happen to be sitting on top of warm water ports on the approach to the Bosporus and Black Sea that Russia might take an interest in?

    3. Mr. G

      Gabriel, well put. Analogies are imperfect, but similarly….the U.S. Isn’t kicking Puerto Rico out just because they borrowed too much. Feds will probably bail them out via perpetual bonds or some infinite debt instrument. Net impact to the remaining country=zilch.

      1. Gabriel

        Blyth gives good quote.

        At some point I’ll have to put down in writing the degree of, for want of a better name, “creditor bigotry” one absorbs very routinely in econ and polisci courses at elite institutions in the US (maybe UK too–Germans seem just wired that way). Anything except full face value payments on previous loans, “financial repression”; set longer maturities and lower interest payments, “sovereign theft”, etc. I hear Carmen Reinhart’s latest also a lament for creditors when imprudent (“impatient”, in the language of Krugman’s paper modeling banks) borrowers find excuses like bankruptcy or inflation or foreign exchange to pay them less than they expected.

        Anyway, I’m flogging the newest Blyth talk to anyone at the least excuse, so check this out. Many good lines, but the one I think should be better known, about Draghi’s ECB “whatever it takes”, comes a little after the 32-minute mark

        “$5 trillion total state support for EU financial sector…Has anyone voted on this?”

  3. madisolation

    Not mentioned is the fact that Greece will sign a memorandum of political support for Gazprom’s Turkish Stream project. No, it isn’t the answer to all of Greece’s economic problems, but it’s a start, with up to 20,000 new jobs added. Furthermore, and more important, the project could have a stabilizing effect on Greece’s economic future, since Greece would be one of the main power distribution centers for Europe. This could lead to more and more business investment in Greece. Maybe this project will propel Greece to leave the Euro once and for all.

    1. Ned Ludd

      Greece had earlier ruled out financial aid from Russia and reportedly walked away from a Gazprom offer “(which was ready for signature [sic] on 23rd April 2015)”.

      Far from Greece’s refusal to sign a deal with Gazprom having bought for Greece goodwill, the failure to do so left Greek finance minister Yaroufakis playing at the meeting from a desperately weak hand. Without the $5 billion he might have had from Gazprom, he was left begging for money, which predictably he failed to get.

      I wonder how much Gazprom is planning to invest, this time; assuming Syriza does not get cold feet again.

      1. dbk

        I read yesterday in the (Greek) press that the initial investment was planned for 2 billion.

        1. Ned Ludd

          According to RT, “Greece to invest $2 bn in Turkish Stream”. I’m not sure how much Russia will invest. Back in April, Bloomberg reported on the earlier negotiations:

          Russia’s guarantee to deliver gas for the European market through Greece in five years would help the debt-burdened Greek economy to get new loans, according to Moscow-based OAO Gazprom. […]

          If there’s political will in Russia to help Greece, any state-run bank in Moscow might provide a loan, Egor Fedorov, an analyst at ING Groep NV in Moscow, said. […]

          Russia may give Greece as much as 5 billion euros in advance payments for the proposed gas transit under an energy agreement to be signed this week, Spiegel reported on Sunday, citing an unidentified official in Greece. Putin’s spokesman Dmitry Peskov denied that there is such an agreement, according to Interfax.

          1. wendy davis

            Ha; so many takes, so many rumors…But a commenter on my homesite left this piece, which reads almost as though *were* Greece to join the BRICS bank, their buy-in would amount to the ‘in-kind’ sort.

            “The relevant request for Greece’s participation…will be symbolic and will be paid in installments, while right after operations begin, it will be able to accept financial support,” the minister said.

            Lafazanis added that technical details were also discussed on how to submit the request so that it will be accepted after discussions within the Greek government conclude.

            He also noted that he also discussed the credit facility that will be provided by Russian banks to the Greek company which will undertake the construction of the new gas pipeline which will cross Greece. “Repayment of the Russian loan will be achieved by the profits made through the operation of the pipeline and this facility is not related to loans or economic assistance between states,” he said.”

  4. Jackrabbit

    I think that Das’ summary of the situation supports the complex (unevenly matched opponents, multi-stage payoff) Game of Chicken that I have previously described (HOP back for details).

    The cost to the Troika after a GRexit is difficult to determine with much certainty but it is significant and it is the only reason that Greece could continue negotiations as long as it has. It seems clear, for example, that the instability caused by Greece’s exit provides great leverage for the next country that raises the possibility of an exit.


    So the notion that the Toika has all the power and that this is just a negotiation about structural reforms is less true than it seems. THAT is the box that the Troika tried to put Greece in with conditionality and the ‘Catch-22’, and which TPTB-friendly media focuses on. But Greece has not succumbed to that trap. They have said that they want to end the farce and have acted accordingly (within parameters forced by the Troika).

    Yes, the Troika has power to crush Greece BUT it does not have the power to force Greece to remain in their grip. It is not in Greece’s interest to present a reform plan that shows how it can service a crushing debt because that undercuts its demand for debt restructuring (the ‘Catch-22’).

    Restructuring debt again and again with creditor-friendly mechanisms like extended maturities and capitalized interest would leave Greece burdened by austerity for an indefinite time. And that is no doubt what the Troika plans for the debt restructuring talks after a structural reform plan is agreed.

    I think a default is much more likely than conventional wisdom, swayed by the power of the Troika, believes. There has already been talk (from the Greek side) of a managed GRexit – as they expect that the ECB would not support their banks after a default.

    H O P

  5. MaroonBulldog

    “… most of the financial media still believes a deal will get done …” I have to confess, I was thinking so, too, until about the week of May 11 or so. I have only myself to blame for my own errors of thought and judgment. At least, I confess error. You won’t see most of the financial media doing anything like that.

    What’s most likely to happen now is that Greece will not make its June 5 payment to the IMF. Greece has some slight slack to wiggle in the tether that ties it to the IMF, so missing that payment will not immediately trigger all the consequences of default. But it will provoke name-calling, finger-pointing, and recrimination. Probably also baying at the Moon. Not yet general consternation, but events are now tending strongly in that direction.

    1. Mr. G

      The markets say the opposite. Greek 10 year yield was down a whopping 5.65% today. Equities were up too.

  6. Hermes

    Considering all the pain involved with staying in the Euro I have never been able to understand why that is the most popular option in Greece. Of course leaving the Euro would be painful, but it seems like the Greeks would be better off in the long run.

    1. Mr. G

      National policy is forged in medium term self interest. No one cares where Greece will be in 20-30 years. Many of the pensioners ( avid voters) will be gone by then. People are pragmatic, not rational. After 5 years of horrendous depression everyone just wants the good times to return, even if it means one last dose of medicine.

      1. Sanctuary

        I guess I contest your idea of medicine. I don’t consider poison (pension cuts to already meager pensions in a Depression) to be medicine.

        1. William C

          Why do the Greeks want to keep the Euro.

          Last I heard it was at least in part because they do not trust Greek politicians to manage the currency. The drachma was i believe a weak currency prone to inflation. You could easily see the new drachma being overwhelmed by hyperinflation quite quickly.

  7. Mark Alexander

    In the “Getting Real” section it is stated that “[t]otal capital flight is estimated as €25 billion since December 2015[…]”. I assume that should read December 2014?

      1. Mr. G

        Yves….I think these proofreader types are angling for employment at NakedCapitalism. No?

  8. Mr. G

    The U.S. Angle here may be more than just protecting financial markets. Are they throwing money at the problem through the IMF to help reach a deal?

  9. MaroonBulldog

    No issues will be settled, no agreement will be made, before they have to be. An old book said something about: … the time is always the time, after the time is sometimes still the time, but before the time is never the time.

    In the meantime, today’s news has Mr. Tsipras negotiationg with Mr Juncker, but with back-up plans to speak to Mrs. Merkel and M. Hollande. Reminds me of a story about a Viking army besieging Paris. The Parisians sent a message asking, “Who is your leader?” The answer came back: “We have no leader; all are equal here.” Negotiate with that. How Mr. Tsipras must feel at this point.

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