Will the ECB Continue Its “Sherman’s March to the Sea” with the Greek Economy?

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After the momentous “No” vote in support of the Greek ruling coalition Greece’s lenders and most important, the Eurozone leaders of the countries that have made 60% of Greece’s outstanding loans, are officially still figuring out what to do. Merkel is going to Paris to confer with Hollande today. The Eurogroup has set a meeting for tomorrow at 1:00 PM

However, despite the responses of media outlets and many pundits that the Eurocrats will have to beeat a retreat and offer Greece concessions, it’s not clear that this event strengthens the Greek government’s hand with its counterparties. Remember, Tsipras enjoyed popularity ratings of as high as 80% and has always retained majority support in polls. And it’s all too easy to forget that “the creditors” are not Merkel, Hollande, Lagarde and Draghi. The biggest group of “creditors” are taxpayers of the 18 other countries of the Eurozone. The ugly design of the Eurozone means that the sort of relief that Greece wants most, a reduction in the face amount of its debt (as opposed to the sort of reduction they’ve gotten, which is in economic value, via reductions in interest rates and extensions of maturities) puts the interest of those voters directly at odds with those in Greece. Our understanding is that a reduction in principal amount, under the perverse budgetary and accounting rules of the Eurozone, would result in those losses showing up as losses for budget purposes, now. They would need to be funded by increased taxes. Thus a reduction in austerity for Greece, via a debt writeoff, simply transfers austerity from Greece to other countries. It’s not hard to see why they won’t go for that. And Eurozone rules require unanimous decisions.

Even though the ruling coalition had said it wanted to restart negotiations immediately upon getting a “no” vote, the lenders have asked Greece to send a new proposal, apparently deeming the one it submitted on June 30 to be out of date. It’s doubtful anything will happen before the Eurogroup meeting tomorrow.

The remarks from European leaders have been mixed. Eurogroup chief Jeroen Dijsselbloem made it clear he was Not Happy:

I take note of the outcome of the Greek referendum. This result is very regrettable for the future of Greece.

For recovery of the Greek economy, difficult measures and reforms are inevitable. We will now wait for the initiatives of the Greek authorities. The Eurogroup will discuss the state of play on Tuesday 7 July.

German MPs, who would need to approve any new bailout package for Greece, were also not sounding very accommodating. The first official remark from Berlin was hostile From the Financial Times:

But there was a scathing response from Berlin, which has refused to contemplate debt relief until Greece commits to and implements reforms. Sigmar Gabriel, deputy German chancellor, said Mr Tsipras had “torn down the last bridges on which Greece and Europe could have moved towards a compromise”.

“With the rejection of the rules of the eurozone … negotiations about a programme worth billions are barely conceivable,” he told Tagesspiegel newspaper.

A seemingly more considered response was not much better. From Bloomberg:

Ingrid Arndt-Brauer, who chairs the finance committee in Germany’s lower house, said that she had expected the committee to be summoned Tuesday to begin the process of helping Greece with a new bailout package. The “No” vote rules out any such move.

“Nobody wanted to torture the Greeks — we’re not terrorists — but to help them,” said Arndt-Brauer, a lawmaker with Merkel’s Social Democratic coalition partner. “A ‘Yes’ vote would have signaled a readiness to cooperate — some reforms at least for fresh help. I see no credible basis to help Greece right now, none at all.”

This morning, some hardliners are making more conciliatory noises. For instance:

Spain’s economy minister Luis de Guindos has echoed that Greece should remain part of the eurozone and the euro is irreversible.

He said the Spanish government was open to negotiating a third bailout, and any new Greek package should include a comprehensive analysis of Greek needs.

More important, the Telegraph reports that Hollande has said he will “bend over backwards to keep Greece in the euro.”

However, the key party to watch to see whether the lenders are prepared to soften their stance much is the ECB. The central bank is to decide today whether to increase the ELA, which is a necessary step for the punishing bank holiday to come to an end. The ECB has decided to wait till later in the week to decide whether to really lower the boom and increase collateral haircuts, no doubt waiting for a reading from the Eurozone politicians. Yanis Varoufakis had promised Greek banks would open no matter what on Tuesday. It’s hard to see how they could given that even cash itself is running scarce. Banks do have “vault cash” on their premises, but that’s not meant to stand up to large-scale withdrawals.

As Wolfgang Munchau pointed out in the Financial Times, one way the vested interests overplayed their hand was by talking up scarcity and shortages before many people were experiencing them. But suppliers and distributors of food and pharmaceuticals are sounding desperate, and desperation does not mean just lost revenues and upset customers. As the experience in Cyprus showed, a mere 12 day bank holiday started breaking supply chains. It’s not hard to imagine, given the sustained depression in Greece, that businesses are even more fragile, so that business closure and failures will start occurring more rapidly than in Cyprus. While some might be reversible when the money spigot is turned back on, most are likely to be permanent. And that means loss of jobs, and even greater difficulty keeping commerce and important resourcing going.

As we discussed in our posts yesterday, a bank holiday is also a huge turn-off to tourists. Few are brave enough to come when access to medicines, food, or even cash at ATMs is in doubt. And this bank holiday falls at the worst possible time, in the midst of tourist season, in an economy that gets roughly 18% of its GDP from tourism.

Let us also not kid ourselves: it would be highly unlikely that the ECB would keep the ELA limits in place without having conferred with the Fed.

If the central bank continues to play the enforcer role, it’s a strong signal that the other creditors are not likely to relent. While the ECB is nominally independent, it’s far more political than the Fed. And the tame market reaction to the surprisingly large margin of the “no” vote means it will have to deal only with political and not financial market considerations in deciding what to do next.

If and when the ECB does cut the ELA. it’s game over for Greece. From the Financial Times:

On Monday, the ECB may determine that the path to default is now so much clearer that it must ask for even more collateral to keep the current €89bn lifeline open. For banks already short on collateral — and one of the four big Greek banks is known to be on EU authorities’ watch list — that could push them over the brink into bankruptcy.

The ECB is unlikely to take the more drastic step of entirely withdrawing emergency funding on Monday, however. The last time Athens came this close to “Grexit”, in mid-2012, Mario Draghi, the ECB president, decided it was too momentous a decision for unelected central bankers to make, and warned the EU’s political leaders they would have to make the ultimate choice on their own.

According to two eurozone officials, in July 2012 Mr Draghi told the heads of the European Commission, European Council and eurogroup of finance ministers that they would be asked to guarantee the Greek bonds and other government-backed securities being used by Greek banks in return for ELA. If they demurred, ELA would be pulled and Grexit would ensue.

Samaras knuckled under in 2012. But the lenders no doubt had a good reason to think he would.

We need to stress that merely refusing to increase the ELA will strangle the banks and the economy, and quickly, too. The decay will not be liner and it will probably start to accelerate this week if the ECB does not relent. This is no different than Sherman’s march to the sea, when General William Tecumseh Sherman engaged in the first large-scale example of scorched earth warfare, destroying homes, crops and infrastructure on an over 300 mile swathe through Georgia. While this may not subdue the Greeks, it would presumably decourager les autres.

Readers have no doubt heard about Yanis Varoufakis’ surprise resignation as Finance Minister. It’s being spun as a way to undercut creditor excuses for being difficult with Greece by removing a major negotiating impediment. But the Guardian live blog reported prior to his departure that leaders of other parties that Tsipras was meeting this morning to get their support for his new initiatives with the creditors were calling for his resignation. And I wonder if this had anything to do with it, that Varoufakis had tired of fighting internal hardliners as well as European officials. From Ambrose Evans-Pritchard at the Telegraph:

Syriza sources say the Greek ministry of finance is examining options to take direct control of the banking system if need be rather than accept a draconian seizure of depositor savings – reportedly a ‘bail-in’ above a threshhold of €8,000 – and to prevent any banks being shut down on the orders of the ECB.

Government officials recognize that this would lead to an unprecedented rift with the EU authorities. But Syriza’s attitude at this stage is that their only defence against a hegemonic power is to fight guerrilla warfare.

Hardliners within the party – though not Mr Varoufakis – are demanding the head of governor Stournaras, a holdover appointee from the past conservative government.

They want a new team installed, one that is willing to draw on the central bank’s secret reserves, and to take the provocative step in extremis of creating euros.

I hate to give a cold dose of reality, but these measures would not solve any of Greece’s problems. If Greece goes rogue and prints euros without authorization, it will become a pariah quickly and will justify the ECB going nuclear. Trying to raid accounts electronically would be deemed as hacking even if a team who didn’t know the systems could pull it off.

As much as I’d like to be hopeful about the Greek vote, I’m deeply concerned that like the Arab Spring uprising, which in the end seems to have done little to help struggling people in the Middle East, and led to civil war in Syria, that what seemed like a promise of a better day for ordinary people will lead to even worse outcomes. As much as the Eurocrats have become unaccountable and causally malevolent in how they operate, Greece is too weak a vehicle to take up a successful, frontal revolt. Greece’s defiance may put forces into play that will accelerate the dissolution of the Eurozone, which is inevitable given Germany’s insistence on running trade surpluses and its refusal to finance its trade partners or more to greater fiscal integration that would do more or less the same thing. But the Greek people themselves are not likely to come out winners.

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  1. which is worse - bankers or terrorists


    “The door remains open for bailout talks with Greece, following the No vote, but they cannot start yet, German Chancellor Angela Merkel’s spokesman says.”In light of the decision by the Greek citizens, the conditions to start negotiations on a new aid programme are not met yet”, Steffen Seibert said.”

    You can see what Angela is doing….in every negotiation one side has the benefit of time, and she has time on her side. She is going to let the Greek banking system collapse, let the country run out of money, and let Greece starve to death.

    And there is simply not much Greece can do about it if they stick to the euro.

    This is why last week I was asking if, for example., the tourist industry can operate in euros entirely outside the physical boundaries of Greece and import euros if needed. What is the reason a majority of Greeks need a banking system, aside for public sector needs? I realize the pensioners will be stuck, but clearly someone is going to lose, and it sure won’t be Germany.

    1. Chris in Paris

      Any business that supplies itself with imported parts or services needs banks.

      1. which is worse - bankers or terrorists

        Agree….but domestic or international banks? I bank outside of my country all of the time for services inside my country and outside of it. I keep most of my money outside of my country because the banking system is more stable there and I’m not subject to local inflation.

  2. Santi

    According to Paul de Grauwe, Greece is not insolvent, just illiquid, and it just needs nominal growth of around 2.5% to have sustainable debt. He seems to be offering the ECB a way out. There is talk in media about having the Greek collateral guaranteed by EU members so that the ECB can maintain and increase ELA as needed while the crisis is unwinded. Still things are dire now.

    1. Yves Smith Post author

      We are talking about two different things. De Grauwe is saying what I have said, that Greece’s problem is austerity, not its debt burden. Greece has gotten big debt reduction in economic terms via interest rate reductions and deferrals and maturity extensions. Its economic value, as opposed to its headline value, is more like 70% of GDP. But as long as the economy keeps contracting, it will just get deeper and deeper in a hole. It’s the horrid state of the Greek economy due to so much unemployment and the continuing deep depression that makes its debt burden impossible.

      But I was not referring to Greece’s solvency in this post but that of the Greek banking system. Greek banks are deeply insolvent. The ECB keeps pretending they are for official purposes but they have tons of bad loans, way way too many for them to be viable.

      1. Cugel

        Yves, I think you’re right about how quickly the ELA is likely to be revoked. And the Greek banking system will collapse within a matter of days. This gives the creditors some additional leverage so the result will not be favorable to Greece. But, then nothing has been favorable to Greece since last autumn when the Troika decided to crush them and refused to give Samaras even a fig leaf.

        The Greek referendum vote matters nothing to the Troika, let alone the European parliaments. I’ve seen nothing that indicates that the German parliamentarians have changed their view about not accepting ANY proposed compromise so long as Tsipras and Syriza remain in power. They are openly calling for regime change. The fact that they didn’t get it in the vote they are calling “disappointing”. That doesn’t sound like they have reconsidered their position at all. And Varoufakis resigning – how does that change anything since he wasn’t even on the negotiating team anymore? He clearly wasn’t the obstacle to a deal.

        They have already rejected the last Greek offer, and now the Troika is sitting back waiting for Greece to propose something new? That looks like an excuse to let market forces go to work. Grexit is looking like a short-term rather than a long-term “solution” in their eyes.

        As for the political fallout, the “autres” are not going to be discouraged at all. I predict big electoral gains by rejectionist parties in Portugal, Spain, Italy and above all France. Not all of these will be leftist of course, especially France.

        Another thing the Eurocrats forget is how insular Britain is and how easy it would be to whip up nationalist sentiment forcing a withdrawal from the EU altogether in the 2017 referendum (if that happens as Cameron promised). Nothing really has changed in their attitudes. Remember how freaked out Britons got over the Chunnel?

        How can Grexit and mass turmoil in southern Europe help the cause of the EU in Britain? They aren’t even in the Eurozone and never will be now. Is “Brexit” going to follow? Remember that the idea was that once the “five tests” were passed Britain would join the Eurozone? “Convergence” – all that stuff? Seems like ancient history now. Chances = Nil. And a permanent Eurozone without Britain eventually joining? Also nil.

        1. Stephen

          “This gives the creditors some additional leverage” . . .
          How much more leverage do the creditors want or need??? Isn’t the point precisely that the creditors are totally and completely dominant from the perspective of “raw power” ?? They can crush the Greek economy in a heartbeat, whenever they decide to do so. Which is why more is demanded of them than of Greece, in any moral equation.
          As Yves mentioned above, their power stems in part from the fact that their electorates are now on the hook for any “bailout” of Greece. But why? Five years ago it was the “too big to fail” French and German banks that were on the hook for inept and irresponsible loans to Greece, but since they (not the Greek govt. or people) were “bailed out” by the first round of loans to Greece, the burden was shifted to, first, Greece, and, secondly, to the populations of the other EU member states. Now their leaders plead for “fairness” because the cost of Greek debt forgiveness (inevitable in any case) will fall upon their “innocent” taxpayers. It all looks fine and dandy if you ignore the historical journey to this impasse.
          What would the electorate of these creditor countries have said if five years ago they’d been told their banks needed bailing out and they (the electorate) would possibly (i.e. likely) have to pay for it?

          1. Yves Smith Post author

            About 93 billion of relief went to French banks, 59 billion to Greek banks (!!!) and 40 billion to German banks.

            Greece has no meaningful deposit insurance. so Greek depositors would have lost almost the entire amount less bank equity. Let’s be charitable and assume 40 billion. For a country of 11 million people, that’s $3600 per person. More important, the banks would have had to be resolved, so the exercise would have had additional knock-on effects.

            I must confess to not knowing the state of deposit insurance in France and Germany. Two of the French banks owned Greek banks, so any losses on Greek government debt would have been limited to the subs, as in they would let them be resolved and take a hit only for the equity. But in general, you’d expect that some of these banks would have lost all their equity and need to be resolved. I suspect SocGen or Paribas were exposed, and both are systemically important players. Deutshce Bank was also fabulously undercapitalized.

            So sadly, this was a bailout of systemically important players, and by happenstance, Greek banks and depositors.

            And the argument isn’t over whether they should have been bailed out but what should have happened afterwards. The boards and top execs should have been replaced and the institutions should have been turned into utilities. But no one has the will to go after private businesses even when they are so heavily subsidized as to not be properly regarded as private enterprises. That looks too much like socialism (appropriation of “private” businesses!) for anyone’s taste.

            1. Stephen

              So two thirds of the bailout went to foreign banks, and one third to Greek banks. Even the rescue of greek banks isn’t quite the same as rescuing “Greece” or the greek people.
              I confess I don’t know what happened to this insurance scheme, but according to a 2008 piece in the Guardian the EU finance ministers agreed to insure deposits of ALL member states to the tune of 50000 Euro. If that agreement held, then bailing out the Greek banks simply rescued the EU from having to pay out to Greek depositors. Of course 50000 Euro is nothing for the big depositors, but I bet it would cover everyone Syriza is worried about. See article link below with text.


              European Union finance ministers, seeking to bolster confidence in the battered banking system, have agreed to raise the minimum level of bank deposit insurance across member states from €20,000 to €50,000 (£38,000).

              They also agreed to support bigger financial institutions that might cause systemic failure if they were allowed to go under.

              The agreement, thrashed out at emergency discussions in Luxembourg, fell short of the €100,000 being discussed by some ministers, and is less than the £50,000 (€64,000) guarantee on deposits offered by the British government.

              French economy minister Christine Lagarde, who chaired the talks, told a news conference the deal had been a compromise between governments with large firepower and those with less reserves. “To paraphrase what someone said: ‘What looks big to you, looks enormous to me’,” she told a news conference. “So it’s to take account of this diversity among member states.”

              A number of European countries have caused anger by offering blanket guarantees on bank deposits, including Ireland, Germany, Greece and Iceland.

              The Netherlands today announced that it was raising its deposit guarantee from €38,000 to €100,000.

      2. Synoia

        Take the Greek Banks into bankruptcy, and have the Greek government nationalize the payments system.

        “If Greece goes rogue and prints euros without authorization” as a sovereign government, does Greece have, or can it assume, this power? If so I’d use it to fund the newly nationalized banking system.

    2. ChrisFromGeorgia

      Taking de Grauwe’s analysis as correct, for the sake of argument, is there any country in Europe that has sustained 2.5% nominal growth lately? I realized that nominal growth includes inflation, however I seriously doubt any other country within the E.U. is capable of this kind of growth given demographics, outside of maybe Eastern Europe.

      The core E.U. countries seem to throw parties and set off fireworks when they eke out a meager 0.1-0.5% GDP growth rate. Even throwing in core CPI around 1% to bring this to a nominal GDP of 1.1%-1.5% doesn’t bode well for Greece.

      1. Santi

        Take a look into the table in the paper, Portugal needs 3.8% nominal growth, Italy and Ireland 3.6, Greece 2.2, and Spain 3.4. Of those only Ireland is delivering, with a 4% nominal GDP growth. All the rest are burying in debt (r-g), Greece the fastest with 3.2% due to -1% inflation, then Italy with 2.8%.

        So when some people say “it is not Greece that has a problem, it is Europe” they are essentially right.

        Yves, I was not arguing against you, your points are ok. I’m just pointing that some people is making positive noises.

        1. Yves Smith Post author

          First, there is no way we are going to see anything approaching those numbers. Even Germany has low/no growth.

          Second, Greece is in such a deep hole that Bill Mitchell has estimated it will take 10% of GDP budget deficits for a sustained basis for them to recover. Governments can’t wrap their minds around doing that even if they are fiat issuers. If Greece were to exit the Eurozone, which we have argued would be catastrophic, it won’t be able to borrow (even Argentina now, more than a decade after its default is regarded with considerable skepticism among investors and would have to print). That much printing would result in a severe fall in the value of its currency That would be OK if Greece didn’t need petroleum, food, and pharma as imports. 25% of its GDP is imports, and most of that is for internal use, not for production and re-export.

        2. Mark P.

          ‘It is not Greece that has a problem, it is Europe.’

          As you say. Perhaps it’s my mundane perspective or lack of imagination, but the eurozone increasingly resembles a currency version of a struggling tenants’ association, with increasing costs borne by survivors as members fall away.

          So, even if Greece somehow just vanished from the equation — and there’s no way that’s going to happen cleanly no matter how much the likes of Schauble may desire it — this will put pressure on the next weakest link — Portugal, say.

          Portugal will now know better than to expect any mercy and, if economic trends don’t improve, may determine to defect and prepare an exit in secret. Will, say, Italy then suspect that Portugal is preparing an exit in secret and make their own plans to preemptively? And so on.

          Well, the Germans have built their dream castle.

          1. Synoia

            Well, the Germans have built their dream castle.

            Remember, when in trouble at home, go adventuring abroad.

            The German position in Europe has led to at least 3 major wars.

            1. Mark P.

              Trouble at home? In this case, perhaps the cost of reunification.

              Still, I think you’re being a little unfair to Germans in the modern era. It’s more the simple scale of Germany and its economy, and — I’ll allow — a certain inflexibility in German thinking.

          2. Nick

            Mark P, your third paragraph is a cut-and-paste from a comment I left over at Crooked Timber. Of course, you’re free to plagiarize your thoughts from where-ever you want to; but you should choose better targets. I don’t know anything about economics, and my points are generally either trivial or wrong.

  3. no one of consequence


    Your post is cut off after this paragraph:

    “Moreover, it has a ready excuse to stand pat, that it now needs loss protection if it’s going to let those wobbly Greek banks have more money. From the Financial Times:”

  4. Eric377

    ELA is an on-going element of a comprehensive offer that is not being accepted. It isn’t what the majority of Greeks want per the really conclusive referendum just held. Munchau speculates that the the doom-and-gloom was oversold. A few days to reassess makes a lot of sense if either party uses the time to figure out what they are willing to agree to. For all anyone knows, the next referendum will be in Germany or Holland. Every Sunday another referendum some place.

  5. RabidGandhi

    First as tragedy, then as farce:

    As much as I’d like to be hopeful about the Greek vote, I’m deeply concerned that like the Arab Spring uprising, which in the end seems to have done little to help struggling people in the Middle East, and led to civil war in Syria, that what seemed like a promise of a better day for ordinary people will lead to even worse outcomes.

    Kαὶ τὰ λοιπά.

    1848 democracy turns into Luis Napoleon…

    Obamamania turns into Romneycare…

    Tahrir turns into Sisi…

    Temporary defeats of SOPA/TPP turn into approval of fast track…

    The oligarchs feed off of the left’s vapid enthusiasm, converting revolutionary zeal into harsher oppression. Plus ça change.

    1. Dino Reno

      While your take is probably the correct one, I lean toward a different historical analogy and possible outcome. I see Tsipras as more like Lech Walesa who brought down the mighty Soviet Union while operating out of a shipyard in Poland. The European Union just got its death notice.

      1. washunate

        That strikes me as a very interesting comparison in another way, as well.

        The core, if you will, of that mighty Soviet Union is the Russian Federation. Post-Soviet Russia is still the most populous nation in Europe.

        If the result of the ‘death notice’ of the present incarnation of EMU is to leave a core actor as integrated and cohesive as Russia, I think much of the Franco-German world would take that outcome. If Italy drops out of the core, the other five ECSC nations have a population a little larger than Japan and Russia.

  6. Eric377

    Come to think about, why would Chancellor Merkel much care if 61% of voters in Greece want a better deal for Greece? Greece as a nation isn’t set up economically or socially to be on a pretty hard currency. You can rearrange the pieces ten ways and that underlying condition won’t change for a decade or more. Italy probably is the real case that kills the Euro someday.

  7. charles 2

    Yves, you omitted the last paragraphs on AEP story about printing euros and I believe it is significant. I reproduce it here :
    “Such action would require invoking national emergency powers – by decree – and “requisitioning” the Bank of Greece for several months. Officials say these steps would have to be accompanied by an appeal to the European Court: both to assert legality under crisis provisions of the Lisbon Treaty, and to sue the ECB for alleged “dereliction” of its treaty duty to maintain financial stability.”

    This has its importance, Greece will become a pariah only after the ECJ had said so (The Treaty explicitly says that the ECB has to answer to the ECJ for its actions). It won’t be a walk in the park for the creditors nor for the ECB. There will be several Economic Nobel testifying in favour of Greece in the Courts (coordinating the action in the court could actually be a good job for Varoufakis).

    You mentioned ad libitum that it is not easy to introduce a new currency, banknotes, introducing a new banking system etc… Printing euros solves that problem, it will also increase the velocity of euro banknotes in Greece because good money will become bad…

    Bottom line : Euro is drachma, and the problem of introducing a new currency is the creditor countries problem, not Greece’s. I wouldn’t blame them if they were doing it on a national basis, something they have already worked on. Actually having Germany returning to the Deutsche Mark is in the interest of so many countries (France not the least : a euro break-up before 2017 would cut the wings of Marine Le Pen and allow French Industry to recover) that it has a good chance to happen.

    The real losers in that case ? US, Asia, Gulf States. Not our currency any more your problem…

    1. juliania

      Thank you, Charles 2. The legal ramifications, what are the ‘rights and privileges’ of a member state have always been, it seemed to me, the backstory of what Syriza has attempted here, and Varoufakis’ resignation fits in with that. I really thank Yves for hanging in there and providing many of us with the basic tenets of the square dance only now beginning in earnest.

      I hope you are correct that Varoufakis will still be a player. Perhaps his release will afford him the luxury of other economists in adding to the explanations of what is going on for all of us, the way he was wont to do in the past.

      1. Yves Smith Post author

        Not “believe”. They can’t. For starters, you need special stock and they only would have limited supplies. And as we discussed at great length in our posts over the weekend, domestic cash in whatever form (euros, drachma, scrip) does nothing to help them with imports unless you think hauling cash to border towns, taking it across the border, and depositing it in banks across the border is something importers are prepared to do on a routine basis.

        See Clive on this issue:

        The ECB controls euro note production and issuance, regardless of how we, or Greece, feel about this. Greece is bound by treaty to produce euro notes in accordance with the ECB’s stipulations. To quote http://www.ecb.europa.eu/stats/euro/circulation/html/index.en.html

        “The ECB closely monitors the stock and circulation of euro banknotes and coins. It is the Eurosystem’s task to ensure a smooth and efficient supply of euro banknotes and to maintain their integrity.” (emphasis mine)

        If Greece were to issue new euro notes outside of the ECB’s permission, the ECB would, using the provision that it must “maintain integrity” (of the euro) take steps to rein in Greece. They would not hesitate, worse-case, to declare Greece’s “screw you, ECB” euro notes counterfeit.


        The other Eurosytem currency issuers know exactly what serial numbers they have generated and printed on the notes. They would fully co-operate with the ECB and provide real-time information on the notes they had issued, their denomination and the associated serial numbers. The ECB would make a declaration that any notes not bearing those serial numbers had not been validly issued by the ECB or their agents and were to be treated as forgeries.

        Yes, the Eurozone and euro note users would be presented with substantial additional work, aggravation and costs. Every single person in the Eurozone would have to regularly check their euros for validity. How would people react to Greece and its government ? The German tabloid press would be demanding air strikes on the counterfeiting note presses. The Daily Mail would run headlines day after day trying to scare middle England brits into not daring to venture across the Channel. U.S. citizens (and sorry to denigrate here but it is proven by history) suspicious at the best of times on how “backward” anything outside of U.S. territory is and not exactly known for their willingness to venture into what are perceived as trouble spots internationally would stay away in droves. I am not kidding here, this is exactly the sorts of reactions such moves by Greece would result in. Are you seriously trying to help here, or just having a laugh ?

        1. Synoia

          Most of the Euros are not “currency” but electronic entries in Bank accounts.

          Physical currency is not as important as bank liquidity.

          1. charles 2

            The electorate of Syriza is made of young people and workers who earn and spend a few hundred euros a month. They buy in markets in the streets. For them, euro is banknotes and a bank liquidity means an ATM spitting one or two hundred euros of cash from their account from time to time.
            Yes, if you want to but a Mercedes Benz, Target 2 bank liquidity is more important, but Syriza doesn’t care about the people who want to do that.

        2. charles 2

          A) Putin may not be willing to part billions of dollars of its Reserves for Greece, but a few thousand tons of ink and paper, I am sure he can provide. Greek airforce is not ridiculous too, thanks to generous vendor schemes from France in particular. Any European airforce will be very careful to try a raid on a country with more than a hundred F16 and some still good-to-fight Mirage 2000, and you can say good bye to NATO with such an action.

          B) Good luck securing the border with Greece, it is not Germany on the other side, but Bulgaria, the same folks who fought a military conflicts with Greece against Turkey. And I am not mentioning the lack of reach of the rule of law in Southern Italy… As the Italians are next in line, they may not be the most enthusiastic enforcers of Frankfurt bankers’ rule.

          C) Do you really believe that “every single person in the eurozone” will “regularly check their euros for validity” ? No way ! Having to painfully explain serial numbers on banknotes would be like lifting the curtain in the wizard of Oz. The likely result is that you will just have the French clamouring for French Francs, the Dutch for Gilders and the Germans clamouring for Deutsche Mark, and they may get what they want this time. Remember that we were close to that only four years ago !

          Again, “Euro is drachma” is a very attractive way out for many countries in Europe. They may give the excuse “the mad Greeks made me do it” but they will not fight it to death.

      2. alex morfesis

        yves KNOWS the greek government can’t just print euros

        they do not belong to the greek government…it is “legal tender”…

        a closed loop system…a roach motel…you can get in but you can’t get out…

        greece “in theory” can try to do other things, but it seems obvious only the swiss are allowed to have the WIR…

        anyone else, fuhgitaboutyt

        the strategic advantage of germany over everyone else in europe is it has more institutions which can issue euros via “loans”

        it has its regular banking operations


        over a thousand Co-op banks

        and a few hundred sparkassen

        in addition to its various insurance. pension and capital market activities

        in greece, the eurozone convinced the previous governments to keep the lid on

        in 2006 the Euro Central bank came across with its new and improved idea to bring
        banking together…


        in the european system, there are

        credit institutions and

        financial institutions

        credit institutions are considered “deposit taking” and need a direct banking license

        but in many countries, there are many things that are not controlled by the central bank

        but in greece, the octopus is around everything


        the foolish oligarchs who have strip mined greece these last 50 years don’t care since they
        only keep operating capital in Greece, the rest they keep in “other places”

        it serves their purposes to have a small loop of “options” to insure lowered opportunities for
        competition, both from inside (which they worry most about) and outside…

        if one is going to boot leg a currency, might as well just print drachmas over the foolish idea of printing bootleg euros…the euro belongs to the central bank of europe…it is NOT a sovereign currency…it does not belong to Greece…it never did…

        (and the only way to create draxmas would be by putting some type of stamp over the “bootleg” euros one might physically print, since there are, it seems, no physical drachma plates that match up to the euro in terms of physical size…)

        but the paper that is designed to currently prevent massive third party counterfeiting is probably
        not in large supply…remember…

        samaras didn’t even leave computers in the finance ministry…you think he left enough spare secure euro “paper stock” to help Syriza do much…??

      3. alex morfesis

        the Euro does not belong to greece (or anyone else)

        it is non sovereign legal tender of the european central bank

        that is why technically greece could go to the dollar or the yen and stay in the system
        since it could internally accept them in addition to the frozen euros(no one will lend them
        the yen or dollars so it is just an example, not a solution) for use within its country…

        and technically, if it could get one mainline country to accept the drachmas, it would then
        be able to force its way back into the system (technicality in the rules and again not viable…no nation is going to wrestle with draghi to help greece this week)

        but it can’t issue European Central Bank “Euro” Instruments as “Legal Tender”

        Legal Tender being financial instruments you MUST accept…

        you personally and individually can issue your own notes and if people are happy to accept them
        in payment, so is life…

        but you cant MAKE anyone take your personal notes…

        LEGAL TENDER forces people to accept the payment without question when tendered…
        as in handed over…

        the central banking system, in effect, makes a market for its instruments through its
        licensed entities…and offers credit based on its instruments…

        even if greece went rogue, no one would accept them for financial purposes and the
        instruments would be useless…like zimbabwe dollars…

        a trillion here a trillion there…

        soon enough you have kindling…

        greece has a 15 to 20 billion dollar a year gap between imports and exports…

        and was importing about 8 billion a year in petrol and now probably down to 4 billion this year…

        but discooperationalism is the problem…

        no yogurt that is labeled “Greek Yogurt” in the USA actually comes from greece or is sold by a
        greek company…there are a few greek named brands that are owned by non greek companies, but 2 billion a year in a product that is made by non greeks…

        and no consideration of filing any lawsuits or even saying, hey look…we are the “real” greek yogurt…

        sofia vergara gave some free publicity to a real greek brand and they were not smart enough to bite nor piggy back on it…and you still can’t buy “mevgal” brand in the USA…it is what it is…

        woyk…it takes woyk…woyk that I wish was in the mindset and the cards of my fellow hellenes…but sadly, by letting YV leave…they handed their nemesis a free pass…

        and the other side smells weakness…

        live to fight another day my fellow hellenes…yes these fools to death…

        as yogi says…it aint over, ’til its over…

        but for now it is time to step back and regroup

    2. MyLessThanPrimeBeef

      In addition, do we distinguish whether it’s a man-made emergency and a natural emergency? And whether it’s self-inflicted or imposed from without?

      Here, the other guys might argue that while the creditors asked for pensions cuts, Tsipras counter-offered with pension cuts and also tax increases. If it was that close, and Tsipras was on record many times that they were close to a deal, it is not an unavoidable emergency.

  8. TarheelDem

    Eurozone rules….Eurozone rules….Eurozone rules…

    Some clues what needs to change to deal with this crisis. Have European countries painted themselves into a corner with the interactions of their rules?

    1. fajensen

      It’s rather that the technocrats in Brussels wrote the rules in the kind of language that can be interpreted in about as many different ways as there are member states in the EU. This was a sneaky way to get consensus amongst member states while they actually do not agree at all.

      Once a treaty is “agreed”, Brussels then set about “clarifying the law” – which means widening the scope and interpretation of the legal text for “Moar power to Brussels” as much as they can get away with. Which is a lot: Reading the verbiage in these texts will shut a normal persons brain down after a few dozen pages, as indeed is intended.

      Now, since reading Eurozone rules, understanding the rules, and applying the rules seems like it could be hard (it is) and that it might take a while (oh, yess it does) everyone (Even the ECB) is just winging it … so in practice, there are no rules and “he who shouteth the loudest rules” ;-).

    2. Oldeguy

      The Italian Prime Minister apparently thinks so; he is quoted as saying on his Facebook page that if the EU ” remains prisoner to its Rules and Bureaucrats, Europe is finished.”
      God knows I’m no expert in this area, but what has become brutally obvious in the unfolding of this incredible fiasco is the deeply flawed structure of the Eurozone- while the Greek society and economy are far from perfect, and yes, could do with a stiff dose of “reform”, the sclerotic and shortsighted Eurozone structure is itself a major, if not the primary, obstacle to problem resolution.
      The Doctor is killing the Patient.

      1. BillC

        Renzi’s been singing this song for domestic consumption for a while now. Tangible results emerging in Brussels remain to be seen. Domestic outcry over the continuing refugee crisis (>1000 arrivals/week) may do more than yesterday’s Greek vote to give him the backbone to pound on the table instead of being a collegial EU-PM. Like Greece on austerity, the EU is leaving Italy to twist in the wind on this score and Italian voters get more exercised about that than about austerity, to which they’re mostly resigned.

        Solidarity with Greece re, austerity is pretty thin on the ground, since Renzi has crammed down Brussels’ economic dictates in italy, claiming it’s working. Yeah, official GDP and employment numbers tick up a tenth of a percent or two some months, but the number of folks not in the workforce keeps rising and I keep seeing small retail outlets go belly up.

    3. reslez

      > under the perverse budgetary and accounting rules of the Eurozone, would result in those losses…

      Rules don’t apply to the elites, only to little people they’re trying to punish. Any bureaucrat or politician or lawyer with a brain and the correct motivation can figure out a reason to not apply rules they don’t want. There just is no political will.

      1. Synoia

        Hi, ho, hi ho
        It’s off to work we go,
        With a bail in here, and bail in there
        Hi ho, hi ho.

        with the consequence

        Oh no! The peasants are revolting!

  9. allan

    “Nobody wanted to torture the Greeks — we’re not terrorists — but to help them,” said Arndt-Brauer, a lawmaker with Merkel’s Social Democratic coalition partner.

    Maybe one should start referring to what Europe is doing to Greece as enhanced economics.

    1. polarbear4

      Good one. At least the speaker knows that this a form of terrorism.

      People die, physically and spiritually, under austerity and the financial systems in place don’t seem to care.

      1. shinola

        “People die, physically and spiritually, under austerity…”

        For modern neo-lib’s that’s a feature, not a bug.

    2. James Levy

      I was struck by that line like a thunderbolt: what kind of Social Democrat could possibly ever believe that impoverishing people and destroying worker rights (because that’s what capitalists mean when they say “reforms”) is “trying to help them”? On what planet does that make sense? How could this person not be lying, or a complete idiot? It makes no sense at all.

  10. Christer Kamb

    In the long-run it have to be drachma, not euro. In the short run? Well it does not matter really because things will be bad all the same.

    2 new drachma for 1 euro could possibly strenghten the drachma due to contagion-effects within the Euro-zone!

  11. Swedish Lex

    Thanks. I suppose you have mentioned the following repeatedly before, but it lacks in your current piece:

    EU states and citizens are on the hook for Greek debt because the EU Governments decided early on to bail out their banks (who monumentally stupidly had lent vast amounts to Greece) and instead put their citizens in the place of the banksters (who instead went home with bonuses and champagne for all).

    We are a family of three living in France. Sarkozy has thus added 2000 euro in debt on our tab, without informing us and even less consulting us, that (to the largest part) previously was the debt of incredibly stupid French banks.

    The purpose of the whole opration was of course to save the banks/banksters and to socialise the losses.

    So now I believe we should write of 50% of the Greek debt.


    1. charles 2

      What one government does, another can unwind. Nothing prevents the French Govt to impose an exceptional tax on banks to pay for the Greek Debt cost.

  12. Confused

    The post says:
    “The biggest group of “creditors” are taxpayers of the 18 other countries of the Eurozone. ”
    What does this mean? Does it mean taxpayers who bought Greek Bonds or the governments who hold the bonds for their citizens? What would be the repercussions in practical terms for the “taxpayers” of the other countries if Greece defaulted on these debts to the “taxpayers”? Or if the debts were just written off?

    1. Yves Smith Post author

      No, it means that:

      1. The governments provided guarantees to the funds that made the loans to Greece.

      2. When those funds show losses, and a writedown is a loss, the goverments have to stump up money to the fund. That means it comes out of their national budgets. Under Maastrict rules (plus the Stability and Growth Pact), governments in the Eurozone aren’t allowed to run deficits at more than a relatively small level. Most governments would increase taxes to cover the charge. That’s how the taxpayers would wind up paying, in a pretty direct and immediate manner.

      1. charles 2

        First, the ESM guarantees will be accounted using IAS39 hedge accounting, which means that there will be no writedowns because there will be no losses.
        Second. Eurostat rules are different from GASB rules. The guarantees are accounted in govt books only when the cash is called, which means that the ESM must loose all access to funding (including the ECB) before that. Not going to happen as long as “whatever it takes” is on.

        So Greece defaulting in the ESM means. nothing happens for years, possibly forever if the ESM morphs into an Eurozone Treasury ! The Maastricht Debt of the guarantors does not even move ! It is extend and pretend nirvana, Andrew Fastow could not have done better…

        The structure is so efficient that it will be likely that any restructuring Greek Debt will involve moving debt from the ECB and IMF to the ESM.

      1. Gabriel

        Same thing’s been happening to me over the past few weeks. I don’t know if this is a symptom, but the timestamp on the preview consistently wrong as well (and not because of a timezone difference).

      2. ambrit

        Don’t get too tinfoil hat about it Lex. It seems to be happening to a lot of us here lately. In other words, it’s probably not the Suretee censoring your communications. I am leaning towards the opinion that it is an indication of scaling issues for the underlying hosting service. (And no, I do not have a spare hundred grand to contribute.)

      1. Swedish Lex

        Been used to my regular dose of drinks at NC for the several past may years, no questions asked. Why the change?

  13. hemeantwell

    As I’ve said before, much of the speculation by commenters about coups tends to assume the Greek army and police are completely unified and at the bidding of anti-Syriza elites. While NATO elites may be unified in their worry about Russian influence, it is not clear to me that domestic Greek elites are, and I think that we should not assume that the army and police are. This is not 1967, and even though a number of former military commanders urged Yes before the election, we should be careful about assuming that they speak for the current officer corps and enlisted men . Some sections of the elites certainly are nothing more than neoliberal running dogs, the equivalent of anti-Red, State department friendly capital back then. But, faced with what is essentially a social democratic government that wants to find a way to break out of the debt burden and resume economic development, I think it likely that some sections of capital are truly national and do not find the government hostile to their interests and, moreover, are not prepared to risk a guerrilla or civil war that might well include defection or breakdown of portions of the security apparatus. As far as I know, ANEL is still on board, and they represent more than just restaurant owners on the islands.

    Almost every person commenting here seems to regard the Greek population as lacking any organizational forms that would constitute the basis for serious resistance. They implicitly bring to bear a model of popular fecklessness and disorganization that has some validity in the US and parts of Europe, but is a poor fit with the Greek situation, and I think that the Greek ruling class would likely agree.

    As I’ve said a while ago, the scenario I worry about is that Syriza might fragment and stumble into a role akin to that of the German SPD after WWI, taking on the role of providing cover for the destruction of the radical left in a nominally revolutionary situation that would also tend to pull capital and the security forces together. It’s possible that Syriza’s center and right might eventually agree to such a crappy deal that Syriza’s left would break away and line up with more radical groupings like Antarsya that could then miscalculate. However, the 1919 debacle occurred in part because the German revolutionary left then was inspired by the Russian revolution and German elites were terrified by it. Putin just doesn’t fill that role for either side.

    1. zooter8

      Interesting reference to Germany 1919. Don’t underestimate the danger from the army here. Recall the illusions in the Egyptian army lower ranks after the Egyptian revolution.

    2. Lambert Strether

      “seems to regard the Greek population as lacking any organizational forms”

      I certainly do not (which is why I hunted down Greek networking evidence and put it in Water Cooler after Diptherio found it). Nor does Yves.

  14. zooter8

    Yves your pessimism is correct in that only if the Greek working class unites with the other oppressed working classes in Europe to end austerity and overthrow the stranglehold of the oligarchs can progress be made. Instead Syriza’s bourgeois nationalist program ultimately has led to caving in to all the demands of the Troika. Hence a Sherman’s March to the Sea is indeed in the offing. Yet a specter haunts Europe….

    1. Yves Smith Post author

      I have to tell you that up to now, Podemos in Spain has avoided making the obvious comparison to Syriza. After doing worse than expected in March elections, it moved its messaging to the center, to the point where one of the old party top leaders resigned. Podemos was rewarded for that move in the form of strong electoral results in May. And a big part of the moderation of their position was stressing that they were pro-European.

      1. zooter8

        Podemos had already moved to the right by March. And it didn’t do that great in May. Regardless, it too never provided a way out, only a recipe for another Greece. Pro-European on what basis? Chipping away at the edges of the current setup run by oligarchs and their bureaucrat stooges, or a United Socialist States of Europe? Unfortunately the former.

        1. Lambert Strether

          I’ve always wondered why Syriza didn’t assault the oligarchs on, say, tax evasion, thereby both empowering themselves and pleasing the Troika. Any thoughts?

          1. Jb

            I guess, political capital. These guys – and the church – won’t pay nicely nor easily.

            The govt needs a political victory first to embark in this and be able to resist the ensuing propaganda warfare…

          2. different clue

            How many tax havens exist in jurisdictions within Europe itself? How much money on its way to tax havens is moved through or by European institutions or players? Wouldn’t Syriza need the genuine cooperation of a Europe devoted to sheltering its tax shelters and its shelter-seeking money-ratlines to hunt down Greek tax dodgers? And if tax escaping is important within parts of Europe in general, why would Europe welcome any genuine results against Greek tax-escapers if such results threatened other European tax-escapers were threatened by the same sort of results?

            Or am I being too cynical and suspicious?

  15. timbers

    The Saker: How The Empire Will Strike Back

    “I think that the most likely scenario is that the next thing that will happen is a Greek Maidan, followed by accusations of police brutality and all the rest of the typical color revolution scenario. At the end of the day, what will happen will largely depend on the stance which Tsipras and his party will take: if they seek to appease the Eurobureaucrats, if they offer infinite concessions and if they act like loyal “EU patriots” they will be crushed. But if they appeal directly to the Greek people and explain to them that this is a struggle for national-liberation and that they need the people’s support, help and protection, then they might well prevail, especially if they chose to break free from the Eurozone and turn to the Eurasian Economic Union and China for support. I hope that I am wrong, but I don’t see Tsipras daring to do something that dramatic. This is why I predict a color revolution next.”

    1. MyLessThanPrimeBeef

      The thing that keeps one from being completely paranoid is that the small comfort that there is no one CIE (of Europe) to implement color revolutions on their own.

  16. Chris B

    The cruelty of how the EU is neglecting the Greek people is so disturbing to me. Be it any other disaster that happened to a people who decided to build a city in an earthquake/flood/tsunami zone there would be an outcry to help.

    But the Greek people are decimated because they decided to build in a Banking Zone and get flooded with debt and no one rushes to the peoples assistance, they just tell them they get what they deserve.


    This is genocide, pure and simple.

    1. RabidGandhi

      Vijay Prashad says the opposite: that while being cruel with the Greeks, the IMF reserves the true brunt of its wrath for the third world:

      No 1980s “Third World state” could call for a referendum so as to ascertain the will of the people. The demands came in the dark of night. The deadline to accept the deal was hours – not days or weeks.

      If Greece were in what was known, rightly or wrongly, as “the Third World” during the 1980s, officials from the International Monetary Fund would fly silently into Athens, meet the finance minister and head of government and deliver an ultimatum…

      Lines of credit began to dry up. Ratings agencies lined up to downgrade the state. Aircraft carriers powered along the coastline. Heads of government hastily signed the dotted line. The signatures seemed wobbly, the paper damp with sweat. There was no real choice.

      1. Chris B

        Agreed regarding the the IMF, but I was not referring to the IMF in my comment, I was speaking of the EU nations and people.

      2. Yves Smith Post author

        Yes the IMF board members that are not US/European (about half now) are upset that Greece is getting BETTER treatment than they did. Wrap your mind around that one!

        IIRC during the Asian crisis, 5,000 people died in food riots in Indonesia. The fall in the price of the rupiah made soy products, an imported staple in their diet, vastly more expensive.

  17. fosforos

    No, he was not the first. “General William Tecumseh Sherman engaged in the first large-scale example of scorched earth warfare, destroying homes, crops and infrastructure on an over 300 mile swathe through Georgia.” The first large-scale example was when the Russian Tsar defeated Napoleon by destroying homes, crops and infrastructure (including the burning on Moscow) over a far larger and longer swathe, starving the Grande Armée as it died in the snow.

    1. PlutoniumKun

      The use of scorched earth policies goes back as long as there has been recorded military histories. The Romans certainly used it (which is why we don’t have any Carthaginians anymore). The Mongol hordes among others seemed to do little else.

      1. MyLessThanPrimeBeef

        Scorched earth before the end of war AND afterwards.

        Salting fields around Carthage was after.

        Sherman’s March was before.

        And ‘we give you Reconstruction, with funding for public schools, and charitable institutions, and massive aid to improve railroad transportation and shipping. But only after you surrender.’

        Fire bombing Dresden was before.

        Again, ‘you will get Marshall Plan, but only after the Soviets have their revenge at the citizens of Berlin. Right now, the scorched earth policy is still on, because you won’t surrender. Surrender now, I repeat. Why won’t you?”

        And these guys will brag. “Look at Germany now. Rich and powerful…or hegemonic.” Or, “look the Rust Belt North.

        And then they move on to Iraq, Syria, Ukraine, and elsewhere.

        “Money will be there afterwards…for someone.”

    2. MaroonBulldog

      I think fosoros is correct, for these reasons. First, I have always understood “scorched Earth” to refer to the specific defensive strategy that Alexander the Blessed deployed against Napoleon: burning the crops, the seed grain; the barns, and the silos; stampeding the livestock; destroying the forage; poisoning the wells; devastating the resources of one’s own countryside to deny the use of them to an invader.

      Next, fosforos says Alexander’s was the first use of it on a wide scale–the scale from the Vistula to Moscow is enormous. Everything fosforos say matches what I was taught in Russian history, nearly 50 years ago. Forsforos did not say Alexander’s was the first use: I’m sure the strategy was known to the ancients, and practiced. But Alexander was the first to use it so boldly on such a scale.

      1. MyLessThanPrimeBeef

        Not Scorched Earth, but related – Pyrrhic Victory.

        Too big to fail is a slightly different version of it.

        “If you take me down, you go down too,’ instead of ‘In my victory, I will take you down with me, or I will take myself down with you.”

        1. MaroonBulldog

          Although the Russians scorched an enormous amount of their earth ahead of Napoleon marching in, the strategy paid off after Borodino, when Kutuzov cut off Napoleon’s other avenues of escape, constraining him to march out the same way he came in. Starvation, exposure, and disease mostly defeated Napoleon after that.

          The only Pyhhric victories in that campaign were the ones Napoleon won: Borodino, if Napoleon thought he won it. (Borodino was inconclusive, but the loss of life was ghastly).

  18. thom

    NO: “The biggest group of “creditors” are taxpayers of the 18 other countries of the Eurozone.” No. No. No. Non. Non. Non. Nein. Nein. Nein. Nyet. Nyet. Nyet. Ei. Ei. Ei. Ingen. Ingen. Ingen. Zadna. Zadna. Zadna. Nej., Nej. Nej. No. No. No. et cetera.

    The BIGGEST group of creditors are the criminal bankers, the IMF, the ECD, the currency speculators, bond betters, hedge funds and GOLDMAN-SACHS et al.

    Greece is just the FULCRUM on which the heavy load is positioned to teeter-totter back and forth among the bankers while the fulcrum sinks lower and lower into the ground.

    If you keep saying stuff like this, then PLEASE remove the “Support Occupy” ribbon on the right of the screen.

    1. Lambert Strether

      It’s not our problem that you can’t handle the truth and respond by shouting, albeit in several languages.

      If ignorance and lying are the strategies of the left, I weep for Europe.

      1. susan the other

        The EU taxpayers became the creditors by magic trick when the big banks would have gone down in smoke. Greece just happened to be the perfect excuse at the perfect time for moving money. And in the process of “bailing out” Greece, which only bailed out the big EU banks, there was some (fake) legalese that made taxpayers the ultimate collateral. In a world of no collateral left. I’d love to know how those documents were compiled; what they actually say and who the hell signed them. Because by joining the EU every country subordinates their own monetary sovereignty to the EU. So if you are not sovereign, how the hell can you subjugate your hapless taxpayers to a debt they didn’t create? The EU is a can of worms.

        1. Yves Smith Post author

          I hate to tell you but that does not change the outcome.

          In the highly unlikely event that Greece were to get a principal writedown (a reduction in the face amount of debt most likely via a refinancing), it would result in tax bills in all the countries that guarantees the loans to Greece. The effect is in who bears the burden of austerity.

          This is why we are certain that seeking a reduction in the face amount of the debt to Greece is a non-starter.

          What was ALWAYS on the table, at least until the talks became so poisoned, was reduction in the economic value of the debt via extensions of maturities and reductions in interest rates. On one of the Eurozone lending facilities, the first payments isn’t due till 2020, and on the second not until 2023.

          Those attenuated payments are also now why the European leaders are so indifferent to default. The losses won’t show up until Greece does not pay, and then only in the amount not paid. With payments so spread out over time any eventual losses are as well.

  19. grizziz

    Definitely a signal to Austria which is trying to walk away from guaranteeing bonds in the bad bank that was set up after the failure of the Hypo Group bank. This was in the news back in March, per FT:

    Vienna has ordered a 15-month moratorium on principal and interest payments on around €10bn of bonds issued by Heta Asset Resolution, the so-called bad bank set up to deal with the collapse of stricken lender Hypo Alpe Adria, after an audit of its balance sheet revealed a hole of up to €7.6bn.<blockquote

    Also, the article mentions the BRRD the EU resolution to Bail in depositers in failed banks. This seems to be germain even if it is a bit in the weeds.

  20. Lambert Strether

    Greece loses the gambit Mosler

    The camp claiming that Greece has been dragging down the entire EU economy is getting more support from the same data.

    And so now while Greece isn’t being formally ousted, it will see it’s economy continue to deteriorate if it doesn’t agree to troika terms and return to ‘normal funding’ via securities sales at low rates under the ECB’s ‘do what it takes’ umbrella, and rejoin the rest of the members.

    If the govt starts paying in IOU’s payments get made for a while, however they will be discounted ever more heavily with time, raising the cost of re entry to ‘normal’ funding, and the EU counts those as additions to deficit spending which could cause the terms of re entry to be that much steeper.

    And any movement by Greece to use alternative funding will be taken as reason not to return Greece to ‘normal’ funding under the ECB umbrella.

    Which some may say is a good thing, since that leads to Grexit. But it’s worth a reminder that’s not what Syriza says it wants, and not what the Greek people voted for (twice now).

    Mosler’s sang-froid is famous, or should be. So this is a cold-eyed look at the power relations, unwelcome as that may be to some.

    1. Robert Dudek

      By definition, gambit means you are supposed to lose something and appear to be in a worse position, before a complete analysis reveals that you may have come out ahead. In chess, when you gambit, you sacrifice material in exchange for other advantages, such as initiative, a superior coordination of pieces, or weakening of your opponent’s pawn structure.

      I don’t think this referendum was a gambit in that sense, more like a gamble pure and simple.

  21. Matt

    “I hate to give a cold dose of reality, but these measures would not solve any of Greece’s problems. If Greece goes rogue and prints euros without authorization, it will become a pariah quickly and will justify the ECB going nuclear. Trying to raid accounts electronically would be deemed as hacking even if a team who didn’t know the systems could pull it off.”

    Greece became a “pariah” in January when it elected the Syriza government. Since then the only aim of the merciless Troika was to oust the “pariah, rogue” government. Now, to quote Maggie Thatcher, “There Is No Alternative” to “going rogue”: Halt debt payments, nationalize the banks, do what it takes, just for starters.

    “As much as I’d like to be hopeful about the Greek vote, I’m deeply concerned that like the Arab Spring uprising, which in the end seems to have done little to help struggling people in the Middle East, and led to civil war in Syria, that what seemed like a promise of a better day for ordinary people will lead to even worse outcomes.”

    The Greek vote contradicts the NC slant about “hard leftists callously using the Greek people as political-economic cannon fodder”, that will “make things much worse”. And it figures that the “right wing of the Left” view of the Arab Spring – basically a Putin-oriented line – prevails here. It’s a Vote for Hillary pitch.

    “As much as the Eurocrats have become unaccountable and causally malevolent in how they operate, Greece is too weak a vehicle to take up a successful, frontal revolt.”

    To paraphrase my favorite Naked Communist: “People make their own history, but not in the manner of their own choosing”. Translation: We “would-be condescending saviors” don’t get to choose the time or place of battle. The masses choose that for us, and when they do, There Is No Alternative but to stand in solidarity with them and assist them in THEIR fight as best we can. Not counsel surrender as a “lesser evil”. Not in Europe or the Middle East. Basically NC expresses a loathing for the emergence of either revolutionary situations (M.E.) or of desperate defensive fight-backs by a people pushed to the wall (Greece, in no way a ‘revolutionary situation’, merely a first attempt in reversing the “neo-liberal” Permanent Counterrevolution). This isn’t the All Capitalism All The Time 1990’s any more. The Time’s They are A’Changing. Back to the future.

    1. Lambert Strether

      “It’s a Vote for Hillary pitch.” Is everything else about your comment made up, or just this part? Listen, I do understand that vanguardists get to make shit up because reasons, but I’d like to sort out which part of what you have to say is worth paying attention to, and which isn’t. So, could you maybe put a delete mark through the lying, and leave the rest alone? Thanks! (Cue: The other guys make shit up….)

      1. Pancho

        Matt, thanks for pointing this out. I agree that NC authors tend to misinterpret this as a merely economic issue, while it’s a mainly political struggle. Of course this is based on the economic situation, but it’s more about mid-term perspectives than on a short-term situation which either way will be dire, yet somehow endurable, given public solidarity.

        Lambert, as I said before, it’s beyond populist rhetorics that a majority of Greeks wants victory, no matter if Western establishment bothers dubbing it Pyrrhic. They want their long-time oppressors to apologize, to capitulate, or at least to be punished.
        Your “vanguardism” strawman doesn’t help understanding Greek intransigence or the strategic and tactical moves of the Greek gov’t. And I have to say that your rude dismissal of Matt’s – IMHO largely justified – critique really is a shame.
        Even if this is your blog, please consider changing your attitude. You’re of course free to reject anybody’s position, but you might want to refrain from disparaging as a “lie” whatever contradicts your personal interpretation.

        1. Yves Smith Post author

          Huh? If this were purely economic, a deal would have been cut long ago. We’ve discussed repeatedly and consistently the political issues, which include Eurozone structure, the requirements for approval of any deal by the other states, and their interests. In fact, the people who have been treating the Greek/creditor negotiations as simply economic, namely financial analysts, all were highly confident that a deal would be worked out. We were the ONLY major commentator to say early on and consistently that there was no bargaining overlap between the two side’s positions.

          It’s is thus false to say that we’ve been treating this as an “economic” issue (as if economics are divorced from politics; economics was called “political economy” in Marx’s day). It’s that you don’t like our reading of what Syriza has been doing.

          And as for the wisdom of Greece’s moves, I suggest you read this piece from Ambrose Evans-Pritchard of the Telegraph today. AEP has been Syriza friendly and has spoken regularly to Varoufakis. The odds are decent that he is a major source:

          Prime Minister Alexis Tsipras never expected to win Sunday’s referendum. He is now trapped and hurtling towards Grexit


  22. Danny

    The Eurozone countries (and their taxpayers) will end up needing to accept a write down regardless. I think it’s better to work with the Greeks than continue with what appears a scorched earth policy that will only lead to further disintegration of the Eurozone and potentially the EU.

      1. thoughtful person

        So what might happen?

        The ECB has decided to not extend any additional funds, the ELA will stay where it is. That means the banks stay shut, and likely more than 2 days. Shut banks means a large economic contraction in Greece, plenty of human suffering and perhaps, some contagion will also affect the rest of the EU. Syriza will be soon under pressure to either change course or start printing. If the later, Greece will become an example in the extreme of what happens when you don’t play by the rules – got that Ireland, Italy, Spain, and Portugal? Meanwhile the crisis may present an opportunity to push through some much desired legislation – greater EU integration? TTIP? CETA? TISA? Etc

  23. Gio Bruno

    So maybe the Eurozone taxpayers should better understand how private bank debt became their public debt. And begin to understand the need for social solidarity against the “enhanced economics” of the Bankers.

      1. German native speaker

        What do you mean by “had taken power”. Voted in? Or does how does a party ‘take power’?

  24. susan the other

    Sherman was a tortured soul. He became a genocidal maniac probably to just get it over with. Whereas Draghi is a very sophisticated financier. Certainly the financiers in the Civil War were not tortured by their own demons. So I wonder who will be doing the scorched earth in Greece and the periphery? Driven by the financiers, it will be the politicians (generals for finance) who can’t take it any longer and destroy their own countries. I think this No vote was a surprise even to Varoufakis. Because he resigned anyway. He’s out. Which raises the question: If all the henchmen, all the generals, all the politicians finally say no thanks, I’m out, where does that leave the financiers? I like that thought.

    1. James Levy

      OK, genocidal is out of order here. Show me the piles of corpses he left behind in Georgia and the Carolinas. Sherman’s “Bummers” were rotten, but to confuse them with Einsatzgruppen is just perverse. Not even the most dead-ender Lost Cause types accuse Sherman of committing genocide. It didn’t happen. You are misusing a very important word. Destroying property is bad (although some of it, like railroads and factories, was then, and still is, considered legitimate targets for destruction in war). Genocide is infinitely worse. Atlanta was not Nanking.

      1. Jim in SC

        Didn’t Sherman give orders to kill civilians in order to instill terror? That may be more Lt. Calley than Pol Pot, but it is something.

        There was a letter in today’s local paper in SC in relation to the Confederate Flag flap. The writer was complaining about Sherman’s men stealing his family’s furniture and shipping it North. Memories are long.

        1. James Levy

          He never gave any such order. You won’t find it in any biography or history book. Utter nonsense. The most critical biographer is Marszalek and he would be flabbergasted by such a charge. Sherman even made peace with Red Cloud in 1868. He was brutal but not murderous, or at least not more than any other general. You are all, I think, confusing him with Sheridan, who famously said that the only good Indian was a dead Indian and organized the destruction of the Plains Indians in the 1870s. Sheridan’s actions bordered on the modern definition of genocidal.

  25. John Yard

    I would like to read comments about how Greece and the referendum fits in with other recent elections : Denmark and the UK. We see labor defeating itself, and the rise of the SNP; Social Democracy defeated in Denmark, and the rise of a euro-skeptic party; in Greece the repudiation of the EU.
    It would be easy to say ‘there is no commonality’ but I think this reflects a right – left dicotomy that is partially being overcome by events.
    One commonality is the decay of the ( formerly ) reformist Social Democratic parties. Indeed, one of the strongest boosters for austerity in Germany is the SPD. Another commonality is the rise of parties that promise self-direction in the face of State Capitalism – the SNP, the Greeks, and the Danish euroskeptics.
    Comments and suggestions ?

    1. Jim

      The decay of reformist Social Democratic parties has been going on since the turn of the 20th century.

      This process commenced with the so-called Bernstein or “revisionist” debate when it was realized that Bismark’s top-down social welfare programs began to successfully integrate the more radical grass-roots initiatives of trade unions, cooperatives and neighborhood associations into the logic of bureaucratic corporate capitalism, without any democratic participatory items.

      People like Sorel, Sombart and Mussolini had already moved right and had it not been for the voluntarist coup d’etat of the Russian revolution, contradicting the determinist character of more orthodox Marxism, it was probably quite likely that Marxism would have gone the way of other 19th century philosophies of progress like those of Comte, Spenser and various Social Darwinists.

      Later when left wing political parties did finally take power, the template of top-down bureaucratic social democratic reform became the norm and within the Soviet Union itself the revelations about the Moscow trials, the Molotov-Ribbentrop pact and such things as the Gulags, made it difficult for many intellectuals to continue to identify with communist movements.

      With the collapse of the Soviet Union and the rise of public-private bureaucratic network of power in both the U.S. and the European Union is is not surprising that other attempts at creating local and regional social formations that promise self-direction in the face of these seemingly monolithic structures of power are now being attempted.

  26. Gaylord

    The arch criminals that have taken over the Western financial system are filled with boundless greed. They will stop at nothing in order to grab absolute power and control over everyone and everything. They care not about mass injustice and deaths, irreversible environmental destruction, or even the specter of nuclear war. They are the worst monsters of the human race and they now run the US Government while holding a sword over European, Japanese, Canadian, Nordic, and Australian governments as well. Only the Russians and Chinese have the power to repel them.

    1. MyLessThanPrimeBeef

      We little people have to empower ourselves.

      The Russians and Chinese are nice, but do we trust their elites are not just another pot or another kettle?

        1. Kurt Sperry

          I’ve thought this for some time, that if we Americans can get our own house in order, we will show the way for the rest of the world who for whatever reasons seem determined to follow us wherever we lead. A Sanders administration would change the direction not only of the US, but in some significant measure the entire world. We need to do less preaching to others and more leading by example.

          1. different clue

            Perhaps we should be less concerned with leading also. Perhaps some spiritual settling-down and letting go of our own “Middle Kingdom Complex” might be good for us.
            And set us free to concentrate on making America an okay place for Americans to live in.

            I have decided to be an American Okayness Ordinarian. We’re Number Whatever!

      1. jrs

        A people’s empowerment may happen but not in the U.S.. Quite frankly this country is likely hopeless at least in any thing other than the long long term. Never say never, but the people really are too propagandized. Europe on the other hand may rebel (starting with Greece). The hope as always is NOT in the U.S. – that sad sack of a fading empire.

        1. Kurt Sperry

          Disagree. I find Europe today, a few shining counterexamples excepted, as hidebound and sclerotic and stupid as the US. Sometimes less so; sometimes more, but hardly much better.

    2. alex morfesis

      last I checked the chinese communist party had no problem cooperating with the c-suite to destroy american unions….

      and vlad “raz”putin, last i heard, just wants his check…and a few moments on tv every once in a while…

      oh yeah, and while fannie and fredie were being accidented with phony calls on derivative collateral positions…he parked himself in georgia that week…

      don’t expect any changes from these folks anytime soon

  27. Jim S

    I wish M. Varoufakis well, and hope he takes care for the foreseeable future to avoid open windows, shallow pools of water, and especially any Star Marshals imprisoned in powered exo-skeleton suits.

  28. Rosario

    Binoy KamPmark wrote a great summation of the referendum result and the enormous gap between the the political insider “technicians” running the show the only way they know how (and they don’t “know” how) and the democratic rejection of an idea that either the citizens of the world cannot visualize or dare not speak its name for fear of a hopeless realization, that, despite the sacrifices, they have yet to breach the walls of the castle:


  29. RBHoughton

    My money is on Greece remaining in the EU but issuing its own currency.

    That will satisfy the greatest number of power centres, not least the BIS/Fed who merely have to transfer the Greek account from the Euro to whatever comes after, to maintain near perfect control of the global money economy.

    1. Me

      Will the debts be transferred over to that currency or would they owe what they owe in Euros and still have to export their way out of debt (which is impossible)? I don’t know the answer but I am sure someone here does. If they could owe money in their new currency then the biggest concern would be inflation, right? I am sure it is more complicated than that. I know this site has posted good articles on the implications of a Greek exit, I could just read them too.

  30. Me

    My question is where, exactly, the EU itself goes after this? Is Portugal, Spain and Italy not looking at a similar situation? My understanding, which could be wrong, is that the “leaders” of Europe have transferred the banks’ risk and financial junk onto tax payers and the IMF and are now in the process of looting the country. The public debt to GDP ratio gets worse and worse and that is then used to take more and more public assets at lower and lower prices. So, how sustainable is all of this politically, economically or socially?

    I don’t know tons about EU politics, but it seems that Greece is fighting this alone. I don’t see much solidarity from other countries, I don’t see any common debtor blocks forming to take on the banks. Am I wrong? Is the strongest anti-EU and ECB push coming from the far right?

  31. GRP

    None of this was unpredictable. If either Tsipras or Varoufakis thought they could change the minds of the creditors (or those negotiating on their behalf) simply by talking sense into them or by showing that their position has the support of majority Greeks, they should be really the silly fools or worse, bald-faced liars, they are accused of being by their detractors. Tsipras is a career politician, so has nothing to lose by appearing to be a fool or liar to his detractors.

    However, Yanis Varoufakis is not a career politican and got elected to purely help Greece and European Union out of the mess they find themselves in. He couldn’t possibly have believed that the tactis Syriza adopted since its election victory would lead to the lenders budging. Since I don’t believe Yanis Varoufakis to be either naive or a liar, there must be something he knows will force the hand of the neoliberals. It can’t possibly be anything Greece can do, so it must be something from outside Greece.

    If the ECB is defanged from using liquidity to terrorise Greece into submission, the creditors have no other instruments to coerce Greece. Greece would be in debt default, but life won’t be any worse for Greeks than it was when it was in the programme. At that point of time the options before the creditors would be to get Greece to agree to a programme with some mutually agreed upon terms of servicing and repayment or a Greece that is in debt default but keeps chugging along as if it has no debt but without access to more credit. The second scenario would be a nightmare for the creditors. They would have to write off, not just write down, the money lent to Greece. When this reflects in their budgets, none of the current creditor governments will survive the resulting public outrage.

    So what is the magic bullet which would defang the ECB from using liquidity supply to blackmail people and national governments? Visible concern expressed by large euro holding entities from outside the Eurozone. Quite likely few non-Eurozone entities have any deposits in Greek banks or cheques pending clearance on Greek banks and hence unlikely to be impacted by the liquidity freeze to Greek banks. But the implications of liquidity freeze to solvent banks are staggering. There is no other currency zone where this is even possible. More importantly, the fact that providing liquidity is at ECB’s discretion means there are no eurozone countries, including Germany, immune to such a blackmail from the ECB. In other words, there are no safe Eurozone banks to park their money in for any non-Eurozone entity. Any non-Eurozone entity who has deposits in Eurozone banks should be scared witless about that conclusion and panicing out of euros and into other currencies, which admittedly doesn’t seem to be happening given the euro holding strong. However, if you are a huge holder of Euros, like China, you don’t panic, you warn the ECB that you may be forced to transfer all your holdings out of the currency, unless the ECB can prove that it is a Central Bank like any other with a responsibility to provide liquidity to every solvent bank under its supervision.

    I think Tsipras and Varoufakis were banking on China, speaking alone or as part of the BRICS, making that statement publicly. Once that happens the euro will not know bottom vis-a-vis other currencies. The ECB will be forced to revise all the ELAs of all EZ countries up to a level where practically every euro in any Eurozone country can be withdrawn as cash or transferred to any other EZ country’s bank and eventually get rid of the rules regarding the ELA and treat liquidity to banks as overnight lending as all other Central Banks do.

    1. Clive

      For what it’s worth (not, it has to be said, a great deal) I think that Varoufakis’s great miscalculation was as a result of his academic background.

      So sure was he of his — undoubted — economics acumen and the strength of his logical arguments that he, quite wrongly as his recent history has shown, assumed that the edifices of the ECB, the EU Commission, the IMF and various eurozone member states would tumble before him in the wake of his subject matter expertise.

      Unfortunately he quite forgot about the politics. They don’t call academia an Ivory Tower for nothing.

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