Why is Greece turning down the “bailout”

by on November 1, 2011 at 10:02 am in Economics, Political Science | Permalink

Make no mistake about it, the decision to hold a “referendum” is a decision to turn down the deal altogether.  The referendum will never be held.  It is scheduled for January and the current deal, which is not even a worked out deal, won’t be on the table by then.  It’s already not on the table.  The opposition leader is already opposed to the referendum, there are months more of market volatility to come, the other EU powers will get skittish about the deal, how is the conscientious Slovakia supposed to feel, and how many other factors do I need to cite?  And how can the Greeks decide how the referendum will be worded?

This is a way to back out of everything, under the guise of “democracy” and ex post blame the speculators and the rest of Europe.  But why?  Here is one on the mark take on the matter:

A plan be­ing devel­oped to help reduce Greece’s debts — and pre­vent it from becom­ing the first eu­ro-zone country to default on its debts — will fall hard­est on the country’s banks and the national pen­sion system. They would face tens of billions of dollars in losses on invest­ments in Greek govern­ment bonds.

Accord­ing to data from the Eu­ropean Bank­ing Au­thor­ity, major Greek banks hold about $70 billion

in Greek bonds, more than one-fourth of the total held by private investors worldwide. Greece’s national pen­sion system has about $30 billion at risk, accord­ing to local bank and corporate of­ficials.

Even as Greece ben­efits from emergency debt re­lief included in the new bailout plan approved by Eu­ropean leaders last week, the Greek govern­ment will have to borrow even more mon­ey to shore up its financial system and replen­ish the pen­sion fund. Greek bankers say they doubt they could come up with the mon­ey on their own.

In other words, the deal would make the country totally bankrupt.  Greek voters already feel blackmailed.  A good rule of thumb is that if a very unpopular government holds a referendum on something — anything — that government will lose.  Seriously now, which way do you expect the Greek bus drivers to vote?

Did I mention that the Italian ten-year yield was up to 6.31%?

KLO November 1, 2011 at 10:43 am

It seems pretty simple to me. The bailout package should be re-shaped as proposal fit for a referendum. Under the reformulated proposal, Greeks would have a choice to accept a bailout plan or leave the Eurozone. A vote against the bailout would be a vote for leaving the Eurozone and vice versa.

prior_approval November 1, 2011 at 11:07 am

‘In other words, the deal would make the country totally bankrupt.’

Greece is already totally bankrupt. The only point of the deal is to avoid that fact from becoming too public.

But the Greeks are welcome to turn down German money (with German terms) on whatever Greek terms they desire.

It won’t change the fact that bankrupt Greece was a massive case of fraud and tax evasion.

Nor that Greeks prefer not paying taxes more than they do living in a country that is not bankrupt – here is a little quote from 2010 –
‘As demonstrated in my recent book with Carmen Reinhart This Time is Different: Eight Centuries of Financial Folly , Greece has been in default roughly one out of every two years since it first gained independence in the nineteenth century. Loss of credibility, if it comes, can bite hard and fast. Indeed, the historical evidence slams you over the head with the fact that, whereas government debt can drift upward inexorably for years, the end usually comes quite suddenly.’ – Kenneth Rogoff

JWatts November 1, 2011 at 11:41 am

That’s an interesting quote.

Mouras November 2, 2011 at 4:26 am

The problem with what you’re saying is that is this crisis Greece is not alone. Now you can go on and comment about the bad Greeks, if that satisfies you.

Denise November 2, 2011 at 6:59 am

You are right Mouras. The Greeks are not alone. However not being alone does not change the situation for Greece, they are still bankrupt. The only one who has a changing situation is Germany and the other countries who are forced to help out… And they are as reluctant to give the aid as the Greek people are of accepting it….

Corey November 1, 2011 at 11:09 am

This whole thing is the very definition of a slow motion train-wreck. Fascinating, yet horrifying to observe. Was anyone predicting this referendum Papandreau just produced? Seems like everyone was caught off guard by it.

Dredd November 1, 2011 at 11:13 am

If you recall that “chaos theory” is now widely used, even in politics and economics, it is at once clear that some things may not appear to be in order absent the opinion of one schooled in chaos theory.

KevinH November 1, 2011 at 11:15 am

isn’t the alternative total default rather than partial default? This is what I’ve never understood about the whole Greek debacle. Do the Greek people have a good understand of what happens without the rest of Europe’s help?

KLO November 1, 2011 at 11:18 am

They do not. Large majorities are against the bailout and for remaining in the Eurozone. Until it becomes clear to them that the two are mutually incompatible and some tough decision must be made, they will not get it. The referendum can perhaps provide the necessary clarity that the situation has lacked for most Greeks.

msgkings November 1, 2011 at 12:29 pm

Democracy fail. In the birthplace of democracy.

Hasdrubal November 1, 2011 at 2:45 pm

Well, they did execute Socrates, after all. Sort of history repeating itself.

David Wright November 1, 2011 at 3:12 pm

Default and staying in the euro are not mutually incompatible.

NAME REDACTED November 1, 2011 at 5:56 pm

+1

Marcos November 1, 2011 at 12:40 pm

I don’t know if the greek people understand what happens on a total default. Now, do you understand what happens when your debt explodes because of interest and you offer everything you have to secure that debt when it wasn’t backed with anything at the start?

The answer is, you lose everything and still face a total default, while if you didn’t accept the offer you’d face a default but keep what you already have. For whatever reason, the greek are actualy going in the best possible course.

Lord November 1, 2011 at 11:16 am

Isn’t the question why is the EU turning it down? And they have turned it down by making it so onerous that Greece leaves. They want the result but to be able to deny blame, so it is best if they left voluntarily. The question is then how many others will be invited to leave. Italy isn’t looking that good either.

Finance Addict November 1, 2011 at 11:30 am

By the EU’s own admission (i.e. the leaked Troika document of 2 weeks ago) the solution imposed thus far is not working. A referendum would be a chance for Greeks to make their voices heard, above those of the politicians and the technocrats. Reminds one of the Occupy Wall Street chant:

Show me what democracy looks like!
This is what democracy loos like!

http://bit.ly/uBk7Pa

JWatts November 1, 2011 at 11:43 am

I thought we had already heard the Greek voice. Isn’t the Greek position pretty much, we want nice stuff, but we don’t want to pay for it?

Too easy November 1, 2011 at 12:40 pm

Another OWS parallel?

xysmith November 1, 2011 at 2:26 pm

I always scratch my head when I hear a handful of protestors telling a much larger crowd that the protestors’ position must be adopted and if it’s not they will prevent the larger crowd from proceeding and then they tell the world that that is “what democracy looks like.” I scratch my head.

thehova83 November 1, 2011 at 11:32 am

Will this be bad timing for BHO?

B.B. November 1, 2011 at 11:41 am

The Greek PM is clever. He is facing demonstrations and riots in the streets. The opposition party is being criticial without presenting an alternative. The referendum will force their hand. While polls show the Greeks don’t like the austerity or the bailout, they continue to give overwhelming support for membership in the EU and the euro.

So the PM is saying, “Man up and make a decision; stop whining.” Vote for the bailout and tough it out. Or vote against it, suffer a hard disorderly default, kiss your banks goodbye, and leave the EU. In poker terms, he is calling a bluff and saying show me your cards.

As for the rest of the EU, the threat of rejection may get the other governments to offer last-minute better terms to bribe the voters into voting yes.

If the PM loses, he resigns, Greece collapses, and he gets to both blame his opposition and dump the whole mess into the laps of the opposition. You think you can do better, show me the money!

Pshrnk November 1, 2011 at 11:55 am

Exactly

londenio November 1, 2011 at 12:00 pm

+1

Nathan November 1, 2011 at 3:17 pm

‘Clever’ maybe, but only in terms of his own legacy.
If I understand the situation correctly it seems likely that there will be acrimony either way, but washing his hands of the decision seems like weak leadership and the resulting turmoil caused to neighbour states by the delay is hardly going to help friendships inevitably needed to get them through on the other side of this.

Ed November 1, 2011 at 5:17 pm

Well what else do you do when your electorate has it’s head up it’s own arse?

Norm November 1, 2011 at 7:13 pm

Ed, Could you draw us a picture of this?

Snorri Godhi November 2, 2011 at 5:23 am

Yes, that’s what I think too; with the qualification that I am still unconvinced that a total default _necessarily_ implies leaving the euro: I do not believe that competitive devaluation is going to do Greece any good (ergo the Greeks have no incentive to leave voluntarily); and afaik there is no mechanism by which the rest of the eurozone can kick Greece out.
A total default would still bring lots of pain to Greece, bu at this point it’s a matter of choosing the lesser evil and the Greek people might as well make that choice themselves.

TheophileEscargot November 1, 2011 at 11:55 am

I’m a bit skeptical of people who are instantly and absolutely certain about the True Motivations behind an event, but were not able to predict that event.

msgkings November 1, 2011 at 12:30 pm

Bingo.

prior_approval November 1, 2011 at 11:58 am

Well, the sort of thing that Greece is distracting Americans from -
‘The Chicago Mercantile Exchange issued an email circular this morning (I received mine at 8:39 am MDT) stating that all MF Global positions were limited to LIQUIDATION ONLY and all MF employees and brokers and traders were banned from the floor of the exchange.’

Fraud and manipulation – it isn’t just in Greece, and the chickens are coming home to roost (ironically, I have read that the Obama re-election campaign funds are held by MF Global – unintended damage, or a reason for all that focus on eurozone problems very close to home?).

A primary NY Fed dealer is gone in the blink of an eye, apparently – but remember, what the Greeks are doing is of the utmost central importance, followed by the NBA.

The Anti-Gnostic November 1, 2011 at 12:37 pm

Must be nice, getting paid a ton of simoleons to make upside-down bets with other people’s money.

Cliff November 1, 2011 at 12:50 pm

Are you implying there is some reason to be concerned about the loss of MF global? Didn’t they go bankrupt because of Greece?

txrider November 1, 2011 at 1:08 pm

They took huge losses on Italian Gov debt, but more concerning (as prior_approval points out), there seems to be evidence that they misappropriated client funds in an effort to salvage something from their trading losses. This is tantamount to embezzlement.

This will make it more difficult to unwind MF, (hence Lehman like bankruptcy rather than Bear like dissolution). This has liquidity implications as some hedgies will have money tied up in this. Plus one must wonder if a Primary Dealer headed by an ex-Goldmanite and former Democratic governor is commingling funds, what about other brokers?

Jim Glass November 1, 2011 at 9:08 pm

Corzine, it is reported today, bet heavily long on the PIIGS leveraged 40-1. What’s happened in Greece the last few days did not help him.

As to allegations that MFG used client funds to try and bail itself out … maybe John should’ve stayed in New Jersey where this kind of financial acumen is par for the course,

Steve C. November 1, 2011 at 12:03 pm

BB is right, if a bit cynical. Give the public a voice in what is a critical decision.

My own opinion is that the Europeans are going to wind up with a central bank that creates Euros. How they get there is what’s unknown.

prior_approval November 1, 2011 at 12:24 pm

Whoa – the MF Global bankruptcy may have a more clear connection to our hosts than it appeared at first – TIAA-CREF (which years ago was the pension fund for GMU personnel) and Fidelity (which also handles that pension sort of deal for GMU personnel) look to be out some money. Well, the Greeks may not want to deal with a eurozone bankruptcy avoidance scheme wiping out their pensions, but to the (I’m sure extremely minor) extent that TIAA-CREF and Fidelity take a hit, the eurozone crisis has just hit our hosts’ potential pension benefits.

Steven Kopits November 1, 2011 at 12:48 pm

I was critical of successive Hungarian governments for being unable to get their act together to meet the criteria for Eurozone membership. It turns out to have been a blessing in disguise. Given Hungary’s reality-challenged governance, the country would have gone down with Greece had it adopted the Euro.

Pat MacAuley November 1, 2011 at 12:55 pm

The referendum is one of the few smart decisions in this sordid course of events. Public opinion polls have shown that Greeks are 60+ percent opposed to the bailout terms, so why is the government trying to cram this down their throats in the “Cradle of Democracy”. If the bailout had been approved by their parliment, the voters would have eventually elected a pro-default majority.

The Greeks will have to suffer one way or the other to resolve their economic mess. A public referendum is the fairest way for the Greeks to choose which painful course they will take.

Sam November 1, 2011 at 1:52 pm

Seems like a game of chicken to me… Papandreou knows that France and Germany won’t let their banks go bust due to a Greek default. This gives him some leverage in negotiations, Frau Merkel can’t just tell him what to do now. Any plan has to be approved by Papandreou or he can refuse to make a good case for it to the Greek people. That’s my theory for what it’s worth… This is some serious brinkmanship, but it risks unraveling the EU….

Andrew Edwards November 1, 2011 at 5:38 pm

This. The whole thing in Europe, in my view, is and has always been about who would hold the bag at the end of the day – the ECB, the large country banks, the large country governments, the EU governments together, and the Greek, Italian, and Spanish people have so some how sort out how some combination of them will fund a $1T liability.

Since there is no solid decision mechanism to dole this one out, we should have expected it to descend in to a high-stakes game of poker.

But the situation should still get resolved. The consequences of not sorting it out are too dire.

dearieme November 1, 2011 at 1:53 pm

Maybe they should just invade Sicily again?

Derek Lowe November 1, 2011 at 2:33 pm

Why not – it’ll probably work out about as well as it did last time. Sicily’s relative value seems to have declined over the years, though – Syracuse isn’t what it was. . .

Jeffrey Deutsch November 1, 2011 at 5:27 pm

Referring to “one on the mark take on the matter” – Pun intended?

Scoop November 1, 2011 at 6:02 pm

There’s a tendency here to think that the Germans are “learning their lesson,” but history suggests that however much foreign investors lose now, they will, within five years, be making unsecured loans to Greece again at far lower interest premiums than the very real default risk will justify. Can anyone point me to something, written in layman’s terms, about why creditors simply refuse to write off a nation and never lend to it again, no matter how many times it defaults?

john haskell November 2, 2011 at 9:40 am

What should be the interest rate for Russia today, with debt/GDP of 7% and oil at $110? Lock them out of the market because they selectively defaulted in ’98? Fine, the sovereign will just borrow domestically. who cares

fledermaus November 1, 2011 at 7:38 pm

” Can anyone point me to something, written in layman’s terms, about why creditors simply refuse to write off a nation and never lend to it again, no matter how many times it defaults”

Because there’s not that many places to invest $10B in one shot and get 4-5%?

Also credit default swaps

Daremo November 2, 2011 at 7:41 am

So if they refuse the deal, what then happens to Greece? Furthermore, what will then happen in Italy?

Vassilis Serafimakis November 2, 2011 at 8:17 am

It is unfortunate for Europe that Greece is the first country to present itself at the cashier’s desk for help. Greece is indeed a severely corrupt country, with significant defects in its civil administration system, including tax collection, as well as with many other social illnesses. But all these ills are not the cause for Greece now being a bankrupt country! They are simply what brought Greece first in line in the bankruptsy queue. Every country in the Eurozone that has an external account deficit will follow. But, for example, Ireland and Spain are not as corrupt or in any wayas deficient as Greece. Yet they are in the middle of a crisis as well – as is Italy and, in a short while, France. So, what is going on? Perhaps the core cause for the Euro’s troubles is something systemic, something inherent, irrespective of Greece’s Bad-Boy behavior.

A house apartment is on fire. Everyone says the tenant set the fire. But perhaps it’s the building’s fault and not the tenant’s.

The Anti-Gnostic November 2, 2011 at 9:05 am

Perhaps the core cause for the Euro’s troubles is something systemic, something inherent, irrespective of Greece’s Bad-Boy behavior.

A house apartment is on fire. Everyone says the tenant set the fire. But perhaps it’s the building’s fault and not the tenant’s.

It’s called social democracy, and it is following socialism into history’s trashbin.

Mads Bro November 2, 2011 at 9:04 am

Im tired reading about Greece. They do not belong in EU.

George November 2, 2011 at 11:38 am

The amount of vitriol and close-mindedness I’ve been seeing on various comment boards directed at Greeks has reached a ridiculous level. For all those who wrongly assume that Greeks are lazy and like to live off stuff and not pay for it, a few things:

A- where are your sources that most Greeks do not pay taxes? The wealthy are the worst tax evaders, and it is exactly these people that those protesting want to see pay up. In other words, those making under 1,000 euros per month do not want to see their taxes go up further while the wealthy continue to get away with it- no, not class warfare, just fair.
B- Check Eurostat and you will see Greeks work the most hours per week in the EU. You will also see that Greeks take less vacation days and have less holidays than the average German
C- The average Greek’s household debt is less than that of the average German
D- there is a strong distrust in both authority and European powers- this stems from the fact that the Greeks won the first Allied victory against the Axis, yet there was no thanks- instead, there was continued meddling in the Greek political scene for years after, which had a profound affect on Greek society.

Perhaps some of you here can educate yourselves instead of resorting to the continued baseless accusations and unsupported stereotypes. It’s getting old, and you just look uneducated.

The bottom line is the fact that it is idiotic that the EU allowed a nation of 11 million to affect global markets to this degree. It is a joint failure of Europe and Greece (I am not trying to absolve Greeks of our share of the blame in this, but the vitriol directed at us has reached an insane point).

George November 2, 2011 at 1:59 pm

Just to clarify further- Greek household debt as a % of GDP is lower than German household debt as a % of GDP

Floccina November 2, 2011 at 11:58 am

Europe needs free banking NOW!

Dena November 2, 2011 at 2:04 pm

I’m confused about this. I thought it was the banks that were in trouble, not Greece itself. Since when did taxpayers become responsible for bad judgment calls of bankers? Aren’t banks supposed to do the “due diligence” and make sure their loans can be repaid before lending money? It seems to me that the banks got greedy and made loans they should NOT have and now want taxpayers to pay for their losses. Not fair.. this is not how democracy or capitalism is supposed to work.

Chewbacca November 2, 2011 at 3:48 pm

Greece can go back to the dracma and still be a part of the Schengen space!
That would allow a restructuring of it’s finances at a suitable pace,
without forfeiting sovereignty or pawning 2 generations.

Simultaneously it would send a very large F#*$ you to the “central block” profiteers,

The choice is not between black or white, there are tones of gray in the middle.
Somehow I feel that part will be left out of the referendum…

Dr. Goose November 2, 2011 at 11:42 pm

“Monsieur Président,” said Premier Hu,
“If the Greeks carry on as they do,
We would scarcely esteem
Your stability scheme,
Or the chance of financing it, too.”

Dougie B November 4, 2011 at 4:04 am

The situation in Greece is by far one of the biggest potential threats to international economic stability. Since Greece is tied directly to the euro the resulting economic collapse has a ripple effect on Europe, as well as the United States. Greece has very limited options concerning the bailout, either face a direct bankruptcy which is sure to damage other European nations economic prosperity in a recovering economy, or to ease into a default on loans. Either way this issue is not going to end well for Greece. The fiscal system which masked the rotten internal functions that were steadily destroying the Greek state is in inescapable turmoil.
When looking at Greece’s two plausible paths, offered by the above post, it can take Greece can either make the rest of Europe in part suffer so it can stay afloat for a while longer, or it can nobly take the full hit of the economic collapse. The Greek Prime Minister has an understanding that this is the scenario since he has called for a referendum in a couple months to be held so he would not have to make the decision himself. The choice well believed by the people will be to reject the bailout money and attempt to reconstruct the fiscal system outside the Eurozone, and establish a debased currency system which could maintain basic economic functions.
If Greece were to hold onto the bailout money, as the above post does bring up, bankruptcy is inevitable. Greece will attempt to borrow in order to repay pensions it owes, but then it will run out of money entirely due to the lack of currency it can borrow due to the diminished credit rating of the country. When Greece were to run out of the money it could borrow it would internally diminish financially, and every nation involved with the Eurozone would get hit by a heavy blow. The economies of stronger states like Germany would be scrabbling to recover its losses which would be a part of the bailout to Greece. With such a hefty hit it would damage the GDP potential of Germany, and bring in a loss in investments to the German state since investors would be wary of investing in any Eurozone country affected by the economic collapse in Greece. Other nations such as the weak Irish economy would be more in danger of a Greek bankruptcy, since the nation could be hit by losses in GDP, rises in unemployment, and a return to recession which could produce another state in danger of bankruptcy.
Greece did catch a slight break when the International Monetary Fund offered a reduction of debt it will be owed by the government in Athens, and spanned it out from the Greek GDP until 2020. With this kind of offer on the table the Greek people are going to be in for a long ride with fiscal hardships ahead, which can only be remedied by Greece abandoning the Eurozone for the sake of its people, and for the European community.
The Greek people will more than likely suffer a loss in their pensions, raises in taxes, increased unemployment, increased poverty, decreased interest rates, and a good deal of businesses would shut down. Each of these would seem highly plausible since the government would need to attempt to find a way to balance out the gross inequity of the debt, governmental income, and national budget. The rise in taxes would be a governmental action to bring in more money to try and repay some of the skeleton of the pensions, but that would damage industry. By damaging the industry, jobs will be lost thus rising unemployment, and also poverty rates. The interest rates would have to drop to very low levels in order to even have a chance of encouraging any kind of investment in industry, which would promote recovery.
If Greece were to wish to maintain a stable fiscal system within the country it only has one real option. Greece for the sake of the Eurozone is going to need to leave the EU and reestablish a debased currency in the state in hopes of IMF aid, and assistance from its European neighbors who would then be less vulnerable to economic danger. If Greece doesn’t leave the Eurozone everyone even affiliated with the Greek market system will be affected further. By saying that the Eurozone would be hit by further vulnerability it would imply that the entire world could be in danger. The international economy is intermingled with nations relying on each other more heavily than in previous times, if one nation is in danger of bankruptcy the effects will be felt in a ripple effect spanning the globe. The nations to be hit first will be the Eurozone nations due to the direct contact with relief/ bailout aid to Greece. Following the Eurozone would likely be the rest of Europe, as well as the US, China, and other major exporters due to the lack of buying potential from importing nations. From there the production in those major exporting countries would be scaled back, and the excess product the nations sell would also be reduced. Countries which rely on imports, specifically more developing nations, would then have been affected due to the scaling back of production.

Andreas Moser November 6, 2011 at 2:57 pm

My only confidence vote for Greece concerns Souvlaki, Moussaka and Gyros.

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