Eds. Note: Reports in the international media suggest that Greece is about to default on its debt to the International Monetary Fund. This is a complex matter, one that could potentially have an impact on economies worldwide. This week San Diego Free Press is presenting analyses of this crisis by Frank Thomas and John Lawrence.
By John Lawrence
How to figure out the ongoing crisis that is Greece? What exactly is going on there? As per usual it’s another chapter in the strange saga that involves Wall Street’s stranglehold over the world economy.
What happened to Greece is similar to what happened to American mortgage holders after they were encouraged to go in over their collective heads borrowing more money than they could reasonably expect to be in a position to pay back. Greece did the same.
Will Greece default soon? Will they stay in the Eurozone or be ejected out of it? These questions have been hanging in the air for what seems like an interminably long time.
Is Greece having a liquidity crisis or an insolvency crisis? That is the question. If the former, a short term loan should be able to get them over the hump. If the latter no loans or bailouts of any kind will ever solve their problem.
It all started when Goldman Sachs assisted Greece in lying their way into the Eurozone in the first place. They really didn’t qualify for admission but Goldman hid that small detail under a heap of trompe l’oeil, sleight of hand and financial shananigans that got past the critical eyes of the European ministers. They manufactured a highly questionable derivative scheme involving a currency swap that used artificially high exchange rates to conceal Greek debt.
Goldman then turned around and hedged its bets by shorting Greek debt just as they had done with the mortgage crisis in the US. Predictably, these derivative bets went very wrong for the less sophisticated of the two players, namely, Greece. A 2.8 billion loan to Greece in 2001 became a 5.1 billion debt by 2005. In the US mortgage fiasco they packaged subprime loans in portfolios, after having loaned money to people with questionable ability to pay back the loans, and then bet that they would default. Goldman made tons of money that way.
Now this operation on the part of Goldman should come as no surprise to those familiar with Goldman’s shenanigans leading up to the debt crisis of 2008 in which they packaged a bunch of mortgages that were designed to fail into collateralized debt obligations, sold them off to unsuspecting investors and then turned around and placed bets against them. Such a deal was the Abacus fund designed by John Paulson who made billions on it. The American government then bailed out the too big to fail Wall Street banks while leaving the underwater mortgagees to dangle from a fiscal rope.
They did the same thing with Greece. They loaned Greece big bucks for its 2004 Olympic Games. Greece also borrowed a lot of money for its military. In retrospect it was foolish of Greece to borrow all this money. It never got a return on its investment from the Olympic games which it thought would encourage tourism. The Olympic site essentially became a heap of trash and rubble.
While Greeks Suffer, Big Banks Are Made Whole
With Greece owing tons of money to Wall Street, the European Central Bank (ECB) stepped in with loans ostensibly to the suffering Greek people but not really. Instead the borrowed money went straight to Wall Street to pay off Greek debts to them. The debt never really went away. Instead it was converted to debt owed to the ECB. Private debt was converted to public debt with the Greek people left hanging just as American mortgagees were.
Mario Draghi, President of the ECB, is a former employee of Goldman Sachs. So he represents Wall Street interests. It’s in Wall Street’s interests that austerity be imposed on Greece and that Greece be forced to sell off public assets to private investors at fire sale prices. Draghi was vice chairman and managing director of Goldman Sachs International from 2002 to 2005 so he is a natural to protect Wall Street interests, not the interests of the Greek people.
Just as a poor person who cannot pay his debts is forced to sell off his assets at fire sale prices, Greece has been forced into what is called a debt deflation spiral. Greek assets and bank collateral get deflated meaning they decrease in value making it even more onerous to make debt payments or borrow new money. Interest rates for Greece go up because the deflation of assets makes their situation even more precarious. Finally, the poor person having sold off all his assets hits the road and becomes homeless. This is also the prospect for Greece.
There is one ray of hope for Greece, however. It’s primary balance – meaning its financial situation before debt and interest payments are taken into account – has become positive in the last couple of years. The Greek government is actually taking in more in revenues than it’s paying out in expenses which means it is no longer in recession. There is positive GDP growth. That means that if Greece repudiated or defaulted on all its debts, it would actually be in the black. When debt payments are taken into account, however, the situation is hopeless: Greece is insolvent.
Since the ECB is not designed to do fiscal policy ala John Maynard Keynes, who believed in deficit financing to prime the pump of a down and out economy as ostensibly happened during the Great Depression when the US government borrowed money and spent it into the economy in order to get it moving again, Greece is left in the position that a) it can’t borrow any more money at reasonable interest rates and b) it can’t print money and spend its way out of debt. It is in the position of the average household which must balance its budget and pay its bills. If it can’t pay its bills, its creditors will demand that its assets be sold.
The question is, if Greek debt were nullified by default, would Greece be in a position to have a functioning economy in which government revenues would be sufficient for it to pay its bills? Evidently, the answer is yes because Greece has a positive primary balance. In that case Greece would not be insolvent. But when Greek debt is taken into account without it being written down by the ECB which is highly unlikely, Greece cannot pay its bills and is, therefore, insolvent.
Greek taxpayers have been notorious for not paying taxes. The ECB will not and should not let Greece become a money pit for the rest of the Eurozone countries. Having no central bank of its own and the inability to just print money like the US does, Greece is stuck between a rock and a hard place. For sure it needs to start collecting taxes especially from the rich who should be prevented from taking their money out of the country and putting it in secret Swiss bank accounts like rich Americans do.
The anti-austerity Syriza Party, that took control of Greece recently, has not been able to convince the ECB to cut Greece a break by writing down its debt to a level that the Greek government could manage. The ECB is holding most of the cards. Therefore, Syriza will not get any further than its predecessors did with the ECB. The EU, however, must consider the implications of a Greek default either within the Eurozone or one in which they leave the Eurozone completely and perhaps become aligned with Russia, something that the US would not be too happy about either.
The ECB has been reluctant to print money as the US Fed does except to bail out Wall Street. Controlled basically by Germany which underwent hyperinflation in the 1920s, the ECB is reluctant to risk that happening again. So they are on the horns of a dilemma. From Greece’s point of view, it might make more sense to default on its loans, exit the Eurozone and start over with structural reforms it imposes on itself. It could obtain liquidity financing elsewhere like Russia or China. But it wouldn’t have the heavy foot of the ECB standing over it and almost guaranteeing that Greece will become a perpetual debtor.
Hit The Road Jack
The noose around Greece’s neck is this: the ECB will not accept Greek bonds as collateral for the central bank liquidity all banks need until the new Syriza government accepts the very stringent austerity program imposed by the troika (the EU Commission, ECB and IMF). That means selling off public assets (including ports, airports, electric and petroleum companies), slashing salaries and pensions, drastically increasing taxes and dismantling social services, while creating special funds to save the banking system.
Just as the person who loses his job and cannot make his mortgage payment must hit the road, the Greek people through no fault of their own are being told to hit the road. Many young Greeks are doing just that and emigrating.
This could all have been avoided if Greece had a public central bank not beholden to Wall Street or the ECB for money. A public bank can create its own money and spend it into the economy thereby avoiding paying interest to Wall Street or the ECB. This gets people back to work and gets around the predicament of having to borrow money to get the economy running again as Keynesian economics would necessitate.
Greece doesn’t have the luxury of Keynesian pump priming.
Germany’s Bild newspaper claims that Athens is planning a special tax on the country’s 500 richest families.Bild says the measure is included on the Greek finance ministry’s list of reforms, which also includes a luxury tax on items such as expensive cars and trips to Greek islands, and higher taxes on workers earning over €30,000 per year.
This is a step in the right direction no doubt. It’s a conundrum facing the US as well: how to tax the wealthy in order to help out the poor and middle class. Syriza probably would not mind forcing austerity on the rich. It just doesn’t want to balance its budget on the backs of the poor by cutting their pensions and the minimum wage any more than they’ve been cut already.
The Financial Times reported on May 6 that Greece will rehire 13,000 civil servants whose jobs were cut in an overhaul of the public administration agreed with bailout lenders. Clearly,
will not be bullied by the Troika. Hopefully, Greece will get its house in order by balancing its budget on the backs of the rich not on those of the poor.
There is additional possible cooperation between Russia and Greece and even the possibility of Russia providing financial assistance. And where there’s financial assistance, military association would not be far behind. Military cooperation would not only be a thorn in the side of the EU but one also in the side of the US which has only one military base in the Greek island of Crete. Financial and military cooperation go hand in hand as we have recently seen with the Obama championed free trade deal know as the TPP. It’s as much about reducing China’s influence in the Asian sphere as it is about economic cooperation.
This is from Business Insider:
Additionally, Russia and Greece’s new government have taken initiatives to explore their military and economic relationship (for example, here, here, and here).
In fact, the new Greek Prime Minister Alexis Tsipras even said in early February: “Greece and Cyprus can become a bridge of peace and cooperation between the EU and Russia.”
So this part of the world could soon become very interesting — and a huge pain for Europe.
The EU has to consider the implications to a Greek default which might not only be a harbinger of future defaults for other weak EU states such as Spain and Portugal, but might increase Russia’s influence in countries surrounding the Eurozone which are becoming increasingly friendly with Russia. Could China be far behind as well in offering financial help?
John Lawrence
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There just might be something wrong with the Western economic model, don’t you think? Since the British went to India and North America, western economies have extracted resources and returned with trinkets and flat screen tvs to sell to the natives. If the indigenous didn’t like that deal,the guns came out.
Anyone who’s been to Greece or Spain understands that they’ll survive. The more sophisticated and worldly and colder nations will regard their poorer cousins as stupid peasants but, boy, when the pig they’ve been keeping out in the stone hut is slaughtered the slicks from NYC and San Diego will show up and take selfies at the fiesta.
Well, the Greek situation just might be the fly in the ointment of the Eurozone. Too bad they let the Wall Street banks do their mischief there and the European bigwigs were hoodwinked just like the Americans. Maybe they’ll wake up and realize that there is a better way to do business.
Considering how fast many Greeks are leaving the country for good, I have to wonder if there will even be much of a population in the near future?
There won’t be. They will all move to Germany where jobs are plentiful, and social services are fantastic.
Excellent article John. In fact it is the best analysis of the Greek crisis and its underlying causes I have seen anywhere and I am living (6 months of the year) in Ireland where they have swept the same crisis under the carpet in abject appeasement of the “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money”, which is how Matt Taibbi described Goldman Sachs in Rolling Stone magazine in 2009.
A March 2014 European University Study shows that of the 200,000 well-educated Greeks who have left comprising 10% of the total university-educated, 88% of those hold a university degree. Of those, over 60% have a masters degree and 11% hold a PhD. Most go to the UK while Germany and the Netherlands are popular migration choices.The root cause of this colossal brain drain is fact that since the crisis began in 2009, Greece has lost 26% of its GDP – equal to the GDP lost by Western Europe and U.S. in WWII!
You say it is a solvency crisis while Mr. Lawrence says it is a liquidity crisis.
If the State of Greece has insufficient assets (insolvent) why is the Troika demanding that it sells (or hands over) all its “ports, airports, electric and petroleum companies” as described by Mr. Lawrence, who goes on to describe the Troika demanding “slashing salaries and pensions, drastically increasing taxes and dismantling social services, while creating special funds to save the banking system”?
Is this not an ideological crisis, not a liquidity or a solvency crisis?
I also think it’s a solvency crisis because there’s no way Greece can pay off its debts even if it sold off all its assets. However, if it defaulted on all its debts, it might have a chance to recover with help from Russia or China to get past liquidity hurdles which will inevitably come up. There would be some hope because of the positive primary balance.
Pat, you ask, “isn’t it an ‘ideological’ crisis rather than a liquidity or insolvency crisis.” Greek financial crises have been an off-and-on disease dynamic before and after WWII. So, yes, there are some ‘ideological’ or ‘cultural’ drivers behind that history. I mentioned the deeply ingrained Greek “patronage” practice that has corrupted Greek democratic and meritocratic governance and banking processes for decades and decades. As to the difference between a liquidity or solvency issue, a liquidity issue is a TEMPORARY cash flow problem where assets are GREATER than debts but some assets are illiquid or it takes a long time to sell them. This is NOT Greece’s situation.
A close acquaintance said that Greek employment of 55-65 year-olds is only a paltry 38% compared to, for example, 78% in Sweden, 60% in Germany, the Netherlands and U.S. The Greek work ethic has been on a long course of deterioration.My acquaintance said if the retirement age were just raised to 62, this would go far towards ameliorating Greece’s ongoing financial stresses. But leaving aside ideological or cultural issues, there remains the reality of Greece’s financial crisis.
Starting in 2010, the ECB stepped in to save Greece from a massive deficit and debt overhang built-up over prior years. Since 2010 until today, the ECB has lent Greece euro 240 billion in ‘liquidity’ bailout funds, 85% of which replaced expensive creditor loans from German, French,and other foreign banks. In addition, private investment houses took a 50% loan write-off.
Conditions for the ECB bailout funds have NOT included a demand that Greece “sell (or hand over) all its ports, airports, electric and petroleum companies.” Starting in 2010, the ECB accepted Greek assets and bonds as collateral. What John and I are both saying is that Greece’s debt-deflation crisis with a huge debt overhang eventually forced asset valuations down … so collateral has been destroyed.But the ECB is not about to sell Greece’s airports!
Other than the legal but shifty, unscrupulous cross-currency swaps Goldman Sachs arranged for Greece – that helped precipitate Greece’s spending and debt spree in the 2001-2009 period – Greece did not get involved in other Goldman Sachs or J.P. Morgan exotic financial instruments (e.g., collateralized debt obligations). Of course, people may be right when they say the German and French banks, among others, lent irresponsibly to Greece prior to the crisis. There’s blame everywhere.
The price of EBC’s cheaper “liquidity’ bailout funding was that Greece agree to implement an internal devaluation policy,(i.e., austerity measures and reforms) to get its financial house in order and especially to regain its lost competitiveness with trading partners. But as noted, a relatively small portion of the bailout funds have reached Greece mostly to help pay for basic social services. Greece’s current primary budget surpluses would be lower without these funds.
Furthermore, the ECB waived its normal requirement of having adequate collateral for the euro 240 billion bailout. Now they have discontinued the waiver in light of new Greek government’s admission it is bankrupt (confirmed by Finance Minister) and Premier’s demand to stop the austerity program. Now Greece can only qualify for ECB emergency liquidity assistance if there is adequate collateral and a state of solvency. It is illegal for the ECB to be lending to an insolvent entity.
The core problem, misunderstood or not foreseen in my view, is that when a substantial over-indebtedness and self-imposed deflation policy come together as has been the unique Greece situation, history shows there’s an inevitable automatic spiral created that makes matters worst … to the point Greece is facing structural insolvency and trying to avoid same with emergency funds. That is why Greece’s public debt exploded from 130% of GDP in 2009 to 175% of GDP today and why the Greek people are still suffering horribly … despite recent primary budget surpluses.
This is why I think the Troika made a fundamental mistake assuming way back that Greece’s problem was purely a “liquidity” issue the country could “grow out of” with a rising huge debt overhang. Talk about Catch 22s. Greece has been getting hit from by them from all directions!
As noted in my writing, the Eurobank Research concluded Keynesian “pump-priming” would have made matters ever worse (Paul Krugman will be shocked to hear that). Repeating the words of Eurobank Research: “Given the HUGE size of public deficits and the EXPLOSIVE path public debt had embarked on (2001-2009), a fiscal expansion would only ENLARGE the fiscal crisis and the COLLAPSE of output. Loss of access to international capital markets meant a fiscal expansion was not feasible anyway.Instead, the country had to had to implement a draconian fiscal consolidation program.”
The tragedy is that the piecemealing of ECB funds has failed in resolving the core destructive over-indebtedness-deflation combination.
Serious debt restructuring and debt relief are absolutely essential to stabilize Greece’s financial situation – incorporating limited austerity measures with ECB funds released based on achieving primary budget targets. There may ultimately have to be a “haircut under hard terms.” If parties cannot reach a constructive solution, Grexit is unfortunately the only option left. Greece can then deflate its way back slowly to a sound economic foundation.
My apologies for the long response to your question. It symptomatic of the complexity and history of Greece’s Mess.
Hi Frank,
I asked if this is not an ideological crisis because the Troika is demanding (as you point out) an “internal devaluation policy i.e. austerity measures and reforms”. The current ideological crisis arises in how the Troika so narrowly defines “internal devaluation”.
If Greece’s debt were internal, default would be in the form of an “internal devaluation” of monetary assets, possible even though Greece is in a monetary union. The reason Greece is being brutally prevented from defaulting is because its creditors are external not because it is in a monetary union.
I say “brutally” because as soon as Greece threatened to default on its external debt the ECB declared Greece insolvent because as you point out “It is illegal for the ECB to be lending to an insolvent entity”. Greece was just as insolvent when the ECB was lending it €240 billion to pay its external creditors.
You say “Grexit is unfortunately the only option left”. That denies the much bigger ideological crisis facing the world financial community viz. how to enforce unsustainable debt on vulnerable countries. Greece’s problem is that it succumbed to money-lenders like Goldman Sachs who behaved like drug pushers exploiting human and political weaknesses in Greece and in other countries.
The resulting over-indebtedness of many counties is now a bigger problem for the world’s financial creditors than for the debtor countries. I don’t expect a “Grexit”, forced or voluntary, I expect the present Greek Government will hold the feet of the world financial community to this global fire of their own making.
Pat,
I agree with what you say about placing much of the blame on the external banking community. But, I also go back further – before the Goldman Sachs ruthless money-on-money thieves entered the scene – to explain why Greece has so often historically been in a state of default and financial collapse. Greece never had a real period of statehood before it assumed the ‘cloak’ of being a democracy. This long ago opened the doors culturally and politically to a corrupt democratic and banking culture through and through up to today. That in combination with the ” creditor outsiders” wanting to exploit Greece’s flexibly financially manipulative culture has finally brought Greece to the end of a cliff. Yes, indeed Europe has much to learn from this as does the U.S. that originated the cocaine bubble of exotic financial instruments and risky investments.
Hi Frank,
I am glad you think that the financial world as a whole has much to learn from this “cocaine bubble of exotic financial instruments and risky investments” originally cooked up in the US and foisted on the Greeks. In that neat phrase you put my point better than I did.
The biggest lesson from this international financial crisis must be that lenders can no longer rely on governments, individually or collectively, to back-stop irresponsible lending practices. I hope the Greek Government over the next few weeks brings that lesson home forcefully.
I am not sure historical arguments help. No country or individual is above criticism. It’s a bit like recalling a rape victim’s sluttish past. I am sure the Greeks could find much to recall about Germany’s past if the argument went down that sterile road.
I did enjoy your article very much and I downloaded your links for later study. You certainly do put the work in. I admire that.
Thanks, Pat. I too have enjoyed your pertinent reflections on Greece’s financial debacle. It’s a shame the debt was not restructured properly in 2010.
Greece’s historically corrupt “patronage” governance and banking culture is still alive and unreformed today. Nothing like this exists for a Germany and most mature EU countries today. EU leaders misdiagnosed the problem and, as you say, helped exacerbate the crisis.
In my over 30 years of consulting and training services for international European firms, I have been in contact with a number of respectable top executives who voice a similar criticism about Greece’s systemic mismanagement of its financial system. It also has something to do with the southern countries’ focus on consumption, little savings and poor tax collection in contrast to balanced financing and spending, disciplined tax collection, hard work, and high savings of northern countries.
Oh, those lazy southerners always looking for the north to give them a handout. Frank Thomas, you’re a better analyst than that. I’ve lived in both Italy and, for a longer time, in Spain and I can tell you that the people I knew in the southern reaches of those countries commuted to jobs and came back to their farms or small holdings and raised vegetables, wheat, olives, almonds and and even some animals trying to keep themselves out of debt to bankers and insurance megaliths. I never knew harder working people.
Bob,
Bob, you’re absolutely right. I over-generalized unintentionally. I should have been clearer about whom I was referring to. Sorry about that. I wasn’t referring to the average working class but primarily to the bureaucratic elites who comprise a significant percentage of Italy’s and Greece’s employed. The Italian bureaucratic class has had the highest salary and pension benefit package in Europe along with Greece not far behind. This is why most people in both countries do their utmost to avoid paying taxes. They get almost nothing in return in terms of basic social benefits and are stuck with poor wage levels. One person with whom I was just talking to brought up this subject. In a long career ended not long ago as head of his firm’s worldwide pension funds, he had numerous meetings with the higher levels in Greece’s overblown enriched bureaucracy. In his own words, his experience was they were consistently a “lazy, worthless bunch” who contributed little if anything to important discussions and projects.
But it’s also true that Greece’s early retirement policy has contributed to its sky high absolute pension cost level as well as to people taking the early retirement road, rather than remaining productive.
Hi Frank,
It’s nice when a commenter explains what they mean rather than dig in. It is important that the (we?) the “commentariat” get our analyses right. You have put your finger on an area of governance needing urgent reform, especially in Greece, excessive public sector privileges. I think both the Troika and the Greek Government are united on that.
The trouble is that the Troika is unable to break free of the financial services lobbying straitjacket. Greece claims to have met the Troika 3/4 of the way on needed reforms but the powerful financial lobby threatens Armageddon if any concessions are made to any country in restructuring its external debt. That is where urgent reform must come in order to save the world capitalist and financial system from Armageddon.
It’s good to hear the explanation, Frank Thomas. I’ve had a couple of experiences with public officials trying to qualify myself for one thing or another which unwound my understanding of how the world works. Yes, European bureaucratic policies are layers and layers deep, reflecting imperial practices right on up to yesterday’s bad legislation.
Pat,
Yes, I’m a keen admirer of Elizabeth Warren. She tenaciously tried to get a new 21st Century Glass-Steagall Act passed to counter the dangerous excesses of the financial services industry. Instead, in 2011, the Dodd-Frank Act was passed incorporating some principles of Glass-Steagall, namely, traditional depository banks became walled off from riskier activities like investment banking, dealing in swaps, proprietary trading activities. After five years the reality is big banks are ever bigger, systemic risk has grown and the financial market exploitations and distortions continue. Congress has been chipping away at the new Dodd-Frank protections against high-risk mortgage lending, dishonest credit ratings, and exotic financial products. So, “too big to fail” remains.
Back in 2013, Elizabeth Warren was impressively clear about reinstating a new 21st Century Glass-Steagall Act:
“Such an Act would attack both “too big” and “to fail.” It would reduce failures of the big banks by making banking boring, protecting deposits, and providing stability to the system even in bad times. And it would reduce “too big” by dismantling the behemoths, so that big banks would still be big – but not too big to fail or, for that matter, too big to manage, too big to regulate, too big for trial, or too big for jail.
We have a long way to go before we’ll ever experience real control and proper break up of the mega-banks and mega-investment houses.
Hi Frank,
I agree with everything you said above. If Hilary gets elected it would be nice to think that she might give us Elizabeth Warren as our Treasury Secretary, but no doubt the old Clinton Wall Street backers have already closed off that road.
The financial services industry pay politicians big money all around the world for lite-touch regulation. No doubt Hilary has already done the dirty deal in order to become the first female POTUS.
The solution will not come from the political arena, it will only come about by necessity, another Lehman Bros, probably Greece. That’s the way the world works. Change only happens catastrophe by catastrophe.
As noted earlier, a human catastrophe is unraveling in Greece – a 26% unemployment is rising as government infrastructure projects are stopped for lack of cash; people without health insurance has mushroomed from 0.6 million to over 2.5 million of Greece’s 11 million population; hospitals can’t take on more doctors, and operations are being carried out without anesthetics; poverty has risen from 7% to 32%; homelessness and food banks are exploding; all made worse by hundreds of thousands of illegal refugees already in Greece and thousands more coming from Africa who see Greece as an easy port of entry to the EU.
But Premier Tsipras’ new left Syriza government doesn’t want to negotiate on reforms. And Christine Lagaard, head of the IMF, has just added the EU monetary union can handle a Greek exit – i.e., unless Greece accepts a reform plan, no more emergency funds will be extended. But as I’ve highlighted, Greece’s cash chest is EMPTY and huge debt repayments are coming due in June/July/August. So my view is that unless the Troika provides real debt relief along with its other conditions of reforms, primary budget targets, etc., Grexit is inevitable.
A Dutch journalist likened the situation to the seizure of TROY 3,000 years ago – with Greece’s Premier Tsipras as HECTOR and Holland’s Finance Minister Dijsselbloem (who’s coordinating negotiations on behalf of the Troika) as ACHILLES. “That struggle lasted ten years. Hector was defeated by Achilles … but Achilles knew that in the end he would also die in the struggle. The metaphorical similarity is that if Greece falls and exits the euro, another storm of fleeing refugees to the north will be created – with the only light point being they will not have to cross a dangerous sea.”
Hi Frank,
But don’t you think the Troika are playing ideological hardball with people’s lives?
I don’t think it is fair to say that Syriza doesn’t want to negotiate on reforms. They have presented a wide range of reforms. They are just not the one-sided reforms the IMF and ECB want.
The international bankers are saying it is their way or the highway. This will not end well. It may be the tipping point that is needed. The Greek people simply cannot absorb any more punishment.
And they don’t deserve it.
Pat,
Was preoccupied so couldn’t respond to your latest comment.
First I agree that Greece has taken seriously the Troika’s reform program and has bitten the bullet on austerity measures the last 5 years.
As I’ve said in my paper, what’s needed now is Decisive Restructuring AND Debt Relief, limited austerity while pursuing key reforms noted. The aim should be to create fiscal space for Greece to reactivate its economy and generate jobs. Of the 26% loss in GDP since 2009, over one-third of that has been due to austerity measures, the rest to the economic cycle.
In an economy with one in four unemployed and 3 in 5 young people unemployed with a country that remains insolvent, it’s a dangerous illusion and utterly stupid to think Greece will be able to fund all its borrowing needs from the market – including euro 20 billion debt payments maturing remainder of this year – WITHOUT DEBT RELIEF.
The 20 billion debt maturing by September this year must be rolled over into a debt package that amortizes, for example, over 50 years with a 2% interest-only payment for first +-8 years, increasing thereafter with principal payments. The real debt payment crunch comes in June and July. Greece’s cash chest is now empty. Greece will need a ‘bridge loan’ to cover time it takes to agree on bailout terms.
If constructive Debt Relief can be negotiated, the debt maturing in years 2016 – 2019 is favorable, i.e., not nearly as onerous as the debt maturing the rest of this year. A key condition for this relief should be that any future ECB funds needed are linked to Greece’s achievement of minimum primary budget surplus targets for next 5 years.
Syriza program is to rehire government workers, decrease taxes, go after offshore tax liabilities of Greek offshore accounts which is extremely difficult, etc. It’s plan is too retrogressive and it will cost lots of money without increasing revenues.
I agree a slow death in austerity measures is in order which, along with real Debt Relief, should provide adequate room for fiscal stimulus and eventual demand-side recovery … but this should not occur NOT at the cost of destroying painful gains made in reducing extravagant spending and cost structures (e.g., greatly inflated pubic wages, perks, benefits and pensions) that have brought Greece into this solvency crisis and a long history of such financial crises.
Germany is the most intransigent objector to concessions. But if Greece makes the right deal with key concessions and maintenance of certain priority reforms, I think the chances are excellent Germany – led by its tough Finance Minister, Wolfgang Schauble – will come around.
But, if Grexit happens as a last resort, I’m confident this will be organized and controlled in a friendly, socially responsible manner that will not materially worsen the current deplorable living state of the average Greek citizen.
Hi Frank,
Excellent comment. I particularly like “AND Debt Relief”.
I suspect Herr Schauble is thinking that if the thrifty Germanic peoples give even the slightest hint of possible debt relief hordes of feckless Mediterranean paupers will invade the north rattling their barbarous tin cups so loud that the foul din will drive the simple honest northerners back into their forests and caves regretting that they ever crossed the Rhine into the civilized Roman Empire.
Seriously though, the arguments for debt relief are overwhelming.
Back in April 2009 I did an investigative piece on a guy called Jeff Greene in LA who made a billion dollars by purchasing credit default swaps on loans he knew to be fraudulent – because he had created them himself using straw buyers.
http://www.blogofsandiego.com/Mortgage-Crisis.htm#04/27/09
No doubt Greece’s lenders did exactly the same thing. Like Greene they probably bought CDSs on their own bad loans.
What the public does not know is that the entire Greek debt has thus been hedged many times over. This so-called debt crisis is not a matter of debt forgiveness it is a matter of the markets making or not making a second killing on their own bad loans using the miracles of credit default swaps.
There is no question of any lender losing money if any of Greece’s debt is written off. It has already been absorbed by the house of mirrors we call CDSs, which go on forever and which nobody owns. That is the miracle of modern finance, invented by modern-day alchemists called Harvard MBAs. This so-called debt crisis is simply a matter of scavenging traders either making a killing or not making a killing on already written off dead loans. Human beings got to the top of the food chain by being scavengers. It is in our DNA.
Read what Jeff Greene did. That is how the markets work. Jeff understood human nature and made a billion dollars. This is the Wild West casino that Herr Schauble is protecting, not his imagined northern honor or thrift. And both he and Angela must know it otherwise they should not be in the high offices they are in.
UPDATE ON GREECE FINANCIAL CRISIS:
The Troika has just given Greece a +45 page “take-it-or-leave-it” offer which Tsipras is now discussing with his people. He has little maneuvering room except on details. Greece is technically bankrupt. Yesterday, Draghi made clear that the EU does not want Greece to leave the euro zone, but there’s a strict uncompromising condition that Greece implement and adhere to certain key reforms (noted in my writing). Otherwise, it’s Grexit.
Without this tough ECB approach, the Greeks will never find the discipline to get their financial house in order for stable, sustainable growth. Already now, the primary budget surpluses of 1.7% of GDP in 2014 and forecast 2.9% of GDP in 2015 (noted in my paper)are being readjusted down and the debt/GDP ratio is now expected to rise from 175% of GDP to 180% of GDP in 2016.
Troika funds will be released to Greece only if it accepts the Troika’s restructuring/reform measures. It is still not clear how the ECB will handle Greece’s state of insolvency under a no exit scenario. As noted earlier, it’s illegal for the ECB to be lending funds to an insolvent country. Continuing to release short-term funds to address a mountain of long-term debt is no solution to Greece’s severe underlying insolvency state. It violates one of the basic principles of sound financing.
Under Troika’s “no haircut” policy, debt restructuring and relief will have to include rolling over existing dept coming due and future financing needed with maturities extended to up to 50 years, low 2%-2.5% average interest rate, and annual principle payments deferred for at least eight years. This is critical to mitigate Greece’s insolvency situation by creating more fiscal space – helped by government cost reductions, reform of labor regulations to improve competitiveness – to meet all annual operating costs, debt payments, productive investments to stimulate growth and jobs.
In June, the following major payments totaling euro 1.6 billion are due from Greece to the IMF:
. June 5 : euro 303 million – Greece can meet this payment
. June 12 : euro 334 million – Greece wants to defer this payment
. June 16 : euro 588 million – Greece wants to defer this payment
. June 19 : euro 341 million – Greece wants to defer this payment
TOTAL euro 1.6 billion
By end of June, another huge payment totaling euro 7.2 billion is due for IMF payments, public pensions and salaries. Greece expects to get this sum from funds freed from an old ECB bailout support package. But, Jeroen Dijsselbloem, Dutch Chairman of the Eurogroup negotiations with Greece, insists such funds will come only if an agreement is reached along lines demanded by the Troika in its latest offer.
Stay tuned. Greece is at the edge of a financial meltdown.
Greece has just said they need to postpone tomorrow’s euro 303 payment to the IMF. That’s another indication of how empty the Greece’s cash chest is.
Hi Frank,
I’m watching Euronews on satellite here in Ireland but have not seen any reports of Greece needing to postpone tomorrow’s payment. Euronews just updated the Greece story but did not mention a postponement. Where is that report coming from?
I see what the Greeks are doing, they are bundling the four June payments into one and promising to make it on the last possible day in June – if they get concessions. The NY Times have just filed this report.
http://www.nytimes.com/2015/06/05/business/international/greece-debt-talks-ecb-imf-european-commission.html?_r=0
The Greek boys are going to make the market traders sweat for a while. That is clever politics. The Greeks will keep the financial world suspended over the cliff of global disaster until June 30th. It is at times like that one thinks of compromise and the Greeks have nothing left to compromise on.
My money is on the Troika blinking before the end of the month. They will have almost a month to look down at the bottomless chasm that yawns beneath them, over which the Greek politicians have suspended them by some very tender body parts. We need to see a little more of this kind of political waterboarding
Pat,
Got that surprisingly from a Dutch news commentator about half an hour ago. I’ll check it out to make sure I heard it right. Will get back.
Pat,
Yes, thanks for that link. It’s clear the new Greek government wants a complete halt to austerity which means lower primary budget targets in exchange for conceding to implement limited reforms. It’s quite a standoff. The Greeks can in no way come up with euro 1.6 billion end of the month, let alone euro 7.2 billion. The Greeks are betting the house that the Troika will soften the Debt Restructuring and provide more significant real Debt Relief so that Greece can slowly climb out of the insolvency trap the Troika is still denying … probably because it’s illegal for the ECB to be lending to an insolvent euro zone member. From reading the NY article, it appears the Greek strategy is working.
Pat,
Besides “fairness,” another factor perhaps behind the sudden “softer” deal gestures towards Greece by the Troika is perhaps Greece’s interest in an economic relationship with Russia … specifically concerning a Russian energy pipeline that would cut across Greece to other EU outlets. This would eventually bring in millions and millions of euros annually to Greece. Some top officials in the EU, as well as in the U.S., are concerned about risks of such a development especially if Greece were to exit the euro zone and give up its membership in NATO.
I have had the feeling all along that Christine Lagarde understood the inevitableness of giving Greece a break. She is a lawyer and must have been a good one to become chairperson of Baker & McKenzie.
The idea of using the “bundling” loophole that allows Greece to double down and buy time, probably came from her. She created space to make the deal. It is what good lawyers do.
You are right, the specter of a Russian marriage has been hanging over this all the time. And it is very real. If a deal is not done by the end of June the Greeks will call another election which in effect will be a referendum on “Russia or the EU”.
The Greeks will get their EU deal. Awkward illegalities will be tidied up and the European family of nations will kiss and make up. It is all part of growing up. The US had a few tough adolescent years too. I hope I am right.
POST-SCRIPT – Greece Says NO to TROIKA’s Funding Proposal
Greece’s dilemma of a NO or YES decision on a Referendum whether to continue with the European austerity policy as a condition for further funding has reached a resounding,NO! As noted in my paper, the ECB/European Commission/IMF austerity policy needs to be rethought … it is plunging Greece’s whole society into utter misery, disintegrating the nation’s social fabric.
As stated earlier, unless something is done to make Greece’s HUGE unsustainable debt burden more manageable (e.g., by serious debt relief) while still implementing certain critical reforms – like reducing tax evasion and public pensions, eliminating pervasively corrupt cronyism, reforming labor regulations – there is no financial space to reactivate Greece’s chronically ailing economy and to repay debts.
The country’s long state of structural INSOLVENCY has led to financial chaos with little hope for improvement. Introduction of the Euro sent Greece into higher levels of undisciplined management of its public debt, revenues, and expenditures. A question that still begs an answer is how was it possible for debt and budget deficits to explode so much after WWII and notably after introduction of the Euro?
Partly this can be attributed to Greece’s oligarchic democracy and its insidious patronage culture that was a carryover from centuries of Ottoman-empire governance by ruling families. Financial data was handled and manipulated behind closed doors. The Euro offered more room to expand on this corrupt culture with the comfortable thought the rest of Europe would take care of the inevitable financial breakdowns.
I’ve concluded Greece needs to take charge of its own economic destiny by Exiting from the Euro, but not necessarily the Eurozone. The question I asked was … which Referendum vote, NO or YES, best insures the opportunity and incentives for Greece to get eventual control of its capital flows and money management, thereby restoring its self-respect and integrity within the Western Community?
My answer before the Referendum was a NO vote where the Tsipras government stays in power, the Eurozone and Greece come to a deal on some mutual concessions, Greece is saved, the ECB continues to support Greek banks – or alternatively: there is no deal with the Eurozone, the Greek state is bankrupt, the ECB withdraws emergency support funds, Greece leaves the Euro, but not the Eurozone. The latter path, of course, is the most painful and disruptive.
Hopefully a post Referendum compromise will now be reached somewhere in between the two NO options that brings “serious debt relief” in some form. Most Greeks want to stay in the Eurozone. But for a large majority of Greeks “Enough is Enough” with unsustainable austerity measures that are killing jobs, economic recovery, and impoverishing millions.
Attention: Pat Flannery
Hi Pat,
The Greek Referendum NO vote is NOT a real NO vote against being in the Eurozone or staying with the Euro. It’s about prolongation of excessive austerity and a staggering non-payable debt load, stemming primarily from a culture of gross financial mismanagement and secondarily from foreign exploitive money forces.
Perhaps the NO vote has reawakened concern for the common good of all those Greek innocents suffering so much. Surprisingly, even Germany’s tough Finance Minister, Wolfgang Schauble – who has been very skeptical of a deal with Greece – said yesterday, “”It is clear we shall NOT leave the Greek people to their lot.”
I’m hopeful now, as you were from the beginning, that parties will come to their senses and reach a realistic deal … offering Greek debt relief, a halt in austerity measures and tax increases, while ensuring serious Greek action on critical reforms.
As pensions and salaries must be paid by the end of July, it will soon become clear in what currency that will be done … the Euro is my optimistic view.
Hi Frank,
I have no doubt that the Eurogroup must now (reluctantly and for some with bad grace) finally admit that they cannot and never could throw Greece or anybody else out of the Eurozone. The genius of Syriza was in seeing that clearly. They brilliantly called the Eurogroup’s bluff. There is life left in the old dame democracy yet.
The financial mandarins at Brussels now have no choice but to clean up their Euro project or be the laughing stock of world markets.
There has never been a reluctance by this Greek Government to implement strong tax reforms and to extend the pensionable age. But this is a game changer for the neocons. It is the first real challenge they have faced.
Hi Pat and Frank,
It seems like the ECB must now write down the Greek debt which goes against all the neocons’ principles. This along with moderate reforms on Greece’s part which aren’t too onerous on the Greek people seems like the only rational and humane solution. Do you think they will actually do it and, if so, when?
Hi John & Frank,
I see Doug Porter has given you guys a nice plug on his latest piece on SDFP today. It’s good that there is so much interest in this in America as it is really about the Neocon agenda in the US and the Neoliberal agenda in Europe (there is a slight difference I believe).
In any case they are both scared stiff of democracy which they now tag as “left wing”. It seems there is no right wing democracy anymore, it has been taken over by the global corporations, most especially by the financial services industry.
As to your question, “will the ECB now write down the Greek debt”, the ECB has no say on the question. That decision can only be taken by the actual creditor, the Eurogroup, which is a subset of the Council of Ministers, the ruling executive of the EU.
It is complicated. The relevant ministers of all the EU member states meet in Council on matters relating to their particular portfolios e.g. the agricultural ministers meet to decide on agricultural matters, defense ministers on defense matters, health ministers on health matters etc. This decision-making institution is known as the Council of Ministers.
As you know there are 28 member states in the EU but only 19 are in the monetary union, called the Eurozone or Euro Area. The European Central Bank (ECB) is governed by the 19 presidents of the 19 National Central Banks (NCBs). The ECB is similar to the Fed in that it controls monetary policy i.e. the money supply, but like the Fed it does not control fiscal policy.
The powerful Eurogroup consists of the 19 Finance Ministers of the Eurozone. It decides financially related political matters for the Eurozone. The other 9 EU members such as the UK do not participate in decisions that affect only the Eurozone.
What to do about the money loaned to the Greek state by the Eurogroup (to bailout Eurozone banks in 2010)is such a matter.
What will the Eurogroup decide? One thing I feel certain about is that the decision will be taken at heads of state level. This happens when a matter is considered too important for mere cabinet ministers.
To write off bad debt is all but an existential decision for the common currency. The founding pitch was that there is safety in numbers. It turned out that there was danger in numbers. Greece will call the other 18 members hypocrites if they persist in trying to force Greece out.
I believe the Eurogroup will find a way to save face. They have discovered that they cannot force Greece out without incurring a degree of shame that might ignite a democratic backlash all across the 28 European countries.
There are Greek sympathizers in every member country. Ireland’s Sinn Fein, Gerry Adams’ ultra-nationalist party, sent its finance spokesperson Pearse Doherty to Athens as an observer. There is Podemos in Spain and many more similar left-leaning parties throughout Europe. They are being energized by Greece’s boldness. Syriza has lit a beacon of democracy.
THAT is the contagion the ruling right wing parties across Europe fear most. They are not afraid of financial contagion anymore. They put all manner of safety measures in place since Lehman Bros. But they didn’t reckon on the unpredictability of people.
So for my money, the 19 Heads of State led by Germany and France, will put seasoning on the dead crow and gulp it down. Their PR people are even now frantically fashioning the fig leaf. It will probably be a “humanitarian crisis” in Greece.
With the Greek crisis “solved” they will then return to their home countries and confront the looming left wing coalitions that Greece’s referendum has spawned.
This is not a financial issue. It is a political war of ideologies. It is the beginnings of a counter-revolution to Neoliberalism. Angel Merkel is already being called the Maggie Thatcher of Europe.
I think Neoliberalism will lose, because Greece has proven that fiscal austerity destroys economies and privatization is starting to look more and more like corporate dictatorship.
It is ironic that democracy has reinvented itself in the country where it was born over 2,000 years ago. Sorry for this being so long.
Hi John,
The Greek government has been unraveling the reforms originally agreed to back as far as 2010, has done almost nothing about tax evasion and corruption in a culture of continued glaring cronyism involving political appointments to government positions. Until there is some contractual assurance these dysfunctions will be corrected, the Troika will likely not consider debt relief in any form, especially an out-and-out “write-off” of debt.
In a just leaked report, the IMF admits Greece’s public debt is unsustainable and an amount equal to 30% of Greece’s GDP needs to be written off. The IMF report also says Greece needs at least another Euro 50 billion over the coming years. Others say up to Euro 80 billion will be needed. However, without some clear Greece agreement on accepting certain fundamental reforms there can be no talk of the Eurozone offering Greece significant debt relief.
Under a mutually acceptable reform plan scenario, the IMF has just suggested the possibility of doubling its loan term repayment schedule (covering a Euro +50 billion loan exposure to Greece) from around 25 years to 50 years. Postponing loan payment installments for 2 years is possibly an added feature. Few deny Greece desperately needs some fiscal and monetary breathing room to stabilize and reactivate its sunk economy. It’s not known whether the ECB (with its Euro 118 billion loan exposure to Greece) can or would do what the IMF is suggesting in terms of debt relief. And there remains the problem of diminishing and/or deferring austerity actions.
Re-negotiations are going to be very fierce on these points and will probably continue to take place in a muddled way until the bullet of Greek banks going bankrupt erupts in everyone’s face … forcing parties to come to an equitable compromise probably at the last moment (by end of July)or Greece takes the road of leaving the Euro and possibly the Eurozone – truly an extremely painful, destructive course despite giving Greece control (or illusion of control) over its own destiny.
If the 62% NO position can’t be broken through by a mutual compromise that listens to, respects the Greek public’s wishes of curtailing austerity and decreasing the annual debt burden – but stay in the Eurozone and Euro – in exchange for Greece’s acceptance of some critical reforms, then following currency variations can be considered: (Source: Editors of the Telegraph, The Netherlands, July 4, 2015)
I. The Parallel Currency Option where both the Euro and Drachma exist side by side. If the Greek state is not supported and the ECB no longer helps the Greek banks, then the Greek central bank must issue Drachmas. A large number of Euros will continue to be circulated and used in the economy. Eventually, however, the Drachma will become the most used payment vehicle while people mainly save up Euros.
II. The Drachma Connected to the Euro Option whereby the Greek Central Bank cannot issue Drachmas in an unlimited manner. This can contribute to trust in the Drachma. Also, this means that economic discipline by the Greek government is vitally important. Otherwise, the monetary basis for the new Drachma will be weakened.
III. The Introduction of the Drachma Option whereby Greece adopts the Drachma and steps entirely out of the Euro. This is the most drastic scenario. It will likely involve an interim phase where the Greek government first issues IOUs in Drachmas, i.e., debt obligations whereby the state can continue to make payments. The advantage of this scenario is that the Drachma can be sharply devalued in relation to the Euro. In one blow, this will improve Greece’s competitive position. Although Greece will have very little influence on the European Central Bank, monetary policy for Greece’s currency can be set by Greece itself. A critical question is whether citizens, Greek institutions, foreign firms, and investors develop trust in the weak currency.
IV. The Retain Euro and Exit Eurozone Option whereby Greece is no longer formally a part of the currency union but operates with the Euro. This is the so-called Montenegro Option. The big advantage is that no Drachmas need to be physically printed and spread around. That is a very complicated logistical problem. The negative aspect is that while Greece retains the Euro, it will have very little or no influence on the European Central Bank. Greece cannot determine monetary policy for its Euro currency. Also, there will be no access to bank support. The Greek Central Bank cannot issue Euros.
John, I’m afraid the Eurozone and Greece are far from being independent of each other. Acrimony and distrust have muddied the relationship between creditors and Greece. There’s some serious, calm give and take that must still occur if a humane, democratically binding compromise solution is ever to be achieved over next few weeks … perhaps longer.
If the ECB withdraws its support of Greek banks, then a Greek exit out of the Euro will become a virtual reality. Will the ECB cause that? No one knows. A NO vote position reconfirms the insolvency of the Greek state. Although this puts the ECB in a difficult position, technically the ECB still has the responsible task of ensuring stability of the Greek banking system.
Stay tuned.
This whole situation is so convoluted and twisted that it reminds me of a saying my Dad had: the more you stir a turd, the more it stinks. I thought the thing Greece was resisting was more pension cuts and more taxes on the poor. The powers that be had better come up with a comprehensive, streamlined solution that 1) doesn’t force further austerity on the Greek people and 2) provides a non-Draconian plan for debt payback that doesn’t make peons out of the Greeks for eternity.
Hi Frank,
Your post exactly reflects the neoliberal line that is being pumped out all over Europe by the governing parties. It is getting shriller and shriller as the well-coordinated government PR machines realize more and more that their anti-debt relief spin is not working any better than their fiscal austerity spin worked.
Our own right-wing neoliberal government here in Ireland is getting really nasty towards Greece as it sees its own lies being exposed. The present Irish government was elected on a promise to get “retrospective bank debt relief” for Ireland. Once in power it declared that promise impracticable.
Instead it launched a cringing neoliberal program of privatization and fiscal austerity. It is no surprise then that it is now one of the leading nasties against any debt relief for Greece.
So everything you say in your post I hear all day every day here in Ireland. But as always when a lie starts to unravel more and more people start to look at each other and say “you know, I think we were conned”.
That is the real contagion that is spreading in Ireland and I suspect in other EU countries. The blogs are ablaze with anti-austerity and pro-debt relief rants. And there are more and more of them.
It’s going to take much more than a few “adults in the room” to resolve this. The right-wing ideologues have pushed the ordinary working people too far. More “ve have vays” from Germany and the Dutch will only inflame the working people more.
People are coming to realize that it is not the proper role of governments to be debt-collectors for global financiers and revenue bundlers for global hedge funds. These governing parties are about to discover that they can no longer tap into QE-created money to spin the big lies enabling them to bundle up their voters for sale on the global markets.
That is what created the debt-bondage Greece and the left-wing blogs around Europe are screaming about. I don’t think they can be dismissed so easily any more.
Information is changing the world. It is the real new currency.
Frank, you might want to check out this blog rant from nearer home, San Francisco. It is not just the European lunatic left that is enraged about the lies being told worldwide about Greece.
https://truthandsatire.wordpress.com/2015/07/03/greece-the-one-biggest-lie-you-are-being-told-by-the-media/
John, Pat
Sunday next is a FINAL deadline that has just been set for Greece to come up with a complete, credible, responsible reform plan that offers acceptable grounds for further discussion.
Failure by Greece to show up Sunday and/or to achieve acceptance of their reform plan due to an impasse or inability to agree on a political and economic solution with eurozone members means Grexit. It’s claer most euro countries have lost their patience with Greece.
In the event of Grexit, EU details of the exit process and procedures are already prepared. As I noted before, in such a situation there will be humanitarian funding provisions for the Greek people during the transition phase out of the euro and perhaps also out of the eurozone.
All is in Greece’s hands this coming Sunday … as far as its future association with the euro currency union is concerned.
Frank, as I said above, you are faithfully repeating the bullying threats of the Brussels technocrats. This is a fight for democracy and the position you describe is the antithesis of democracy.
It remains to be seen whether ordinary people across Europe are sufficiently cowed by this bullying from Brussels to accede to its FINAL threats. People across Europe are watching how central power is being used against Greece. They do not like what they see.
There is a growing fear that what the technocrats have created in Europe is a dictatorship at its center despite the fact that Europeans fought two world wars to preserve democracy.
The political attitude you reflect is dictatorial.
The fact is that the Eurozone that bailed out its Eurozone banks, with very little of that money trickling down to ordinary people in Greece, Ireland or anywhere else, is now the power that refuses to burden share the losses consequent of its actions.
This situation cannot stand.
Some irony: New York Times has posted an item showing Hermann Josef Abs, head of the Federal Republic of Germany’s delegation in London on Feb. 27, 1953, signing an agreement that effectively cut the country’s debts to its foreign creditors in half.
Pat,
To see my response to your comments, please click to my article entitled “Greece’s Solvency Problem: More Dire Than Ever.”
I’m relieved with the different tone being set by Tsipras and his new Finance Minister, Euclides Tsakalotos.
Mr. Tsakalotos has a very impressive academic background with a degree in economics at Oxford. He was born in Rotterdam and is the son of Greek expats. He believes in a European solution and has stated without reservation that he doesn’t want a Grexit.
It seems like sanity and realism have returned to the negotiations.
John,
The European Parliament conservative member and former Premier of Belgium for ten years, Guy Verhofstadt, delivered a flaming speech to Parliament members yesterday while addressing Greece’s Premier, Alexis Tsipris of the Syriza party. Tsipras received a warm applause as he entered the chamber.
_______________________________________________________________________
Here is Mr. Verhofstadt speech – I AM ANGRY!
“Mr. Tsipras, welcome. You see that you have no reason to be afraid for the European Parliament. I thought to myself; such a big democrat as Mr. Tsipras who is fearful of a debate, that cannot be true. You have said that the Greek people have made an enormous effort. And that is true. But that is not where the problem sits. The problem is that the political class has not done enough.
And I must say to you – I am mad. For you talk about reforms, but we see no concrete proposals for reforms. And let’s be honest – we have been sleepwalking for five years towards a Grexit. In recent months, we have been running toward that end … with eyes open. But you are not the one who pays the bill. That’s the Greek people. They will lose 30% to 40% of their purchasing power in a Grexit.
I shall offer you five things that must done. I am prepared to come to Athens to discuss these points with you personally because I welcome such a challenge.
What you must first do is make an end to clientelism (edit: cronyism, paternalism).
For this, you must put some legal regulations on the table. Two weeks ago thirteen directors of the Ministry of Education had to be appointed … and per “accident” twelve came from your Syriza party. This is the reality – you use the (edit: inbred paternalistic) system.
You must reduce the public sector. But we must know the exact number of bureaucrats that will not be changed. I understand that is perhaps a difficult task for a left politician, but it must happen.
You must privatize the public banks. You must open up the markets and create jobs for young people.
And lastly, you must make an end to special privileges in your land – the privileges for shipowners, the army, the orthodox church, and the Greek islands must stop. And not to forget the privileges for the political parties, and for you.
Never in Greece was there a Premier that has such a strong mandate as you do. You have in fact two mandates: you’ve won the election and the referendum. The Greek people are fed up with the way Greece has been led over the last decades. Do something about this! You are the only one who cam make an end to the current system.
My conclusion is that you have a choice. The choice is very simple. How do you want to be remembered? As a political disaster that has made his own people poor or as a revolutionary reformer? As a true leader or as a false prophet. Do it!”
_______________________________________________________________________
The President of the all-powerful 28-member full European Council, Donald Tusk from Poland, today broke with his domineering neighbor Germany in an interview with Reuters:
“The realistic proposal from Greece will have to be matched by an equally realistic proposal on debt sustainability from the creditors. Only then will we have a win-win situation,” he said. “Otherwise, we will continue the lethargic dance we have been dancing for the past five months.”
http://uk.reuters.com/article/2015/07/09/uk-eurozone-greece-idUKKBN0P40FR20150709
This important new statement echoes that of the IMF last week, that there has to be some form of debt restructuring. Germany is becoming more and more isolated in its hard line against the Greek people. It looks like the cocky Germans will emerge from this crisis a little chastened by Greek democracy.
What a powerful force democracy is when people stick to their principles. It’s a lesson for all of us.
This whole scenario reminds me of a Marx Brothers skit. The ECB puts down a deadline, a line in the sand. Or else! Then when that day approaches, they say, “well we’ll give you 5 more days and that’s it. That’s the final deadline.” When that deadline is reached and Greece still hasn’t paid up, they’ll find a way to extend the deadline again. It’s getting to the point of being ridiculous.
John, sometimes democracy looks like a Marx Brothers skit. Unlike dictatorship it is inherently messy.
I find it interesting to watch the two systems at work, American and European, as I spend half of my year in each jurisdiction. I study the strengths and weaknesses.
The American system (we all know and love) is dominated by two large political parties that are in turn dominated by a small number of large corporations and special interests. That tends to make life simpler for American legislators as all they have to do is carry their donor list with them at all times.
It is not that simple at European Union level. The European legislators are firmly grounded in their home-country political parties, which are not continent-wide as they are in America. That difference has a huge impact on both systems. Europe appears very strange to an American eye accustomed to a Republican/Democratic, Red/Blue, divide on all issues from local council to US Senate.
There are those in Europe who want to copy the American system and can’t wait to see a United States of Europe. There are others, currently a majority, who prefer the Marx Brothers approach. Which is best? I don’t know.
John, Pat
In this century and most likely much longer, Europe will never be a United States of America. Individual European country historical social-political-cultural-language makeups are extraordinarily different. And that of course is the beauty of Europe! That does not mean there are not some shared significant common values.
I’m an American from the beautiful state of Maine who has been living and working for Dutch firms in the Netherlands for 34 years and is now retired here at 77. Long ago, I became convinced that the varied European coalition (multi-party) governing systems – while often slow and sometimes messy in their operations – are essentially more democratic and social-responsible for the common folk than America’s endemically broken, polarized two-party governing system that has been usurped by vested money powers. If any country’s political governance deserves the ‘Marx Brothers” epithet, it’s my native land’s.
In Europe lately, there has been a movement to the right in some European governing party coalitions. But slight government changes to a dominant left, or to a dominant center, or to a dominant right party coalition are common in Europe. For example, in the different party coalitions I’ve witnessed within the Netherlands, Germany, Belgium, Scandinavia over the past years, parties check and balance each other’s excess or misdirection.
Consequently, Dutch and most European governing coalitions generally operate in the range of slightly left of center or slightly right of center. This in turn leads to a relatively balanced decision-making process that serves well the public’s general interests and greatly mitigates irresponsible or wild courses of policy actions.
(As a side note, the same striving for balance and solidarity within EU countries applies also between EU countries. That is why I feel a sensible, fair deal has ultimately a good chance of being consumated between the Eurogroup and Greece. In this regard, Greece has just today presented a very serious, credible 3-year plan to the European Institutions).
The European conservative political philosophy is far from being the black-or-white or take-it-or-leave-it purist-thinking that U.S. conservative political philosophy has degenerated to. Europe’s moderate form of conservatism is logical given the vast historical cultural differences among eurozone countries. Each individual country government must represent the particular and broad interests of its people by integrating related conservative, liberal, centrist values in a constructive manner.
This dynamic blocks out the purist “either or” politically conservative vs. liberal divisive ideological goverance syndrome America is trapped in. Europe’s multi-party coalitions give an effective voice to the people’s wishes and needs. This is reflected in excellent health care and education systems for everyone; well-managed,decent social protections; up-to-date infrastructure; etc.
Sorry for getting off theme. It’s a subject we, John, and so many others have written extensively about.
I think the European political system is far superior in terms of democracy to the American winner take all two party system. Proportional representation and multi party systems allow smaller parties some representation in Parliament while the American system essentially eliminates small parties. The American system amounts to representation for those who can pay not one person, one vote.
It just seems kind of ridiculous to me that the Greek tragedy keeps going on and on. Couldn’t they have come up with a rational solution many months ago? And if they are so far apart in political outlook, trying to find a compromise would seem futile. Delaying deadlines on and on serves no purpose except to prolong the agony and make the final denouement a train wreck. These parties should have developed a Plan A, Plan B and Plan C long ago.
Frank and John,
Over 90% of an iceberg is underwater and out of sight. Similarly much of the difficulties between the Germans and the Greeks were disguised by politically correct norms, as also happens in America on many important issues most notably race.
The marvel is that European leaders found a way through this dangerous minefield without blowing up the entire continent, as happened twice in the last century. Personally I like to think it was because the participating countries were all democracies, unlike last century.
But I would single out Greek Prime Minister Alexis Tsipras as the “man of the match” to use a soccer metaphor. I think history will recognize his contribution to the science of politics. He has set a new standard and taught the world a valuable lesson on how democracy can work.
He saved his country from Armageddon and saved Europe from the folly of its own hubris. Thank you Alexis.
John,
In answer to your question why the process has taken so long, I would first draw attention to my paper where I noted that EU procedures are poorly written for smoothly controlling such a major default involving bankruptcy and possible exit of a eurozone member.
Yesterday, in a long interview published in a leading Dutch newspaper, Donald Tusk, President of the EU, had following to say which I translated. He gets a bit to your question but EU procedures for anticipating and handling such default/insolvency problems need to be greatly improved.
______________________________________________________________________
Interviewer: Have the Greek Negotiating Partners Made Mistakes?
“Everyone shares a part of the blame and responsibility for what has happened. It is not black-white, with heroes and bad fellows. I certainly think that from the beginning harder limits or timelines should have been set. The playing field was too elastic. From that the Greeks could quickly conclude that continued negotiations made sense. In my opinion, they saw that wrongly, but I can understand that misconception.”
Interviewer: You are criticized for getting involved too late with the issue.
I don’t accept blame games. The rules and procedures for European agreements, which I highly value, say that the Eurogroup (the Ministers of Finance) first examines all the details of support programs. In my view, the Finance Ministers must be given the maximum room and time necessary.
In effect what happened was that after the EU final take-it-or-leave-it proposal was sent, Greece took its time answering. They seemed to indicate acceptance and then suddenly rejected the EU proposal. Tusk then gave the hard message last Tuesday that without reforms, it’s Grexit and set coming Sunday as an absolute deadline. Then came the referendum.
Today Greece submitted a revised serious 3-year plan for euro 50 billion that adopts most of the required austerity and reform demands … but spread over 3 years and including a sharp increase in support funds to euro 50 billion.
On first glance, the plan makes sense to me. But some distrust of Greece’s ability and/or intentions to execute the 3-year plan still lingers. The Eurogroup of Finance Ministers are carefully checking all the calculations. I hope there are no surprises.
That seems like another diversion. A three year plan? Can these guys even keep to a one day plan? We go round and round, but I guess that’s better than Armageddon.
Yesterday, discussions with the Finance Ministers were acrimonious and without progress on Greek proposals. According to one eurozone official, there’s a general feeling Greece’s 3-year plan proposals are “too little , too late,” and as such, more proof of the government’s committment to follow through is required. This means laying out concrete steps and how proposals are going to translate into legislative actions.
There remains a trust deficit over the sustainability of Greece’s proposals given much higher (euro 53.5 and likely 89 billion) EU support funds being requested and debt relief which has not yet been formally broached by eurozone members. However, Donald Tusk, EU president, has said a realistic proposal from Athens needs to be matched by a realistic proposal from creditors on debt sustainability to create a win-win situation.
Should no deal be forthcoming, the German government has made preparation to negotiate a “temporary” 5-year euro exit in which Greece would receive humanitarian aid and assistance while it makes the transition.
A Finance Ministry plan backed by Angela Merkel sets two options for Greece: either the government submits to drastic options such as placing euro 50 billion of its assets in a trust fund to pay off its debts, and has Brussels monitor its reforms and financial administration, or agree to a “time-out” solution where Greece would leave the euro for at least 5 years.
Of course, external monitoring of Greek government’s reform administration will not go down well with Athens. (See: “Germans Tout Plans for 5-Year Temporary Grexit After Europeans Warn Reforms Are “Too Little, Too Late,” by Meheen Khan, July 11, 2015 – Telegraph
As mentioned, this 3rd bailout proposal comes at a much higher price of euro 53.5 billion plus an added euro 25 billion needed to recapitalize the banks according to recent Wall Street report … bringing total added emergency support to euro 89 billion.
Germany and Finland seem to be saying Greece’s new austerity measures will be insufficient at sharply higher EU support price. Thus, a much improved sustainable solution is needed. But both countries say this while omitting mention of any commitment to offer Greece real debt relief. Without debt relief in some form, any solution is a foregone lose-lose situation.
On this Sunday, the eurozone Finance Ministers have come out of their meetings yesterday and today with the request that Greece must sell off more of its assets amounting to euro 50 billion to be placed in a trust fund to pay off debts. Perhaps then a No Exit deal can be made.
Acceptance of a restructuring of Greece debt at a low interest rate is still not evident. This is remotely possible if it’s decided the Greek plan is clearly sustainable and will ensure financial stability to repay debts and room to reactivate economy with sale of certain assets.
Therefore, today’s meeting of top EU leaders for a final decision on a no Grexit or Grexit course has been cancelled and rescheduled for Wednesday.
Paul Krugman op-ed in July 12 NYT: “Killing the European Project” includes a link to the four page Eurogroup list of demands which he characterizes as madness, stating that the trending hashtag ThisIsACoup is exactly right …
Yesterday, the Eurogroup and top EU leaders came to a final position embracing full support to continuing the money flows to Greece, including immediate need for “bridge funds.”
This comes with conditions of NO compromise on original austerity and reform measures, and unfortunately NO debt relief. Instead, a major new, tough, some would say humiliating condition – motivated by an explosion in Greece’s support need to over euro 80 billion; its severe economic relapse; its loss of trust over the referendum episode – calls for Greece to put certain public assets in a trust fund for eventual sale to provide euro 50 billion in funds to pay off its debts (assuming this is feasible without creating a fire sale)
Unless Greece accepts this final plan coming Wednesday, it’s Grexit … with ever more devastating economic pain for the Greek people, if that’s possible.
Whether this means the EU Project founded on values of solidarity and social-democratic processes has been subjugated to the rules of financial technocracy fostering an underhanded financial slavery for weak EU nations, I’ll leave to the Paul Krugmans to argue. Time will tell. In the meanwhile, Spain, Portgugal and Ireland in the main don’t seem to share this EU democratic degeneration scenario.
Practically speaking, most eurozone members are saying “no more discussions.” We do not want to be part of an endless cycle of paying for Greek pensions, early retirement, tax evasion, and corrupt governance founded on cronyism rather than meritocracy.
Whether the EU newly adjusted plan is sustainable and will give Greece adequate room to meet debt payments and economically recover, I’m still not sure – especially given Greece’s HUGE debt and DEEP state of insolvency, described above in my and John’s May papers. Real debt relief should also be forthcoming, for example, by extending debt payments up to 2050 at low interest rates. Apparently, a ” debt haircut” for the ECB is not legally easy requiring eurozome member approval and is a strict no-can-do IMF policy.
But, on positive side, the Eurogroup Finance Ministers have carefully checked the Greek calculations and are evidently convinced the EU adjusted plan does what it needs to do. This is subject to the important proviso that EU authorities (i.e., the ECB, IMF, EU Commission) can monitor and oversee (for a period undetermined) Greece’s legislative and administrative execution of the plan – without conjuring up invasion of sovereignty obstacles. We shall see.
It’s now up to the Greek parliament to decide No Grexit or Grexit.
Frank, this just amounts to more of the same and no definite solution. It’s just “we’ll keep loaning you money, if you’ll keep promising to pay.” It would be a shame for Greece to have to sell off its national treasures to some corporation just to pay its debts. There comes a time where national pride would reject such a humiliating scenario. Greeks are being turned into debt slaves in accordance with the IMF’s neoliberal principles which they tried to enforce in South America. Why don’t the Greeks exit the euro and set up a public bank? Then they could get their economy moving by printing money and putting people to work instead of suffering a national humiliation at the hands of the IMF and ECB.
Frank,
I would add one more condition, that all Germans be required to take basic lessons in the principles of democracy as a condition of staying in the European Union.
Now that we are reminded of a tendency towards dictatorship in the German mindset, courtesy of Herr Schäuble’s recent autocratic, master-race display, I recommend a German Democratic Youth Movement complete with badges and salutes the Germans seem to have a liking for.
Democracy begins in youth. So does its opposite.
Perhaps German reunification brought more of the old Soviet Union’s ways into the west with communist East Germany than was good for democratic Western Europe. This new east/west hybrid Germany needs watching.
Pat, it’s not just the Germans. It’s the IMF’s neoliberal principles which they’ve tried to enforce all over the world. I think Naomi Klein laid that out pretty well in her book, “The Shock Doctrine.”
John, actually the IMF had very little input in the Eurogroup’s deliberations over Greece. In fact the IMF was firmly on the side of Greece. It published a key report two days before the Greek referendum saying that Greek debt was unsustainable and must be written down. This gave the Germans conniptions who blamed that report for the surprise referendum result.
Yes, the IMF has a strong global neoliberal agenda but it is the reawakening of German arrogance and its willingness to use raw economic power that is worrying many Europeans. Just as the Civil War still has a political presence in America (e.g. racism and the Confederate flag issue) bad memories of World War II are still very much alive in Europe.
Germany dominates the management of the Eurogroup because it benefits most from having a weaker currency than it would otherwise have if it had retained the Deutschmark. It is no coincidence that Germany’s exports took off and have continued to soar ever since the creation of the Euro. That’s because the Euro undervalues German exports. This has created a dangerous trade imbalance in Europe.
Britain’s challenge to German hegemony is the next European crisis. They and many other EU countries have been following the dictatorial behavior of Germany with growing concern.
The situation now is that the Euro has survived but many Europeans are awakened to the age-old German threat. While global neoliberalism is a major factor the bullying came from Germany not from the IMF. The Greek crisis may have done some good in that it has exposed a dangerous situation before it is too late.
We should all be grateful to the Greek people that they did not succumb to German bullying and leave the Euro. They have stayed in the tent in order to point out and hopefully fix serious dysfunction within that tent. The alternative is German dictatorship not just in the Eurozone but throughout Europe.
Pat, thanks for educating me. There are so many facets of this conundrum that it’s hard to fathom them all. I guess Germany has now taken up the banner of the neoliberal agenda. I can’t help thinking that Greece would be better off outside the Eurozone and partnering with Russia, China or Brazil.
John, joining a BRIC trading bloc or linking to one of the BRIC country’s currency, such as Russia or China, would likely bring even more problems than staying with the EU and Euro.
On the positive side everybody in Europe, not just the Greeks, is learning hard lessons from this crisis. Fundamental cracks in the EU edifice have been revealed for all to see. But that does not mean that Europeans want to tear the Union down and go back to narrow nationalism.
The Greek referendum showed how deeply the concept of a United Europe has become embedded in European life. Nobody is running for the exits. New thinking and new alliances are already emerging from this chaos.
I think Europe as a whole will emerge stronger and more united. They all know, especially the young people, that they are stuck with each other.
Germany will likely be the biggest loser because everybody looked up to it only to discover that it was deeply flawed in unexpected ways. It’s like discovering that your Dad isn’t infallible after all.
John,
One person captured the Greek tragedy well:
“If Greece leaves the euro, it will suffer the tortures of the dammed. And if Greece stays in the euro, it will suffer the tortures of the dammed.
Headlines are everywhere about the humiliation of Greece, the triumph of a mighty Germany, and the subversion of European democracy.
Meanwhile, humanitarian and bridge funding is needed, like yesterday. No time for idyllic plans or rational discourse about printing drachmas, establishing a national bank, etc.
In all the headline noise and claptrap, there’s one central fact to bear in on: Greece is BROKE, BANKRUPT, BUST!
More and more people are visiting food banks and even eating out of garbage cans. It’s an immediate, accelerating, terrible human and economic crisis.
Total debt now is euro 315 billion with another 3-year euro 80 billion infusion needed for a whopping euro 400 billion debt by 2018 or euro 350 billion including a public asset sale.
This brings the current Debt/GDP ratio of 175% to around 205% excluding euro 50 billion asset sale or 194% including asset sale. I assume Greece’s GDP increases an average 2.5% per year from euro 180 billion today to euro 195 billion in 2018. Greece now is de facto INSOLVENT at a total debt level of near euro 315 billion.
The Eurogroup seems to think the new plan with no change in length of debt terms is sustainable and provides adequate room for both meeting annual debt payments and reactivating Greece’s economy. But some key questions are,
– How is this possible given that debt is still mushrooming bringing higher debt payments?’
– How is this possible given fact same Troika demand to sell euro 50 billion of public assets in 2nd bailout realized a tiny euro 3.4 billion and fact today’s Greek economy is at a standstill? Any public asset sale will be a fire sale. It’s highly unlikely anything like euro 50 billion will be raised. Are people just fooling themselves?
– How is this possible by raising BTW on businesses?
– Lastly, but most importantly, how is this possible without serious debt relief in some acceptable form?
Until these questions and cash flow figures and explanations for the 3rd bailout plan are made starkly transparent by the Eurogroup, one can only draw the conclusion the new bailout plan is a continuation of a failed policy, i.e., pumping short-term good money into a deep Insolvency and mountain of Debt situation that won’t change much … made worse by continued cost cuts and tax increases.
I conclude this old policy is doomed to failure again without serious debt restructuring with or without a public asset sale, a BTV increase and an extension of the retirement age (which has important cash inflow benefits but far into the future).
Extending debt out to 40 years or 2055 at a 2%-2.5% interest rate provides meaningful long-term debt relief in following ways: (1) Greece’s annual nominal debt service payments will be much lower while its annual GDP cash flows are growing at least 1 or 2%, and (2) the Troika receives euro debt payments further into the future when the euro will be worth much less (i.e., the net present value of the payments received including interest is much less – amounting to a significant debt write off compared to receiving same nominal payments much sooner).
Such questions concerning the new deal, one must assume on good faith have been addressed well. If that’s not so, by 2018 mean cries will be heard again for more emergency funds … and then again … and then again. Everyone wants parties to get it right now for the EU and Greece!
Pat and Frank, Well it’s one thing to want to stay in a United States of Europe, but what’s even more important than debt relief or some kind of plan to pay off debts is the fact that the Greek people are suffering immensely, and there doesn’t seem to be a plan to get them back on their feet, Europe or no Europe. They are suffering the equivalent of a Great Depression, but there is no WPA or CCC or any of the other programs FDR instituted to give relief to the Greek people. The debt problem pales in significance compared to the everyday problem for the Greeks to eat and have a roof over their heads. This very real problem doesn’t seem to be being addressed in any kind of practical way. All the negotiations are on a plane well above the plane of reality most Greeks are living on.
Thank you John for putting this in proper perspective. Greece IS a massive humanitarian situation.
I am extremely disappointed at the reaction of ordinary people here in my native Ireland. They just mouth off the same-old-same-old neoliberal clap trap, that the Greeks have only themselves to blame, that all government is bad, privatization is good, shut up and do what you are told, any dissent is to be scoffed at etc. etc.
The Irish feel that obedience is the best policy. Greece’s suffering is being touted as proof that Ireland did the right thing in bending over for EU “discipline”. I find it all very sickening and look forward to my return to San Diego in November where I won’t have to listen to this slavish talk at least until I return to Ireland again in April.
The interesting thing is that you hear the same slavish talk in Portugal and other smaller countries in Europe. Ireland used to be the champion of small countries in the early days of the European Union. Now that it has ascended the economic ladder it is kicking the ladder away from the Greeks.
This is a measure of how successful the neoliberal agenda has been over the last three decades.
But there is hope. There are stirrings of left-wing parties supporting Greek resistance to austerity for the poor and unfettered greed for the rich.
This is helped by the Eurogroup being exposed as a fraud on democracy. Here are some disturbing facts exposed by Yanis Varoufakis:
When Jeroen Dijsselbloem, the European Council President, tried to issue a communiqué without him, Varoufakis asked could Dijsselbloem exclude a member state. The meeting was briefly halted. After a handful of calls, a lawyer said “the Eurogroup does not exist in law, there is no treaty which has convened this group.”
Varoufakis said, “So, what we have is a non-existent group that has the greatest power to determine the lives of Europeans. It’s not answerable to anyone, given it doesn’t exist in law; no minutes are kept; and it’s confidential. No citizen ever knows what is said within. These are decisions of almost life and death, and no member has to answer to anybody.”
Unfortunately our own Irish Finance Minister, Michael Noonan, daily participates in this dictatorial group. That has to change. And if it wasn’t for Varoufakis we wouldn’t even have known about it. The only question is will change come from the extreme right or from the extreme left. The center is no longer the center. It has been severely discredited.
John, Pat,
I’ve just learned some promising news. Yesterday, the IMF sad that a serious discussion on extending debt payments – but not writing off debt or extending interest-only debt payments – can be entertained once Athens takes concrete actions on promised reforms and austerity.
Confirming what I said above, the IMF also warned that – as result of Greece’s very poor economic development, current bank closings, and the new euro 80 billion loan request (including euro 25 billion for recapitalization of banks) – Greece’s total debt will jump from 175% of GDP to 200% of GDP. It will then slide back to a still high 170% of GDP in 2022 vs. 110% forecast in prior agreement.
Recalling Tsipras’ remark, ‘light at the end of the tunnel’ for Greece may be slowly emerging.
Frank, it seems the real negotiations all along have between the IMF and the EZ. Tsipras merely brought back the result for Greek ratification. There was no Greek “offer”, it was dictated to them by a non-existent entity called the Eurogroup.
It almost doesn’t matter what the numbers are now, they are unworkable in any case. Everything will change over the next few months as Europe and the IMF work to fill the giant holes in the present system. That is all to the good. Now all we have to do is pretend long enough to buy time to fix the machine.
The great achievement is that we have avoided Armageddon.
Pat,
For the very intelligent and communicative man your are, don’t you think there’s blame all around concerning Greece? Of course, we can respectfully differ on who shares most of the blame for the ongoing Greek crises. But ….
I was taken in with your statement: “There are stirrings of left wing parties supporting Greek resistance to austerity for the poor and unfettered greed for the rich.” (But I (as once a Finance Director of Scandinavia) was taken aback by the next sentence) “This is helped by the Eurogroup (eurozone Ministers of Finance) being exposed as a fraud to democracy.” A fraud? Really?
The inclusive ‘neoliberal’ claim it’s all Greece’s fault after a half century of bad management, a culture of corruption and cronyism matches the inclusive ‘neoleftist’ claim it’s all the fault of those cruel, greedy northern Europeans who are fraudulently trashing democracy, imposing austerity and costly debt on an essentially healthy Greece to ‘teach people’ a lesson! Forceful argumentation is uplifting and enlightening when objective, well-reasoned, civil.
Don’t get me wrong, I couldn’t respect and agree more with your thoughts that global giant firms and financial institutions are subverting and controlling our lives and political systems more and more. In a small, but also impressive way, Greece has taken a stance against this ugly reality. Bravo!
But the claptrap mudslinging syndrome gets no one anywhere … the farcical humiliation and distortion of the intentions or integrity of parties – the Troika, representing European taxpayers and the Greek leaders, representing their people – to an extent that common sense, trust, and solidarity lose touch with a common human perspective in resolving a horrendous crisis like the one Greece is trapped in.
Just a thought, as I am certainly vulnerable to using negative characterizations of people’s intentions for dramatic effect.
Pat,
Our two emails crossed. I hadn’t seen your latest before I sent mine.
Frank, as the Aussies say: “no worries mate”.
What prompted me to call the Eurogroup a fraud on democracy was the revelation that “the Eurogroup does not exist in law”.
Every Finance Minister who has ever sat at those meetings, where no minutes are taken, has known that no law or treaty gave them legitimacy. Therefore they all knew they are participating in a fraudulent democratic assembly. It was “pretend democracy”, which has now degenerated into “pretend economics”.
As for Greek corruption, I try to avoid victim blaming. The Greeks themselves know their faults better than anybody. And I am not defending them. The Syriza government has shown a willingness to tackle the tax and corruption problems and should be given room to do so without finger pointing. Every country has its faults, even holy Catholic Ireland.
So, you were a Finance Director in Scandinavia. I am (or once was) a Chartered Accountant in London. That was in the ’60s when it was still a respectable profession. I remember our college professors telling us proudly that the reason London was the financial capital of the world was because of its honest dealing. They urged us not to squander that priceless gift. My generation of accountants didn’t. But oh how that precious crown has slipped since then.
I tried Ireland for a while, first as a CFO and then as a CEO. It was — frustrating. I left and spent most of my life in California. Telling folks there that you were a “Chartered Accountant” sounded quaint and old-world to them. I got into real estate, mostly commercial, where titles mattered less than good economic judgment and administrative ability. I liked that and enjoyed the Southern California lifestyle for nearly 40 years.
But I always remembered what I was taught by the London Brits of the ’60s when honest dealing still had value. Unfortunately in my lifetime I had to watch that honesty slip on both sides of the Atlantic.
I blame Wall Street’s introduction of “securitization” into real estate financing (Prudential was its pioneer) for starting the deluge of greed that has made a Ponzi scheme of the global financial system and is hollowing out the world’s public and private pension systems. Pension funds are now stuffed with securitized “assets” based on fictitious income.
The young Harvard MBA “neolibs” want to privatize and securitize every conceivable income stream, down to public lavatories. Hedge fund derivatives are the inevitable bastard children of all this fraudulent (there’s that word again) securitization.
The difference between Ireland and Greece is that Ireland “got it” while Greece did not. I think Alexis Tsipras is ‘splaining the facts of life to them as we speak. He is telling them that it is all just a game of fake numbers, which the Irish figured out a long time ago. The smart thing is to play along.
As for my use of the “fraud” word, I guess I am old fashioned in that I still use it. But it had real meaning when I studied business and accounting at London University, a long time ago. As part of my accountancy training I even took classes at LSE, London School of Economics, when economics was about the means of production. Now it is about the most creative ways of defrauding each other.
So Frank, no worries mate. I just hope the suffering Greek people survive without too much more financial waterboarding. It is more than a game to them.
Pat,
AMEN to what you say. No worries indeed!
Remarkably and coincidentally, I too had a nine-year experience as a residential developer of multi-family condominium projects while living in Canton, Connecticut in the 80s!
You are forgiven for your overdone verbiage accusing the eurozone Financial Ministers of fraudulent undemocratic intentions and actions in their negotiations with Greece.
Best wishes,
Frank
Frank & John,
Yanis Varoufakis latest piece on Dr. Schäuble’s Plan for Europe in Die Zeit.
http://yanisvaroufakis.eu/2015/07/17/dr-schaubles-plan-for-europe-do-europeans-approve-english-version-of-my-article-in-die-zeit/
He explains the difference between a federation and an ‘alliance of states’.
He says “The euro crisis has expanded this lacuna at the centre of Europe hideously. An informal body, the Eurogroup, that keeps no minutes, abides by no written rules, and is answerable to precisely no one, is running the world’s largest macro-economy, with a Central Bank struggling to stay within vague rules that it creates as it goes along, and no body politic to provide the necessary bedrock of political legitimacy on which fiscal and monetary decisions may rest.”
That is the lacuna at the center of EU politics that must be fixed. It has resulted in the “pretend democracy” I referred to earlier. It horrifies democrats like me but is seized upon by people like Dr. Schäuble. I am glad that it has been exposed.
John, Pat
As I’ve said throughout, Greece MUST receive serious DEBT RELIEF to make the new plan (or any rescue plan, for that matter) sustainable and adequate to regenerate its economy. Otherwise, a well-planned EU fund supported Grexit becomes the least ‘dammed’ course.
As noted previously, the current plan (excluding humanitarian and bridge funds) is more of the same throwing of money into a bottomless pit. It simply doesn’t provide the financial “breathing room” critical to overturn a vicious state of over-indebtedness and to revitalize the Greek economy
BUT, there’s some more positive news. Draghi seems to understand this reality. He has also just come out recognizing the necessity of DEBT RELIEF in the final plan. The Guardian wrote that, ‘the beautiful thing about Dragni’s intervention’ is that it sounds like “the most natural, obvious thing in the world.”
Following were Dragni’s words at Thursday’s press conference:
“It’s uncontroversial that DEBT RELIEF is necessary, and I think nobody has ever disputed that. The issue is what is the best form of debt relief within our framework, within our legal institutional framework. I think we should focus on this point in coming weeks.”
Of course, I must add, “We shall see what happens,” as an appropriate cautionary note.
In 2012, private holders of Greek government bonds (banks, investment funds, insurers) took a huge euro 107 billion write off in exchange for EFSF short-term notes and new Greek bonds at lower interest rates and extended maturities to 11-30 years. The euro 107 billion write off caused the Greek debt level to fall from euro 350 billion to euro 240 billion in March 2012.
Now with a 3rd bailout, the total debt exposure will leap to nearly euro 400 billion. Thus, the 2012-2015 shift in liabilities from European banks to European taxpayers has been astounding. If this sum is restructured over a term of 40 years at an average interest rate of 2.0%, this will provide realistic ‘breathing space’ for bringing the Greek economy back – than the questionable selling of public assets for the pittance net sum of euro 50 billion at fire-sale prices.
Of course, whether there is further debt relief or not, the euro 400 billion must be accompanied with stringent and ECB oversight to protect EU taxpayer contributions. A euro absent appropriate fiscal discipline, transparency, and responsibility is an invitation to recurring unsustainable deficits, free riders, financial manipulation and instability.
It’s obvious there are serious structural deficiencies in how EU authorities deal with eurozone member default situations, posing a danger of catastrophic insolvency. The EU ‘ad hoc manner’ of dealing with bailouts and exit or non-exit, the piecemeal liquidity approach to an excess debt-insolvency crisis of Greece’s scale all form a perfect recipe for financial collapses and chaos. I discussed this problem in my May 18th paper above. (see section: “Where to Go from Here?”).
Detailed eurozone discussions and reviews are in process. Anything can still happen.