The Operational Issues of a Grexit Part Two: Organizational Capacity, Capital Controls and Bootstrapping a New Monetary System

Yves here. We thought it was important to focus on the operational issues of a Grexit because the commentary on this issue too often muddies multiple issues, which then leads to a poor understanding of what the costs and risks to Greek citizens might be.

The first, and most important, is a default does not mean a Grexit. Countries can and do default on their sovereign obligations, as Russia did in 1998 and Argentina did in 2001, without adopting new currencies. Moreover, default is not a “get out of paying free” card. Even with defaults with mere private lenders, Russia and Argentina restructured their debts, meaning they agreed to a program of payment of a reduced amount. It is also important to recognize that official creditors like the IMF and ECB have far more power relative to sovereign borrowers that private creditors. For instance, the IMF was the only lender to Argentina prior to its default to be repaid in full. That means even when dealing with a borrower of limited means who has defaulted, an official creditor is in a better position to extract what can be gotten than private ones.

Second, when most commentators discuss a Grexit, they focus on two elements: the forcing of a debt restructuring, and a sudden currency devaluation. Argentina again is a precedent of sorts, since when it defaulted, it also abandoned its currency peg with the dollar. Experts widely acknowledge that a rapid currency depreciation is painful even though the longer-term effects are positive. The reason is what economists call a J-curve effect: the trade deficit gets worse before it gets better. A county goes into a devaluation with an established pattern of trade. The immediate impact of a default is that import prices shoot up in the new, depreciated currency value terms while what the country receives on its now cheaper exports goes down. It is only after trade partners have shifted more of their sourcing of imports to buy from the country with the now-bargain-priced goods that the country gets the benefit of the depreciation. The immediate shock of the spike in import prices is an immediate slowdown, shortages, and business failures.

The conventional analyses generally ignore or wave off the element of a Grexit that Nathan Tankus focuses on here: the operational implications of a Grexit. Launching a new currency would be every bit as demanding as launching the Euro was in 1999, and arguably more so, since the Greek government will also have to contend with a large market of Euros circulating as currency and may come to find it necessary, at the outset or later, to offer dual currency payment processing services. We’ve attached a paper at the end that gives an idea of the amount of planning and lead times that were required for this to go smoothly. Now admittedly the Euro launch had an added factor of complexity, which was a large number of existing currencies involved. However, the Eurozone was also able to force citizens off the legacy currencies in 2002, three years after the launch of the Euro. By contrast, with the Euro the currency of Greece’s major trade partners and Greek bank customers already hoarded large amounts of Euros as cash, the Greek government will have a currency it does not control playing a significant role in its economy.

We believe that the impact of the one-two punch of a conventional currency depreciation combined with the disruption of the imposition of a bank holiday, capital controls, and the chaos accompanying an un or underplanned transition to a new currency on an already deeply depressed economy is greatly underestimated by most commentators.

By Nathan Tankus, a writer from New York City. Follow him on Twitter at @NathanTankus

My last post covered how the Euro payments system works. What happens when it doesn’t? In other words, what are the series of operational events that happen when Greece has a non-negotiated default or the ECB ends Emergency Liquidity Assistance?

Before we begin one point needs to be hammered home. Economics, law and politics are all crucial to the story of Greece, but in the moment of default or Grexit they take a back seat to something far more important: organizational capacity. To exploit every opportunity, to get a new monetary system up and running, to devise a way of continuing imports and exports, to decide what to do with the Bank of Greece and generally to decide how to deal with growing mass of consequences hurtling towards them, the government needs large amounts of organizational capacity.

Further, the longer they take getting the “new” system up and running, the more issues will pop up and the more organizational capacity they will need at a future date. (For more on organizational capacity, here’s something Nathaniel Cline and I wrote two years ago.)

This is a large part of why Yves has been so critical of Syriza. Being shut out from the payments system (on any level ranging from having ELA being cut off from the banking system to Iran or de facto Iran-style financial sanctions) and essentially forced to exit will need mobilization of the society on total war levels. The Greek ruling coalition has not prepared the population for the Troika holding firm and letting a non-negotiated default and/or Grexit happen. While we can’t know how much secret planning has happened, we can make inferences from what has already happened to organizations critical to the delivery of essential social services, like the hospitals, due to years of budgetary starvation, the poor state of tax collection and land records, and more immediately, evidence of strained organizational capacity in the negotiations with the Troika. This included poor setting of priorities (for instance, Yanis Varoufakis making himself highly accessible to the media to the point where Greek commentators were critical of time spent on messaging at the expense of negotiating), apparent limited sophistication in dealing with legal or quasi-legal documents (the treatment of the February Eurogroup memo as a success for Greece when it was very unfavorable to them), and possible shortcomings in basic blocking and tackling (creditor complaints about Greece’s delays in supplying requested information needed to evaluate Greek proposals). These may seem like minor things, but remember: What Syriza needs most is time to prepare contingencies for a default and/or a Grexit and build up their organizational capacity.

Keeping the Troika at the table without having to agree to third rails like pension gutting means showing up to the meetings on time, providing detailed proposals on all the smaller matters and dancing until you get to the big issues. In other words, use the same kind of tactics banks and other corporate interests use to gut regulatory rule-making in the United States. Hopefully, when you’re finally forced to choose whether or not to agree to the major reforms, you’ve pushed the process to the point where the demands aren’t so bad and if they still are, you’ve preserved enough of a veneer of civility that you can move the discussion to impasse alternatives that reduce the costs of negotiation failure to both sides. (Both pundits and financial analysts have mentioned idea like a “managed default” or a “managed Grexit.”) In other words, playing the game has the upside at a minimum of extending the timetable and also increases the odds of cooperation in mutual damage control. If that fails, more aggressive options are still open.

In addition, you’ve bought yourself time to plan for an exit and can reasonably claim — and perhaps leak portions of detailed and very technical plans showing this — that you can exit relatively smoothly as the final bargaining chip. Instead the attitude of Syriza leadership seems to be nicely summed up by this quote from Yanis Varoufakis: “[W]e’re dealing with a system of cronyism and corruption. That’s what we have to tackle. But, instead, we’re debating pharmacy opening times.”

To drive this point home, let’s go back to what Varoufakis dismissively refers to: pharmacy opening times. This is part of the negotiation of structural reforms, something that the Greek government agreed to when it signed the Eurogroup memorandum in February. And recall Varoufakis at that time mentioned how he and the so-called institutions agreed on 70% of those reforms.

Despite Varoufakis’ complaint, pharmacy hours are an important issue wrapped up in the Troika’s desire to “reform” the pharmaceutical retail industry. Greece sets prices of over-the-counter drugs while making it illegal for everyone but licensed retail pharmacies. They also regulate how these retail pharmacies function in all sorts of ways, including setting opening hours. Easing and eliminating these rules is about shrinking this industry and ultimately about eliminating jobs. This week pharmicists went on strike because Syriza conceded on supermarkets selling medications.

That means this set of issues is not beneath Varoufakis at all. In fact, negotiating over issues such as this is his job. Now, he does have a point that he should not be going into the weeds on every deal point, but someone on his team should be handling matters like this. If this is winding up on his desk because there’s no one else to handle it, that demonstrates how desperately overstretched his ministry is already, a poor sign for its ability to take on far more complex and urgent tasks. In other words, you can argue that criticizing Syriza for this is unfair since they were forced into negotiations without having the organizational capacity to conduct them, but then how would they have the organizational capacity to conduct a Grexit?

Let’s return to the most urgent tasks that a Greek government would face in the initial hours of a Grexit: the payments system. The misunderstanding I laid out last post surrounding the relationship between the Greek government and the Bank of Greece has convinced people that taking over the Bank of Greece is a trivial matter. I said then that taking over the Bank of Greece is a trap.

To restate from my first post, the reason I’m skeptical of taking over the Bank of Greece is that it makes the Greek government responsible for the depreciation of asset values posted as collateral for ELA and paying Euro denominated interest when otherwise they are not financially responsible for the Bank of Greece. (The ECB is.) Further, this assumes that the ECB and European powers would be happy for the Greeks to take on this obligation. Even worse, this could be seen as an expropriation that may qualify (especially depending on how rabid other member states get) as a “clear risk of a serious breach by a Member State of the values referred to in Article 2 [human rights, democracy and the rule of law].” This would mean suspension from the European Union, which would have very serious consequences for them ranging from agricultural supports all the way to access to Target2. (Net spending by the EU in Greece, that is spending – taxes, was about 2.5% of GDP in the latest available figures.)

Now someone may argue that “Greece is taking over the Bank of Greece because they’re defaulting and exiting the Eurozone, all of this is illegal and none of their Euro debts matter at this point”. I disagree with this view.

First, what would force them out of the Euro in practice is the cutting off of ELA assistance. Legally however, a member state can’t be forced out of the Euro which is what the ECB action would amount to. The Greek position should be that they have been forced by the illegal actions of the European Union to build a new payments system and thus they aren’t liable. Further, they should state they would welcome the reintroduction of liquidity support so that a drachma in their payments system would equal to a Euro and effectively be a Euro. A way to back up this argument would be to declare that these new liabilities are legal tender only as long as ELA to Greece has stopped but that they are acceptable in payment of taxes and loans no matter what. In other words, legally treat them like Electronic Tax Anticipation Notes (ETAN).

Despite all the issues with taking over the BoG, the Greek government might need to do it simply because of the time it takes to program a new payments system. Even if they take over the IT system from the Bank of Greece, a lot of software will need reworking to separate from the Euro IT wise. In correspondence, Richard Smith (who worked on the IT transition to the Euro) made this quite clear:

Richard Smith: Sounds pretty horrible. The similarish reverse operation that set up all this bliss for Greece a decade and more ago, namely redenomination from Francs, DEM etc to EUR, at fixed rates, took several elapsed months of analysis, design coding, testing, planning and rehearsal, just on one well-maintained system. It worked fine but we were really glad we rehearsed it and had time. Nothing important that we were interfacing to fell over, either (a related risk).

Goodness knows what bringing the Drachma back at no notice and unplanned would actually be like for IT systems. I really don’t like the sound of it much, especially if somehow there would have to be two currencies in parallel and a floating rate

Nathan Tankus: Is there any way for them to secretly build this system on their own and roll it out to the banks over a two to three week bank holiday? What if they impose capital controls and for payment settlement purposes jerry rig it so that drachma equals 1.5 Euros or some such number?

Richard Smith: It sounds like a bit of a stretch. Not sure where you’d hide all the programmers and analysts. Even asking the questions that enabled you to work out which systems needed modding would attract attention and I’d have thought there would be hundreds or thousands of systems.

Simply going all-drachma [using the existing IT system of BoG and commercial banks] is comparatively unterrifying (more or less a rollback of what they did in 2001) but would still take a lot of highly visible lining up. Long bank holiday for sure, plus lots of Drachmas to distribute quietly to all sort of places in advance, with nobody ever, ever talking about it; cash economy for a bit. One of those times when you’d rather everything was on paper, still.

That entire discussion assumes that people will be there to run the IT system. Problems greatly compound if the ECB transfers all the staff out after cutting off ELA or even after the Greek Government comes in. To recap, let’s walk through what each option might look like.

Taking over the Bank of Greece

1. Seize the headquarters of the Bank of Greece.
2. Explain to the staff that the Bank is no longer following the directives of the ECB and salaries will be paid in physical Tax Anticipation Notes and that they can deposit them in the bank once a payment system has returned which requires their diligent effort.
3. Declare a bank holiday.
4. Assign relatively knowledgeable Government officials to meet with subdivisions of the Bank to lead discussions about what needs to be changed in the payment system to convert from Euros to ETAN in their sections.
5. Start dispatching Government officials to private banks after receiving information about the Bank of Greece side. Inspect their IT system and start preparing them for IT changes to introduce ETAN. In the meantime, bring in auditors to examine their books and monitor for transactions.
6. Compare the estimated timelines to what needs to be in place for trade to resume and production to continue. Possibly recruit IT people from private banks sympathetic to the cause to bolster the amount of people working around the clock.
7. Contact the ECB and let them know what is happening and that the Government hasn’t decided to repudiate Target balances. Request confirmation that paying interest on Target balances will be sufficient to maintain access to Target2.

Ignoring the Bank of Greece and Setting up a New Central Bank

1. Declare a bank holiday.
2. Find a building to place a number of IT systems that have been preprogrammed for this eventuality. Start hiring staff immediately.
3. Immediately send officials to outside the Bank of Greece, announce over the speakers what is going on and request any officials loyal to Greece or who at least care for the suffering of Greece to leave the building and join them to rebuild the Greek Payments system. Do this indefinitely until most staff have left Greece or joined up.
4. Send officials out to Recruit retired bank IT people and those at private banks.
5. Send officials to private banks to demand that they disconnect from the BoG payments system and start working out the logistics for switching to the new system. Inspect their IT system and start preparing them for IT changes needed to introduce ETANs. In the meantime bring in auditors to examine their books and monitor for transactions.

This isn’t anywhere near a comprehensive checklist of things they would need to start doing, nor is every strategy necessarily the right one for the particular conditions they emerge from (for example paying interest on Target2 balances or converting euro deposits to ETAN deposits). In particular ETAN have a lot of legal benefits for Greece and make a possible rejoining of the Eurozone simpler, but might have even more difficulty gaining acceptance on the foreign exchange market then drachma would. I’ll turn to the foreign exchange market issues of introducing a new currency in part 3.

Moreover, there is the issue of the large volume of Euro banknotes that have already been withdrawn and which will likely be hoarded and only used for emergency purchases like seeing the doctor or, in the worst case, food. This will strengthen the already relatively strong black market economy and undermine the imposition of drachma or ETAN tax liabilities, a necessary precondition for their widespread adoption. There is also the issue of contracts where in one case they need to all say drachma when they said Euro and in the other they need footnotes saying when the Euro payments system is broken ETAN are legal tender. That is an enormous job to say the least and it needs to be semi-functional by the time they reopen the banking system. What I think this exercise does illustrate, however, is how many discrete activities would need to take place to get the new system up and running, and how time consuming it would be. Further, I think one starts to get the sense of how much additional organizational effort watching the bank staff imposes.

Now one could try arguing that “All we need is actually to get enough drachma in circulation to have things start functioning.” See the Addendum at the bottom of the post on why that’s not trivial either, even assuming you’ve got the new currency ready to go. And remember, having the economy go into an even deeper freeze due to a protracted bank holiday and the imposition of capital controls (which will also hurt tourism during the peak season) will not merely reduce incomes all over the country, increasing distress, but will lead to business failures, so a meaningful portion of the damage will persist even after the money system starts functioning again.

Nearly a century ago the Bolsheviks faced almost an identical problem. In December of 1917 Lenin made this statement to the Central Executive Committee to justify nationalization of the banking system:

Among the employees of the banks were men who held the interests of the people close to heart, and so they said: ‘The bankers are deceiving you, make haste to stop their criminal activity which is aimed against you.” And so we made haste. We know that this is a complicated measure. None of us, not even those who have a training in economics, will undertake to prepare it. We shall employ experts, people who are skilled in such work, but only after we have the keys in our own hands. Then we can even employ as consultants ex-millionaires…

We wished to follow the path of conciliation with the bankers, we supplied them with credit for the purpose of financing business, but they resorted to a sabotage of unprecedented dimensions, and so experience compelled us to adopt different measures in order to insure control… If we do not affirm the decree right now the bankers will take all the necessary steps to shatter our economy [Banks, Credit, and Money in Soviet Russia, by Arthur Z. Arnold, with a foreword by H. Parker Willis. New York: Morningside Heights, Columbia. University Press, page 60]

In this context Arthur Arnold comments, “Apparently the bankers had no difficulty in evading the control set up by the communists, whose ranks included very few who knew anything about the banking, business, accounting or auditing. Especially weak was the control in the provincial towns where the banks had branches.” In other words, they didn’t have the operational capacity to prudentially regulate the banking system and preserve the integrity of the payments system so a nationalization was the only feasible option. The question of nationalizing the banking system is one I’ll return to.

Discussion of capital controls returns us to the argument Lenin makes above. The IT issues with restarting a banking system in ETAN (or Drachmas for that matter) and making sure this new system doesn’t undermine their attempts to survive the crisis might be so complex that the Greeks might have to nationalize the banking system. It may be that no other strategy could successfully transition to a non-Euro economy in the time frame required. Thus, at least temporarily, deposits would be accounts directly held with the central bank and the central bank would make direct decisions about industrial projects to finance. This doesn’t end the organizational capacity needed, it just minimizes it. While they’re rebuilding the payments system they need to make loans in physical cash or large denomination scrip (to pay suppliers), start figuring out which firms owe what to which banks, make it clear that the payments system freeze doesn’t mean they are in arrears or that the debts end. Direct financing of production and investment by Government many precedents but the one that strikes me the most (and one I’ve wanted to write about another time) is the Defense Plant Corporation, a subsidiary of the Reconstruction Finance Corporation set up in World War II that financed a lot of war production and the creation of new necessary industries (like artificial rubber).

Greece has this series of policy choices before it not because it is now run by “radical leftwingers”, but because during a crisis the most valuable resource a country has is its ability organize and reorganize society. Neither committed capitalists, committed socialists or committed fascists can afford to burn organizational effort holding onto bugaboos about private banks, the abolition of money, or any other pet policy.

It should not have to be said, but I feel compelled to explain why I’m spending so much time on the payments system. An orderly and efficient payment system is crucial to the continuance of economic transactions. It allows businesses to buy more inputs to production, enables retailers and shops to meet customer demands for goods and services, helps finance that demand, permits the speedy transfer of supplies around a geographic area, etc. When the payments system is disrupted, even for a short period of time, all of these vital activities cease or require special agreements at all levels to keep going at even a minimal, uneven level. Two years ago in Cyprus, an emergency bank holiday was declared and capital controls installed. The bank holiday only lasted for twelve days yet supply chains started drying up instantly. An ex-Cyprus central bank governor told the Guardian:

Supplies of food are being exhausted and there are cases of raw materials like iron and timber being held up in customs because importers don’t have the cash to pay for them … No one expected, myself included, that the EU, ECB md IMF, would behave like this. Cyprus has been treated very badly … Where is the solidarity principle that is supposed to underline Europe?

Even 6 months later after the banks had reopened and capital controls were loosened, businesses were still having trouble getting basic supplies. This happened because their working capital was largely frozen and/or written down in the bail-in, or they had made payments but their suppliers were frozen because their own working capital had been largely frozen and/or written down. It is important to emphasize that their nearly two-week bank holiday was only to resolve insolvent institutions, not to build or significantly modify the payments system. Cyprus experienced a storm. It is not an exaggeration to say that freezing the Greek payments system would be like a financial hurricane and this one certainly looks to be a category five.


On getting currency in circulation, hoisted from older comments by Naked Capitalism regular Clive who has worked with ATMs:

Way way a-back when dinosaurs roamed the Earth and I was a junior in my TBTF I worked in the ATM Operations unit. It was a big, big unit. The logistical effort is considerable in maintaining an ATM estate — and that is under BAU conditions. Cash is bulky. The security requirements are considerable. The ATM hoppers are designed for specifically sized notes (the specification is exacting — if the notes are not precisely the same height, width and, crucially, paper grade, the ATM will jam up quickly; this applies to note counters as well). You can’t just max out high denomination notes either — a functioning cash currency needs sufficient quantities of various notes and coinage in the right proportions. Physically stocking, balancing and making an ATM ready for service once depleted takes a finite amount of time and that time isn’t trivial. And most ATMs are “dual control” — you need two operators for fraud prevention. Like I say, for a single TBTF to maintain a network of ATMs takes several hundred head office staff and a lot more in-situ staff. Then you need armoured cars, guards, access to premises. That’s many hundreds more needing to be planned, rostered and actually turning up each day. It is a major undertaking — and this is under normal, day-to-day operational conditions. Factor in secrecy (which would be inevitable, certainly in the run-up until the last few days anyway) and it is even more difficult.

And then you have self-service tills in supermarkets, vending machines, ticket machines and so on. Again, the specification of the physical currency is critical. For stores, marking prices is a labour-intensive job.

If Varoufakis were here having a cup of tea with me, I’d tell him that, from first-hand experience, don’t fcuk with the currency unless you absolutely have no options left whatsoever. From what he’s pronounced — and as Yves has repeatedly said, this has been his consistent message — I think he gets that already….

Like I already said, the physical cash handling is just one aspect. And to take your example, okay, unloading the cash from the truck takes 10 minutes. But how does the cash get onto the truck ? Where are the regional distribution centres ? How much cash goes to which ATM ? In what denomination ? Who is the hand off to once the cash gets off the truck ? And when the new currency is loaded, the ATM has to be taken offline until the old currency to new currency switch over date — so the ATM network is progressively disabled as old currency is swapped out to the new currency.

Yes, there is infrastructure, processes and people in place to handle this task now (how else would the ATM network keep going). But it is sized for normal operating parameters! A typical ATM will run for between 3 to 10 days between replenishment (some really busy sites like stations or shopping malls after a weekend will run “dry” in a day, but these are the exception). So everything is geared up to service the ATM’s cash needs in a gradual, progressive fashion. I can tell you without any doubt at all there is not enough pre-existing capacity in the cash holding centres, the fleet of transport vehicles, trained people or the IT systems to cope with a currency swap out in a weekend or even a whole week.

And that is before you get to physical constraints like having to redesign the ATM hoppers. Creating a new currency with the same specification as the old one is a non-starter. It is called counterfeiting.

Put it this way — this has all happened before. The Euro countries swapped over from their previous national currencies to the new Euro. The planning and implementation took the best part of a decade to do in an orderly way. You’d be talking weeks or months — best case — for Greece to do the same.

The last thing Greece needs is more chaos.


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  1. kemal erdogan

    I also happened to work on a payment system. Although I cannot comment on the operational difficulties of cash machines, I can tell with confidence that an electronic payment system can be put in place rather quickly, a week or two perhaps. Most such systems are already designed to handle multiple currencies. Even if greek ones were not, it can work if the government declares that all the euro denominated transactions and contracts are considered in drahmas. Then, all the country needs to do is to block the payment system connections to ECB and treat all electronic payments made in euros as denominated in Drahmas.

    I understand that the euro notes in Greek National Bank and the ATM’s might need to be seized (or not) but that is secondary. The payments system can function just by simply cutting any electronic payments outside the country. This is (I reckon) a necessary step when introducing dramas anyway.

    The real question is can the country go on an electronic only payment system, at least for a while. I think the answer is yes if the Greeks are like most other Europeans who have at least one debit card.

    1. vlade

      When this discussion was going on some time before, I suggested that the solution was to have one country-two currencies system. All cash transactions would be in EUR (and yes, this would likely mean banks would shut down ATMs immediately), and all domestic electronic transactions would be in drachmas. All govt payments would be electronic, in drachmas. The biggest deal would be decoupling from ECB Target2, but how complex that is depends on how it works at GCB.

      Yes, it would be chaotic. Would it be more or less chaotic than what’s happening now? If everyone operates a cash economy anyways, then it could be actually less disruptive than under some other scenarios.

    2. Nathan Tankus Post author

      No IT person I’ve talked to agrees with you. What special key do you have for making the IT transition small and painless? what does “declaring” actually look like in coding terms? The difficulty is not building a payments system IT wise, the difficulty is changing the existing code in all the banks across the country and the BoG or integrating them into a “new” central bank. What “working on a payment system” entails is exceedingly vague and your comment doesn’t betray any understanding of IT in the finance industry.

      “the payments system can function just by simply cutting any electronic payments outside the country. This is (I reckon) a necessary step when introducing dramas anyway.”
      The payments system might be able to function (something I’m not convinced of, at least not in the timreframe you’re proposing) but production and distribution won’t. it took two weeks to resolve the banking system and reopen in Cyprus without an IT transition needed at all. that itself had huge economic impacts. what happens when they reopen the banking system and crossborder payments can’t be made or are very limited?

      “The real question is can the country go on an electronic only payment system, at least for a while. I think the answer is yes if the Greeks are like most other Europeans who have at least one debit card.”

      this is so wrongheaded I have trouble knowing where to begin. First, yes that assumption that everyone has debit cards is a difficult assumption to make. Even if they all did that doesn’t mean every firm has a machine reader. The Greek economy is much more cash based than other economies. you can’t expand the electronic retail payments system to all these firms overnight.

      1. vlade

        If I understand kemal’s comment correctly, he proposes a simple solution. In all greek banks replace EUR by GRD, and create a new foreign currency (similar to say USD) called EUR.

        That would definitely work on a single bank level. The main question is whether the real clearer is Greek CB (Bank of Greece, BoG), or whether Greek banks rely fully on ECB for clearing (BoG says “[BoG] is the operator of the Greek component”, whatever that means.).

        Specifically, much of Target2 system relevant to Greece is operated and run in Greece. That said, Greece has a private settlement/payment netting system Dias S.A., and it may be possible to coopt it to be a full drachma interbank payment system – I just don’t know enough about it.

        So, the real problem is not “can you build a system” (yes, you can, but takes a long time), or “can you just change currency code” (yes, you can, but doesn’t solve interbank settlements), but how easy it is to drop Target2. Which is really a country specific. It’s possible that BoG could just raise from dead whatever payment system it had before T2 came on-line. Or it’s dead, and/or interfaces would never work. Or Dias could just step in easily enough. Or… I suspect that no-one except a few people at BoG really know.
        In other words, yes, if you assume a running start from zero, it’s really hard. But we don’t know how much running start from zero it would be – and in some cases a few weeks could work, and even only few people would need to know. This is not that likely scenario, but I have a few doubts that BoG had someone looking at this for some time already.

        1. Nathan Tankus Post author

          Target2 is a crossborder payments system. it has nothing to do with transactions between greek banks. dropping target 2 (as in not being able to send or receive Euro payments directly) would be a major issue for them. Not insurmountable (they could start doing transactions through a foreign bank- assuming the Troika doesn’t intervene) but much more difficult.

          The ultimate problem with just saying that what the IT systems think are euros are actually drachmas and not making any more modifications to the payments system is that it makes it impossible to do transactions with other currencies, including the Euro. Greece is a small, very import dependent country (as I’ll get to in part 3), the biggest reason the payments system needs to get going again is to get supply chains up and running, including international ones. You ultimately need a payments system for that

          1. vlade

            Ok, my understanding of T2 was that it was the EUR settlement system, not just cross-border.

            Banning Greece from EUR private transactions would be legally impossible for Troika I believe BTW – in the same way, as UK banks do them. Hassle, but not insurmountable.

            But if the domestic clearing system is fully under Greek control, then changing the labels is really all that is needed, and the Greek banks need do nothing, or a just one-off (depending on whether EUR domestic assets/liabilities would get redenom or not). EUR would then become just another FX currencies. Sorry, but you seem to think (“impossible to do transactions with other currencies”) that simple system relabeling of EUR to GRD would make the whole system collapse in a heap. It wouldn’t. It’s just a label.

            Routing EUR FX payments may be tricky initially, but say the whole country could live using USD for trade (which the banks can do now, and could do in the future) for a few months before banks manage the proper swap for EUR payments routing (say via SWIFT).

            So internally it would be no problem (if they own and run the clearing system), externally Greece could use a different currency while the EUR routing is sorted. It’s not cheap , it’s not nice, but it’s doable.

            Also, importantly, you ignore a crucial fact. Those who deal and trade outside Greece already have their accounts mostly outside Greece, and could use them for trade as an when Greece exits (they are all _private_ money, so Greek gov’t default would not do anything to it). I doubt that anyone but government entities and some private individuals hold more than a basic transactional amounts in Greek banks. And Greek government seem to encourage this (and there’s an upside to that I believe).

            So it’s really a question how big a problem it would really be from the trade perspective that Greek banks would not be able to process EUR payments for a few months.

            Now, if Grexit would automatically mean EU-exit, that’s a different story. But this is far from clear.

          2. Nathanael

            “Greece is a small, very import dependent country (as I’ll get to in part 3), ”

            OK, prove it. This is actually the key point here. The ease of disentangling from the euro shackles is *entirely* related to the degree to which the country is truly import dependent.

            I’ve seen competing views on whether Greece is actually import dependent, or whether Greece is simply prone to importing luxuries.

            If you’re going to claim that Greece is import-dependent, I expect a full supply-chain analysis: a list of specific key “necessaries” imports, with their position in the supply chain and proof of why they’re necessary, along with where they are currently imported from.

      2. kemal erdogan

        In coding terms the only change necessary I see is the printing software used to print receipts where it would say euros instead of drahmas. But this is a small issue that can be handled later. A law can be enacted declaring up until a certain date all the receipts shown in euros are considered in new drahmas and actual euro transactions would use the label “xxx” and that would be end of it.

        I don’t see why a change in the interbank payment system would be necessary: the central bank can clear the accounts just as before with the knowledge that euros displayed on screens and prints are actually drahmas. I don’t see why this would not work. For handling transactions with actual euros they could just introduce another currency into the systems with another code. And that would be end of it. They can even handle exchange rates other than 1.0 this way.

        These steps would allow them to prevent the seizure of the payment system and they can have a schedule to fix things properly but I don’t see why this cannot be made work. Sure, none of this is clean and dandy but emergencies sometimes require drastic action.

        Business to business transactions do not require a bank card, they use checks or electronic transfers. I have never been to Greece, but if it is like any other European county all of the retailers even very small ones accept debit cards. In my country, Turkey, even street sellers accept debit cards. However, even if the country was heavily dependent on cash transactions, distributing bank cards to citizens and POS machines to businesses must be a much easier task than distributing cash.

        An all electronic payment system would have a very good side effect of making most transactions accountable, thus taxable.

        1. kemal erdogan

          And, oh sure there will be transactions that cannot take that could take place if there were cash. But urban life, its supply chain and most industry can work this way. The sticking point is how the international transaction in Euros would be handled (other currencies would work) as the Greeks would use another code for euros domestically. But since there would be capital controls for some time I reckon all import requests would be controlled and handled manually to prevent running out of hard currency.

          Yes, this is an ugly situation but in comparison to the hardship Greeks would have to endure I don’t think this is as important problem as you suggest.

          1. Lambert Strether

            “all import requests would be controlled and handled manually” Please show how the Greek government has the organizational capacity to do this. Start with petroleum and move on to pharmaceuticals. If what you say is true, it should be easy to prove. Otherwise, stop handwaving.

            1. kemal erdogan

              Important here is the frequency of transactions, and not the volume. Clearly, Greeks can order bigger amounts less frequently. I also would like to remind you that all world trade was handled without any computers until very recently.

              I also find it appalling that you question the ability of a nation to organize what essentially entails to simple manual bookkeeping. Besides, if that is proven to be difficult, the import/export transactions can be handled using the banking system of a friendly nation (for not risking confiscation of hard currency reserves), Cyprus for example.

              1. Lambert Strether

                It is true that any country can roll back transactions to a pre-computer age, given a level of effort and enough time. (Similarly, the Archdruid points out that rolling Western Civilization back to 1850 still preserves a great deal of technological advance, like railroads and the telegraph.)

                I’m sorry you’re appalled but non-plused at your apparent belief that your feelings matter in this instance. The post is about organizational capacity. If you can show how manual bookkeeping will handle, for example, oil and pharmaceuticals, I invite you to do so. The evidence should be easy to produce, if it exists.

                Adding: I would very much like to be shown that Syriza has prepared the Greek people for this possibility, and that they have bought into it.

                1. Nathanael

                  Oil has been handled by manual bookkeeping for decades since it was discovered. Do you actually check what you’re writing before you post? Oil production and royalties are still handled with archaic 1970s computer systems and printouts….

                  Pharmaceuticals are even simpler. The bookkeeping on those is mostly fraudulent anyway, so you can just punch “zero” in in most places.

                  1. Lambert Strether

                    “Pharmaceuticals are even simpler. The bookkeeping on those is mostly fraudulent anyway, so you can just punch “zero” in in most places.”

                    Wow, that’s pretty funny. I bet the Greek people are laughing, especially the ones who will get sick and die without them. As for oil, handwaving won’t cut it. A fine example or Juvenile Left Adventurism. Thanks for sharing.

            2. German native speaker

              I fondly remember my first time in India, so many years ago – the backrooms stacked full of large, dusty ledgers, the endless patience that was required to accomplish anything, the endless love & time the bookkeeper at the other side of the window dedicated to look at pieces of paper (and me thinking, “will this happen in this life or the next?”), the endless circles and trips around town ‘because one has to go the the main office (e.g. of a bank), but then one doesn’t. And at the time, no one in the West even had credit or debit cards. Every day, one had an experience of eternity. So much for manual bookkeeping in a modern society.

          1. T

            There are card readers that plug right into smartphones:

            I can almost guarantee that the card readers are being built by some Chinese contract manufacturer from a reference design…i.e. the Greek govt should be able to buy them in bulk if it comes to it. Contract manufacturers can be pretty quick, but if this is going to happen better start spinning it up now.

            1. Lambert Strether

              “[I]f this is going to happen better start spinning it up now” In other words, there are issues of organizational capacity. It’s not a purely technical issue. The spec has to be written, the tender made and accepted, the shipping done (ship? air freight?), the phones distributed, etc.le, Presumably not by this Thursday, but when? There are lots of thing that are possible, given time and money, that are not possible, when you have neither time or money.

            2. hunkerdown

              Well, yes, and you can get a million a month of ’em on Alibaba for $13 apiece. If only more Greeks had smartphones… 32.5% smartphone penetration as of 2013, with ~60% of sales mix in 2014 as a rough upper bound. Some 40% of the nation left without access to the medium of exchange is a tough sell.

          2. kemal erdogan

            Tourism is indeed important as that would be their only source of hard currency for a while. But, this can be solved by selling tourists “new Greek notes” when they enter the country. The local economy that is based on cash can run on credit.

            I remember my childhood; I lived in a small community where the local grocery store was both a relative and a friend. Everyone in the town had a credit account with him to be settled when the salaries are paid at the end of the month. He was also smart and kept his records in terms of goods sold: 30 loafs of bread, 3 kilos sugar,etc. to protect himself against inflation. At the time of the payday, he would calculate the cost. I see no reason why this cannot be done in small Greek communities (whose culture is very close to our own) in remote islands.

    3. Santi

      I think Greece will keep using €uro after a default and even after ELA cuts. It will use 1:1 valued ETANs for for payments and settlement between banks, and some rationing of cash might be needed if there is not enough liquidity, but I don’t think the Greek government will issue a new currency.

      As you say, any interbank settlement system should work, and I guess they have some rusty working ones. In Spain we used to have at least a couple of such oldies

      Also, they could subcontract with VISA or MasterCard the settlement of Greece’s money. They already have these systems set up…

    4. Clive

      I work (or what passes for it) at a TBTF and I can tell you as a fact that even small changes to the payments system (and actually, it is plural, “payments systems”) take many months of design, building and testing. One reason is their complexity — not only do they need to interface to the back-end accounting infrastructure of the financial institution which manages their end, but they also have to interface to a central clearing infrastructure, card payments processors (VISA, MASTERCARD, AMEX and others) as well as output to MI and security / fraud prevention sub-systems.

      And they cannot have any tolerance for inaccurate payment processing. Transactions, once confirmed / authorised MUST be honoured. I’ve personally had to work on projects which try to pick up the pieces from glitches in payments systems and even small intermittent bugs can wreak havoc on the financial institution unwise enough to chance deploying a change with insufficient testing. The manual re-work or workarounds become immense resource eaters very quickly because payment processing systems are a volume business.

      Just as a “for instance”, a fairly trivial routine system enhancement for one of the big card issuers gets notified to subscribers (TBTFs, credit card manufactures, ATM builders etc.) 18 months before go-live. More substantial changes have a lead time of 2 years.

      What you are suggesting is bordering on pure fantasy. Sorry.

      1. ambrit

        Then it’s back to “hard” currency transactions? The good old “Black Market?” (Local vendors pick up the slack with individualized conversion of currencies, with a small ‘skim’ implied.) All transactions handled in Euros filtered through a New Drachma to Euro conversion rate. In other words, a point of sale currency conversion. No actual physical New Drachmas needed. It’s all in our head after all.
        I’m confusing even myself, but ask anyone who dealt in the black market in the Eastbloc pre 1989.

  2. rory scott

    to be fair wouldnt this be like adopting the euro/new system , just in reverse ? they have done this before.

    on another note – i havent seen any follow-up to putins version of the swift code that was to be up and running by may- what gives?

  3. Uahsenaa

    Clive is right to point to the logistical nightmare that is stocking, maintaining, and monitoring various automated cash machines, but there is also the simple problem of hand-to-hand transactions in smaller scale businesses. For instance, food stalls and vendors, which are all over the place in Greece, do not take electronic payment of any kind. Also, the further you get outside Athens, especially in smaller towns and villages, the more all transactions take place in cash but with the added nightmare of nothing in the way of standardized accounting or monitoring practices, so you can’t be certain of how much money changes hands on a regular basis. This raises two issues to my relatively naive mind: 1) how do you shift currencies in an environment where transactions are largely invisible to the system set up to regulate them, and 2) what happens when these smaller scale enterprises find it hard to get access to whatever new currency finds itself in circulation? Will we see a repeat of the immediate aftermath of the financial crisis, where businesses failed simply do to liquidity problems?

    Those are actual questions. I’m not sufficiently well-versed to provide even a provisional answer.

      1. Uahsenaa

        My sense of why cash is used, at least when I was there, has more to do with culture/habit than capacity. Japan is like this as well. The infrastructure for electronic payments (via debit, cc, or phone) exist, but people still, for the most part use cash for a wide variety of transactions.

        1. ambrit

          The cash used can still be Euros, but now filtered through an Euro to New Drachma exchange rate, adjusted daily.

  4. George Phillies

    Is the Greek financial system heavily dependent on ATMs, having myself not been there in a quarter century? Is this a critical issue, or not?

  5. JohnB

    Yanis discussed a Bitcoin-like blockchain for his FT-Coin currency proposal – that allows a quick and ready template for setting up a transitionary payments system, functioning just like existing crypto-currencies do – all anyone would need is internet access.

    I’m not at all an expert on crypto-currencies or the issues involved here, but this is actually quite a nice way of quickly setting up a temporary system, that will only exist for allowing a quick transition – and which will be replaced once all of the necessary IT changes have been made in existing institutions.

    This system is not limited to FT-Coins either, it can be adapted for Tax Anticipation Notes, TCC – or whatever – it’s just a quick way of setting up a transition system, and probably all alternative currency plans should include plans for such a system.

    As for physical cash: What is wrong with just printing ‘TAN’ over existing Euro notes? You don’t need to print any new currency to get the transition going.

    Obviously, it’s going to take a while to transition the existing IT/systems over, but it should be more than possible to provide a workable stopgap in the meantime.

    1. Clive

      No. Currency issuance, payment systems management and transaction processing isn’t amenable to a “best endeavours” approach. If you’re maybe North Korea, you can run yourself as a ring-fenced self-contained isolated entity and then perhaps not worry too much about interfacing with the rest of the world. But Greece doesn’t want to become reduced to a North Korea-like level of economic (dis-) functioning.

      Card issuers, individual banks and even whole countries can and have been cut off by the other participants in the world economic and financial system because they’ve not adhered to the applicable standards expected of their currency (e.g. paper currencies being so prone to forgery that they can’t be negotiated outside of the country of issue, card issuers having their cards not authorised at merchant terminals because they are not-to-current standard or wire transfers being un-routable because the bank of origin isn’t deemed trustworthy.)

      A case-study is the Vatican which ended up being a financial system pariah due to not being 100% compliant with prevailing security and fraud-and-loss control standards.

      Experimenting with crypto currencies and making-stuff-up-as-you-go-along is not going to cut it for Greece if it wants to remain in any way connected to the global financial system. While we could argue that this is unfair, that Greece has not been treated with any sort of consideration and it would be being kicked while it was down if it was subject to tough criteria in respect of what it was supposed to do in transitioning from the euro, any arguments which might be made by Greece that everyone should cut it a bit of slack would be made from a very weak negotiating position.

      1. JohnB

        If you’ve properly pre-planned the crypto-currency, you don’t need to ‘make it up as you go along’ – and you can’t sanction a currency whose only requirement for using and transacting in it, is Internet access.

        You might not be able to plug that currency into the existing national/international transaction systems immediately, but you can give everyone the ability to have accounts and transact in that currency immediately – and later enmesh it with the standard transaction systems as the transition period progresses (completely getting rid of the crypto-currency base of the currency, in the process).

        There are almost certainly caveats that I haven’t thought of, but I don’t see anything that would scupper the idea being incredibly useful for the transition – and as being something that should mandatorily be a part of any plan for transitioning to another currency, to significantly limit the (potentially massive) damage of the transition period.

        1. Clive

          When you issue a currency which you then expect to be negotiated by other institutions (which, in its simplest form is having overseas banks maintain a stock of and issue your currency e.g. to tourists) or accept wire transfers in your country’s currency and then clear in them the forex markets to reconcile on your balance sheet — you are asking overseas institutions to accept a risk.

          That risk is that you’ve made sufficient checks and implemented effective controls to ensure that your currency is protected from frauds, forgery and doubts that it can be exchanged to allow institutions who temporarily hold your currency to trade into and out of their positions.

          While few Naked Capitalism readers would hold a lot of sympathy for financial institutions, especially big ones, there’s no reason whatsoever why they would or should take on the risk of exposure to a system of currency that was not utterly proven and at least presented them with a manageable, fairly well understood level of certainty.

          Put more simply, it makes no sense for any financial institution to put its own money up to co-operate with some untried Greek digital currency experiment. And doubly less so for the central banks — who ultimately back-stop the banks under their remit — to try to nudge them into doing so and in the process risk their own taxpayer’s exposure to any losses.

        2. Yves Smith

          Financial institutions that are US taxpayers will not use a crypto currency as a means of payment. The IRS has deemed crypto currencies to be property, which makes them unusable as currency unless you want either a bookkeeping nightmare or want to run lots of tax risk. You have to keep track of the change in value between when you got it and when you sold it and treat it as a long or short term capital gain as appropriate.

      2. Nathanael

        Clive: China hasn’t complied with any international currency standards. At all. Not even close.

        They’re doing JUST FINE in terms of world trade, you may have noticed.

  6. alex morfesis

    go to the dollar

    if dr strangluvauble has truly lost it and is going to push hellas over the brink…there is only one solution…go to the dollar…declare it legal tender in greece…establish credit unions and move forward…declare the yen legal tender also…allow american and japanese institutions to open branch operations…as to credit unions, the american system is designed for start up credit unions to piggy back off of existing platforms…there are over 7000 credit unions in usa…starting 250 credit unions should be the goal…obviously germany has declared

    1. Yves Smith


      This doesn’t solve any problems. See Clive on ATMs (the addendum to the post), that ANY currency changeover is a logistical nightmare. And how does Greece get the dollars to stock ATMs and pay civil servants and pensions? It is locked out of borrowing now and will be even more of a financial market pariah after a default. And it can’t “print” dollars. Only the US can.

      1. alex morfesis

        there are no good answers…but until they can get a new currency up and running…be it two months or six months they need to function…and they need to set up new financial institutions…which has always been a huge problem…per capita, greece does not have enough banking type facilities…i have always agreed there is very limited human capital available to even think of a plan b…but realistically, syriza should just surrender and work its way into other growth areas…if the issue is 2 billion dollars per year….then there are many other ways to make it work if syriza starts thinking outside the cage…no one will vote back in new democracy or pasok…and the golden yawn cant even get their storm troopers to march single file in a parade…so there might be grumbling…but the hard left of syriza is not going anywhere…this is their one and only chance to be the government…there is no one on the hard left that the general public in greece will vote for in any quantity…syriza was run by millionaire marxists until alexis had it dumped on his lap…he herded the kats and got the job done…no one is in a position to push him aside….he is just being too respectful to the old fart brigade…the incompetant. incontinent and impotent semi hard left wing of syriza

      2. alex morfesis

        american banks can…that is the why of allowing us banks to set up branches…the dollars flow from them…and with some stable currency in place, the under the mattress money will convert from euros to dollars…it is all a nightmare but if syriza is not going to buckle under to germany then it has impossible decisions to make…but like some ithakans like to chime up…greece and time against any army….but greece needs time…look even during the ww2 occupation, the hand picked bishop(hand picked by the germans) stood up to the nazis by throwing a rope on the table and insisting on the method of his own execution…the ultimate take away…syriza needs time…who knows…maybe putin stretches his arms into finland now that he has a deal with norway to explore the formerly disputed bounderies…with timo in government and his buddy arto lahti foolishly saying finland should pay 30 billion to reinherit 375 thousand russians in the former karelian area…maybe putin decides to get more cash if he has a few more meters of land…finland has as many tanks as germany…the barking chihuahua hiding behind the old toothless german sheppard with bad hind legs…russia has no real capacity to dig too deep into countries…but there is a whole lot of empty space on morthern finland…and it was less than 100 years ago that finland WAS russian territory,..
        syriza needs to agree with whatever dr strangluvauble wants…and then watch as he overplays his hand with muti and he ends up fracturing his government and forcing new elections in germany…please syriza…be patient…yes the old man to death…his own political death

  7. Oregoncharles

    “3. Immediately send officials to outside the Bank of Greece, announce over the speakers what is going on and request any officials loyal to Greece or who at least care for the suffering of Greece to leave the building and join them to rebuild the Greek …”

    Sounds like a revolution, doesn’t it? Or at least a coup, since it’s the government doing it. As I read the “lexology,” Greece (and the other Euro states) are not in reality sovereign, so yes, it is a coup.

    Fortunately, the EU does not yet have a military.

  8. Jim

    Before even getting to the operational issues of a Grexit, isn’t it first necessary to describe and evaluate more fundamental questions about the present distribution of political power within Greece

    What/who specifically are in the present political alliances/coalitions within Greece that benefit from the creation and distribution of economic rents from the contemporary banking system and the current structure of political power?

    Is Syriza a part of this coalition/alliance? Is the Left faction of Syriza a part of this coalition/alliance?

    What is the exact nature of the present Greek government-banker partnership?

    1. Yves Smith

      From what I can tell, and I invite readers to correct me, my sense is the Greek banks are almost entirely retail banks. That means they aren’t as important either domestically or internationally as international players like Barclays, Credit Suisse, Deutsche Bank, BNP Paribas, and Santander. And the banks have been insolvent for years and on life support, which tends to diminish their power.

  9. Mr. G

    If you are Tsiprias…..what do you gain from Grexit?
    If it would have reinforced and strengthened your political position….why wouldn’t you have done it sooner?

    Conversely, as Tsiprias, what would you gain from a deal ( any deal )? if concessions and negotiations were so bad for your political career and Greece than why entertain them at all?

    The answer is the same to both questions. Grexit ends your political career and plunges Greece into uncertainty. A hard fought, although imperfect deal, affords you the chance to fight again….and later with allies.

    1. Sanctuary

      Your premises are wrong. Just because you haven’t done something already does not follow that it is inherently negative to your position. Some things have to happen at just the right time. By your logic, Democrats should not support gay marriage. Likewise, you incorrectly hypothesize that “any deal” is somehow better than no deal. If that were the case, wouldn’t New Democracy and PASOK still be in power? They did exactly as you said and have been forcefully voided of power. Additionally, you incorrectly assume that a deal wins you the chance to fight another day and hopefully gain new allies. We have the last 2 bailout deals by which to judge that premise and not only did those deals further burden Greece, they have progressively robbed Greece of negotiating power by foisting the cost of the bailouts (and most repercussions of default) onto the public from French and German banks. Concurrently, these bailouts have cost Greece allies by enabling the false meme of lazy Greeks to become a commonly shared stereotype among the other bailout recipients/prospective allies.

      Another deal that does nothing to address the debts at the center of this debacle is the worst thing Greece can do as it only exacerbates all of the negatives listed above.

      1. Nathan Tankus Post author

        This argument is completely disingenuous. The reason those past bailouts didn’t go anywhere is because those parties are at best centrists who had no interest in seriously fighting Europe or the Troika. If Syriza had been in power during the first bailout, or even if they had a clue six months before they got elected that they needed to start building this ability, a deal could potentially buy them enough time to make Grexit plans more concrete and possible.

        The real point is that most of this conversation is moot because Syriza had no interest in building organizational capacity, in governance and bet everything on being able to get the Troika to concede. There’s a reason that when asked if the Troika was bluffing Varoufakis said “I hope so”

        1. Sanctuary

          You call my argument disingenuous and yet proceed to engage in a disingenuous argument. The original poster posited that “any deal” would be better than Grexit and yet Greece has bargained twice previously for “any deal” and left progressively worse off with each iteration of bailout. Your supposition that the previous parties were “at best centrists who had no interest in seriously fighting Europe,” is not a valid critique of my argument since being “serious” in “fighting Europe” is not a prerequisite for getting “any deal”. Likewise, since there HAVE been 2 previous bailouts we have experience to guide our reasoning as to what would result and the answer was and is: nothing. No bought time, no allies. If what you are saying was true, the former bailouts would still have garnered some allies for Greece because the former governments were doing most of what the Troika wanted. Instead, in the meantime that their bailouts bought, they garnered no allies, only increasing scorn from their neighbors.

          Had there been a magical Syriza that you propose that was fighting Europe and building capacity AND in power during the 1st bailout and agreed to that bailout, we would still be here. The original sin was in agreeing to the first bailout and encumbering the Greek public with the private debts of French and German banksters. Nothing you’ve said would negate that.

          1. Nathan Tankus Post author

            point to me where “MR.G” said any deal from any greek government is better then no deal. he was clearly talking about a deal made by Syriza. Straw-men are for other blogs sir.

            This piece says nothing about allies. What I’m talking about is building organization ie groups of people who can accomplish things in small periods of time. buying time hasn’t worked because no party, including Syriza, has done serious work building an organization that can accomplish technical tasks, not just rallies and political speeches. Your argument is the mirror image of neo-liberal argumentation. “We live in the worst of all possible worlds and ever since [insert x terrible thing done y years ago] nothing better could have happened. [z group] failed because it was destined to fail.”

            1. Sanctuary

              “he was clearly talking about a deal made by Syriza. Straw-men are for other blogs sir.”

              And yet, this is what the commentator wrote:
              “Conversely, as Tsiprias, what would you gain from a deal ( any deal )? if concessions and negotiations were so bad for your political career and Greece than why entertain them at all?”

              The commentator is clearly implying that Tsipras would benefit from making concessions to the Troika, that negotiations are necessary and not bad for his political career, which is exactly what the 2 previous governments did and now they are not in power.
              Your irrelevant suppositions to the contrary still do not negate this very important, non-strawman fact. You still have not adequately or logically explained how Syriza engaging in the same concessions and dealmaking that previous governments have done within the same confines of an illegitimate bailout of French and German banks would somehow, magically, lead to a better result.

              “This piece says nothing about allies.”

              This appears to be the crux of your problem. You’ve decided to prattle on about the piece when I was responding to the commentator’s post. The commentator most clearly wrote:
              “A hard fought, although imperfect deal, affords you the chance to fight again….and later with allies.”

              It would behoove you to actually read the comment you are supposedly defending, rather than the ones in your head. Can you tell the difference?

              1. Yves Smith

                You clearly straw manned Mr. G in your very first comment by saying he was advocating “any deal”. You continued to make that abject misrepresentation of Mr. G’s position. That is bad faith argumentation, which is a violation of house rules. And you’ve done it on other posts too.

  10. Sanctuary

    Yves, this post is a good example of what confuses me about your take on Greece. You stated the following at the beginning:

    Launching a new currency would be every bit as demanding as launching the Euro was in 1999, and arguably more so, since the Greek government will also have to contend with a large market of Euros circulating as currency and may come to find it necessary, at the outset or later, to offer dual currency payment processing services. We’ve attached a paper at the end that gives an idea of the amount of planning and lead times that were required for this to go smoothly.

    I don’t doubt what the author is stating about the ramifications of Grexit. But, what I don’t understand is how you can see the complexity involved with establishing a new currency/monetary system, but previously wondered why Greece didn’t attempt to negotiate the proposed Guaranteed Income scheme in the last creditor’s offer? Isn’t it just as complex if not more so to launch a Guaranteed Income scheme, especially in the 4 months allotted in the creditor’s proposal? It said to have the GI proposal completed by October 2015 to begin a gradual rollout after January 2016.

    I know you argue that the Greeks appear to have sloppily overlooked the proposal, but as I’ve argued it was a trap anyway. It was a trap precisely because of the complexity involved in successfully implementing such a scheme, such that the only thing that could have been achieved by October would be to outline the .5% GDP worth of pension cuts they (the creditors) wanted to supposedly pay for it. As time would go on and October deadlines would come and go without a credible proposal for the GI scheme, the cuts would still remain on paper in black and white for all to read. And you know the creditors would simply demand the cuts go through so that some kind of primary surplus could appear before the year was up to satisfy the politics of the creditors.

    1. Yves Smith

      That great American socialist Richard Nixon recommended a guaranteed minimum annual income because it is the cheapest and easiest social safety net to administer.

      I suggest you read our “About” section. You seem to think we are or should be in the business of advocacy. We aren’t.

      1. Sanctuary

        I’m not suggesting advocacy in the slightest. I just don’t understand why you thought the proposed scheme was credible within the given time frame. Four months to come up with a plan to institute a guaranteed income scheme? I don’t claim to know how long it would take, but I don’t see how it could be adequately planned for in 4 months, other than delineating the cuts to pay for it. Which is why I continue to believe it was a trap, red herring. I get your argument about how much more complex a Grexit would be, but I don’t understand why you don’t think the same argument applies here? Just as you argue to those of us who believe at least default is preferable to continuing this charade, that pulling off a new currency would be incredibly difficult under such circumstances, how is it not just as complex to come up with a new social security system in the middle of constant negotiations and debt payment deadlines?

        1. Yves Smith

          There are models in other countries to copy. I could devise one in two weeks max after having a researcher spend two days to do a literature search (and that includes writing up the presentations re how it worked and presenting the numerical backup). You probably need some iterations after that to confirm the costs and tweak income levels and gradients. Minimum annual income schemes were a hot idea in the 1960s when Nixon proposed one. It was a high school debate topic in part because they are so simple that even high school students could design and (with only Federal tax and income data) cost score them. Their big virtue is their simplicity of design and implementation. It’s not hard to understand “one is simple bureaucratically and the other is monstrously difficult” unless your objective is just to muddy the water, which seems to be the case.

          If Syriza is so unskilled at governing that they can’t design and implement a minimum annual income scheme, they should resign.

          1. Sanctuary

            Ahh. See, I didn’t know that. Now your incredulity over Syriza not negotiating that point makes much more sense to me.

          2. Nathanael

            That’s a completely sensible criticism…. if they are that unskilled, then they’re just incompetent. :sigh:

  11. washunate

    Great read, been looking forward to this.

    It is a reminder to me about the limits of growth. Organizational capacity, management, whatever we want to call it becomes increasingly more difficult as we scale size and complexity. No one person understands, let alone can control, the system. Dynamic variables lend to unpredictability.

    Changing the payments system in a small country is orders of magnitude less complex than the USFG, yet MMTers frequently advocate JG as if operational implementation concerns of making government even more complex can just be swept under the rug.

    Now having said that, that doesn’t mean complexity is impossible, or that bearing a hardship is never worth it.

    I guess in a nutshell what I do not understand is why Greece would need to reinvent the wheel (and the door and the engine and everything else) all at once. Several ESCB NCBs do not use the euro and their payments systems work; that could be the long term plan if push comes to shove “we are reintroducing the drachma 1 January 2017”.

    But in the short term, payments wise, Greece just keeps doing what it’s doing – using euros. If the ECB won’t work with Greece, fine. That still leaves NATO allies USUK. Not to mention Russia, Israel, and Egypt. Even regional rival yet NATO ally Turkey might facilitate international money flows. And then of course the near east, southern, and eastern Asia. And lots of countries in Africa and South America. Greece’s cash-based economy, for example, is a strength, not a weakness: it provides redundancy at the local level (and indeed, is preferred over the digital world in many use cases). The government can’t distribute cash fast enough? Watch how many euros (and dollars and pounds) tourists, drug dealers, human traffickers, and smugglers can import – especially when it’s not smuggling at all but instead encouraged by the government. Tourism, shipping, and agriculture is what the Greek formal economy does.

    If the EMU somehow manages to go full Monty on sanctions/isolation, the payments system won’t be the issue anyway; the issue will be the political economy of who is willing to trade with Greece at all.

    Syriza either believes in a sovereign Greece or they do not. Their unseriousness (at least that we can tell publicly from Varoufakis et al) in planning for the operational details of governance these past five years broadly, and the past five months specifically, suggests the latter. They seem interested in how to pay the debts rather than how to reject them.

    Look forward to part 3.

    1. Nathan Tankus Post author

      Well to provide a little defense of MMT on the organizational capacity issue, while i disagree on what seems like the common line on Grexit, I do think that MMT’s response to the organizational capacity point with regards to a Job Guarantee is actually quite sophisticated. They cite quite a bit of different literature and historical examples of this but the one I’ll point to a personal example: CETA. My father was employed as a film researcher for a CETA project for 15 months. That came out of a detailed grant proposal that was made by private individuals with an idea. All the government did was accept the proposal and “write the check”. Now of course that kind of organization of large parts of a job guarantee still requires people analyzing the grant and an auditing process. However, relative to the amount of jobs being created that takes relatively little organizational capacity. Also Most discussions of a job guarantee (sans some very birds eye view statements Mosler makes sometimes) allow for a relatively lengthy implementation period. In short, the MMTers have spent a lot more time talking about organizational capacity in connection to a Job guarantee than most economists have spent talking about the issue at all, combined.

      The thing about announcing an exit of the euro and spending a couple years doing that is that requires deep cooperation of the Troika which is just not forthcoming.

      “If the EMU somehow manages to go full Monty on sanctions/isolation, the payments system won’t be the issue anyway; the issue will be the political economy of who is willing to trade with Greece at all.”

      yes exactly. This is the central issue. The thing is they don’t need official sanctions. all they need to do is cut off ELA, deny Greece access to Target and use moral suasion to discourage banks from accepting and efficiently running Greek resident deposits. They could even just use regulatory powers to discourage or make unprofitable lending to finance Greek imports. that would be enough. I’ll talk more about this in part 3.

      1. washunate

        That’s exactly what I am talking about. “Writing the check” works great when there is a clear principle of what to fund and who gets the money. Think universal health insurance or universal unemployment insurance or universal old age insurance. Or keeping a specific train line or highway or school functioning.

        But when there isn’t a clear principle, when judgment and discernment is needed – especially as these things scale – it all breaks down. This is already happening, from defense contracting to Medicare & Medicaid payments to healthy marriage grants to higher education to housing subsidies. Huge amounts of money simply line the pockets of the well connected and their professional class enablers. And even when money reaches the appropriate place, it often doesn’t actually direct labor in a way that produces a positive return. It’s simply busy work, or in really bad cases, actually destroys wealth in aggregate.

        The government can’t even manage its own looting programs at this juncture, never mind public-private partnerships. From the TSA to the DEA to the NSA, things are effectively out of control. Moreover, that kind of program management isn’t the only organizational constraint. There are also the fundamental operational details like how much do workers get paid, how are they managed, what rights do they have, how are tasks assigned, where are employees based, how are employees evaluated, etc.

        The answer can be ‘use our existing system’, but then that’s not actually addressing the huge waste and abuse that is our public-private model of fascism. Government contracting as it exists today is the very heart of policy induced wage inequality.

        And this is exactly what Syriza is running into. Varoufakis has the intellectual swagger of an affluent globalist, but he can’t communicate a basic vision of what exactly he proposes Europe do with all its currency units.

        1. Nathan Tankus Post author

          You ignored my example completely which makes the point with OUR government and a law that actually happened. talking in vague terms to justify your own prejudice is not an intellectual critique or response. There is a literature on organizational capacity (even if they don’t use that term) among MMT people that you’re completely ignoring.

          1. washunate

            I’m not sure what you mean by ignore. I was talking at a bigger picture scale. If you think I’m someone who thinks that no government program is a good thing, that government is inherently bad, that’s incorrect. Also, as a general rule, I find it wise to be cautious and not directly engage personal examples. I know extremely little about CETA. My general understanding is that it is one of the acts that exemplified the governance philosophy of pushing decision-making to the state level rather than running uniform national programs. I think that mindset is one piece of the problem we face today, especially JG advocates who act like state and local actors can simply be given a blank check and they’ll magically use the money wisely. As if state and local governments aren’t enthusiastic parts of the authoritarianism today. Just look at Occupy and Ferguson and Baltimore and the rest. These are almost always local Democratic mayors and judges and prosecutors and police chiefs and so on.

            Rather, my point is that I really like your series on operational capacity because it is precisely the kind of critical eye that needs to be applied to a whole range of policy proposals, from Greece to jobs to healthcare. The fact that management is hard does not mean we should always avoid complex stuff. Instead, it is a cautionary note that the details matter.

            I’m particularly curious about this statement:

            There is a literature on organizational capacity

            When Firestone posts about spending more money as a percent of GDP or Alt calls on us to forget the 1%, they don’t go into those kinds of details. In fact, the response is often to go read something rather than a succinct explanation.

            So let me ask, point blank: should an economist paid by the state make more money than a JG worker paid by the state?

            1. Nathan Tankus Post author

              ” I think that mindset is one piece of the problem we face today, especially JG advocates who act like state and local actors can simply be given a blank check and they’ll magically use the money wisely. As if state and local governments aren’t enthusiastic parts of the authoritarianism today. Just look at Occupy and Ferguson and Baltimore and the rest. These are almost always local Democratic mayors and judges and prosecutors and police chiefs and so on.”
              A) I said nothing about local and state governments

              B) I specifically referred to an auditing process. Every JG advocate I know talks about controls and auditing processes. I’m not sure what your issue is.

              “So let me ask, point blank: should an economist paid by the state make more money than a JG worker paid by the state?”

              It depends on the program. Minsky worked for the Work Progress Adminstration doing economics work at the standard wage. JG jobs aren’t generally designed to be a hiring route that requires that person long term (as in decades). If a position for anyone, including an economist, needs to be filled long term the JG is an inappropriate system to do that.

              I personally would be happy to work for a JG right now.

              small part of the literature. especially check references



              1. washunate

                Again, this is precisely what I am talking about.The details matter, from payments systems to HR philosophy. Syriza’s unwillingness to offer details publicly, either at a succinct summary explanation level or in a longer form document, is a red flag about their capability and/or intentions.


                A) I said nothing about local and state governments

                1) You said I ignored CETA. CETA’s primary organizing principle, as I loosely understand it, was non-federal actors. From Medicaid to unemployment insurance, I would suggest this is a bad governing principle. If you agree that federal policy should, as a general operating principle, not rely upon state governments, city governments, nonprofit organizations, and similar actors, then we are on the same page on that front. If you think that the nonprofit sector is notably better than city and state governments, then we rather starkly disagree.

                2) More generally, if you don’t make non-federal actors central to your version of full employment, that doesn’t mean there aren’t others who make it a focus of theirs. This is one of the implementation details that makes it hard to discuss MMT. MMTers themselves don’t even agree on who the actor is, as if the idea of government employment can be separated from the government doing the employing (and the work the employees will be doing and the conditions under which the employees will be working and the wages the employees will receive for this work).

                B) I specifically referred to an auditing process. Every JG advocate I know talks about controls and auditing processes. I’m not sure what your issue is.

                1) Because auditing and controls are working so swell in our government right now?
                2) Auditing and controls are still an extra cost. They do not create wealth in and of themselves.

                It depends on the program.

                Exactly. That is what I have been saying for some time. I really couldn’t agree more with that sentiment, and I hope the next time someone posts at NC specifically on this topic, we can get past the ‘you don’t understand’ tripe and actually talk about how different program details lead to different outcomes.

                JG jobs aren’t generally designed to be a hiring route that requires that person long term (as in decades)

                So your version of JG is ultimately dependent upon private sector employment, anyway. Why not just give workers unemployment insurance directly and cut out the temp work?

                If a position for anyone, including an economist, needs to be filled long term the JG is an inappropriate system to do that.

                So what is the difference between short term and long term? Why is that a meaningful standard to build into public policy? And who is determining what needs to be filled, either short term or long term?

                You are basically describing a system where public officials are planning the economy for decades. That may be a good idea or not, but it certainly is a radical departure from the social contract which most Americans think governs the US. I’m not opposed to radicalism per se, but it needs to be presented honestly as such. A JG that actually addresses our nation’s social problems is not just a little tack-on to our existing system.

                I personally would be happy to work for a JG right now.

                What about everybody else? The entire construct of Wray’s full employment & price stability is that the PSE workers will be paid the BPSW (the basic public sector wage). The PSE workers are not to displace non-PSE jobs that will pay more than the basic wage. Inequality is built into the system.

                One final thought I have at the moment, I find it interesting that people keep posting links to non-NC posts even though there are a considerable number of MMT posts at NC. That seems to tacitly acknowledge that critiques of guest postings at NC appealing to MMT ideas have some merit.

                Do you get the hilarity of linking to that Tcherneva paper after your point A? The title is literally:


                That’s about as non-federal as an actor can get :)

              2. washunate

                P.S., if you are really gung-ho on the nonprofit sector version of public-private partnerships, have you ever bummed around A set of public officials still have to conceive and compose the grant opportunities. Then another set of public officials have to monitor compliance with awarded grants.

                There is no magic management dividend from outsourcing the actual performance of the grant. Quite the opposite, it makes government more complex. Now sometimes that complexity is worth it because it’s not an area where a professional standing public workforce is valuable, but there are a finite number of those kinds of projects. We have been doing this not because public-private partnerships are in the public interest; rather, we are doing them for ideological reasons. They allow for more secrecy and inequality than direct government employment.

                As this scales, the problem compounds. The more money being doled out this way, the less valuable the projects become. Stupid diminishing marginal utility…

                Also, have you ever bummed around In addition to the question of productive investment vs. wasteful spending, there is also the matter of inequality. Check out compensation of senior executives at nonprofit organizations receiving government contracts (the IRS form number you are looking for is 990). They vary wildly from one organization to another and from the top employees to the worker bees. In addition, you will see some organizations that are much bigger than the rest; these large nonprofit corporations dominate the landscape similarly to how large for profits dominate their domains. A well known example of this social entrepreneurship is that the Red Cross sells huge quantities of blood. And of course the people who serve on the boards of nonprofits and award state and municipal grants to nonprofits are exactly the local leaders involved in everything else going on in the community, from for profit corporate executives to city, county, and state officials.

                Think Mayor’s offices don’t influence grantee recipients in their cities?

                A final bit of data I would encourage exploring is large employers in each major metro area. Almost everywhere ‘nonprofits’ like hospital franchises and universities are some of the largest employers in their respective regions.

    2. Ro

      I love the pointing out of implementation concerns re: the JG as though that’s a silver bullet critique. Imagine if someone had proposed the idea of universal public k-12 education before you had ever had any experience of it? Can you imagine how people’s minds would explode trying to conceive of the design and implementation challenges it would inevitably involve to make that vision a reality? Can you imagine the public demanding that Horace Mann articulate exactly what a public education would look like in all of its myriad possible forms before signing on board to the idea that children should have a chance to learn? Would you really try to deny the economic benefits of providing public education for all, despite the inevitable administrative inefficiencies that come with it?

      What you see as sweeping under the rug, I see as making a claim that the concerns you’re raising are of a lower order than the economic (and moral) case in favor of the JG. So when you raise concerns about implementation, I say “yes, that’s a concern, as it is with any social program.” But It’s not a case against the idea that we should be committing to overcome them because it is fundamentally a good and correct thing to provide every person the opportunity to participate meaningfully in economic life, with dignity.

  12. Jordan from Croatia

    Original assumption Tankus makes is wrong. The assumption that payment transactions in Greece is timely as in the west is wrong. One of the prescient source of corruption and uneven competitivness in southrn states is untimely payment system. Imagine that every larger firm enjoys a monopsony power on when or even if it will pay its liabilities. This is the major cause of a bad economy. Untimely transactions. Many small companies wait for payments from either the state or a large corp up to a year.

    Simply said: ggreek economy is already accustomed to supply chain that works only on the promise to pay. When economy colapsed in 2010 all nonessntials quickly collapsed due to lag in payments and eswntials keep going on promise to pay and payment arrives just in time to survive. It is based on personal relations of powerbrokers. This is what EU is now doing to prewent Grexit and what major powers are doing with their own banks: solutions just barely in time to survive. This is what Greece is alao doing in negotiations.

    Time delay allows for fudging the numbers and squizing out some more time.

    Greece can easilly go through the switch tto drachma with little pain because they are allready so accustomed to logistics on promisse to pay by powerbrokers which is another word for corruption.
    But to do it painlessly, Syriza has to take over all parliament seats and have full cooperation from its members or just wake up a patriotic sentiment with whole parliament in order to have cooperation necessery for implementing a switch to new money. Croatia did this in time of war within a month and did it two times, but only because EVERYONE cooperated.

    1. Yves Smith

      Huh? A payment system, as Clive pointed out, can’t have features that depart from international norms and connect to those systems. Greece uses cash heavily and that means heavy use of ATMs, particularly by tourists. Moreover, importers will similarly be required to adhere to the payment terms of their supplies. Indeed, with the threat of capital controls and a Grexit, I’d expect suppliers to be demanding more rapid payment or even partial or full payment in advance.

  13. Peter Mayers

    The issues addressed in NC are regularly fascinating and important, but I sure wish the tone in the comment threads were less vicious. A bit more courtesy among the commenters would make it possible for me (and I suspect for a fair number of others) to learn about some critical matters without feeling the old blood pressure build up and fearing that a cardiac arrest is coming on …

    Of course there’s a lot of variation, and the tone and quality of many of the exchanges on the comment threads is decent and encouraging. Pretty regularly, though, someone accuses someone else on the thread of being less intelligent and insightful than pond slime. This is a drag for those of us who are trying to educate ourselves about these important issues, and whose motivation to do so is undermined by that old rising blood pressure. I’ll learn more if I can stand it to read more of the exchanges!

    I haven’t followed NC for more than a week or two now, but I get the impression there’s a fairly long history of bad blood here. Some commenters seem to want nothing better than to sink their teeth deeply into the throat of certain other commenters. Has the hatred been building up for several years, or something?

    However that is, can you please turn down the nastiness-volume a notch or two or three? Even if you think (rightly or wrongly) that some other commenter has made some outrageously brain-dead (and insanely inaccurate, and psychoticallly hallucinatory, and genocidally mistaken … ) assertion or claim, can you contrive simply to write something like “No, I don’t believe that’s right, for the following three reasons” — rather than writing “You psychotic vermin! — with an understanding inferior to that of a dead clump of pond scum!” The issues and structures being discussed here are too important to surround with such a foul cloud of malice. And it’s hard enough for those of us who are little acquainted with these quite complicated technical matters to follow the discussion without having to change our shirt every half hour after it’s gotten drenched from all the flying spittle.

    I know, comment threads on the internet are notorious for nasty exchanges. But can we perhaps make an exception here, if only because the matters being discussed are so important?

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