Is Greece really going to leave the eurozone?

by on February 17, 2015 at 8:47 am in Current Affairs, Economics, Political Science, Uncategorized | Permalink

No one knows.  Nor should you react too much to the latest headline or tweet.  The further apart the various parties appear to be, the more the whip of concession gets cracking.  The closer to an agreement they may seem, the greater the incentive to play hardball and demand further concessions.  So short-run news reports are hard to interpret, don’t obsess over them.  A given swing very often implies a counter-swing in the opposite direction, even if the latter has not yet made a headline.  So the direction of the last-reported swing just doesn’t contain that much information.

We won’t know until the proverbial “fat lady” sings, namely deposits leave the country at a critical pace, or not, or the ECB cuts off Emergency Liquidity Assistance, or not.

So why, then, do I believe that Greece will leave the eurozone?

First, I do not see that (most) extant commentary is properly accounting for the very recent fiscal collapse of the Greek economy.  I am not sure there is any fix, and the expression “failed state” comes to mind.  The momentum here does not seem to be positive.

Second, I do not assume Syriza — whom I have called The Not Very Serious People — have a coherent bargaining strategy at all.  I take this point from a broader reading of history, where I see that quite often leaders in critical positions simply do not know what they are doing.  By no means is that always the case, but it is more often the case than narrative-imposing journalism encourages us to perceive.

Third, I believe we as observers tend to overestimate the permanence of trends/state of affairs which have lasted ten to fifteen years or more.  That included the Great Moderation and that also includes Greece in the eurozone.  In a broader historical perspective, the arrangement simply doesn’t make sense to me, as there is more than one Europe.  So I am willing to predict its end.  And the next year seems like a quite possible time for that end to come about.

Fourth, I still don’t think enough commentators are stressing how much the creditor eurozone countries see this as a nested game, where concessions to Greece would have to imply larger concessions elsewhere and embolden Podemos in Spain.

Fifth, it is hard to see Greece being in truly safe territory for the next few years to come, even if a handy bargain is dispatched over the next day or two.

I gladly admit all of those reasons are speculative rather than firm or based in concrete information.  But that is what I think and why.  I don’t consider this kind of prediction to be very scientific, but still we proceed by engaging in discourse and, next time around, seeing what we got wrong the time before.

1 February 17, 2015 at 9:01 am

In other news, inflation is Greece is at -2.8%.

2 AB February 17, 2015 at 9:08 am

Accross the continent we have become used to governing parties who make a lot of populist anti-EU noise before ‘conceding’ so they can then blame unpopular but (as they see it) necessary policies on Brussels/Berlin. Might the case here be the opposite? Many syrizans are marxists who would like Greece to leave the “neoliberal” EU, indeed would be quite happy to see the whole project wrecked if possible, but they must be seen to have fought tooth and nail to stay in.

As Tyler would say, speculative .

3 raem February 17, 2015 at 5:05 pm

Why should the taxpayers of the rest of the Eurozone, in particular German taxpayers, support a country that has just elected a communist government? On what grounds do communist governments, who tend to be experts in wealth destruction, deserve strong support from other countries? German taxpayers are still paying a “solidarity tribute”, i.e. a tax that was introduced when the bankrupt East was merged with the prosperous West. What is the assurance that support for Greece will be shorter lived? This folly must come to an end.

4 Jan February 17, 2015 at 7:00 pm

Oh, they don’t have to. They can kick the Greeks out if they don’t like it.

5 Andrew M February 17, 2015 at 9:09 am

Greece’s debt negotiations remind me of last week’s post on novels and sports:

“In any given chapter, there is a chance of a plot twist that reverses the reader’s beliefs. As the book continues along, plot twists become less likely but more dramatic.”

6 Hampton February 17, 2015 at 10:12 am

The basic plot is very simple with only two possible final chapters — Greece either pays back the money it borrowed or it does not.

German finance minister Wolfgang Schaeuble recently stated this obvious simplicity:
“The problem is that Greece has lived beyond its means for a long time and that nobody wants to give Greece money any more…”.

The probable final chapter is massive loan default by Greece. Hardly unprecedented. Northern EU taxpayers will be forced to absorb the loss; Greek citizens will suffer significant standard of living decline.
Foolish “leaders in critical positions” who “simply do not know what they are doing” will comfortably survive, perhaps with different job titles.

The separate EU plot likewise has but two ultimate chapters possible — EU survives or does not. Either way it’s only a minor footnote in world history.

7 Phill February 17, 2015 at 12:30 pm

I am fascinated with the twists and turns in these narratives.

To claim that Greece is solely responsible and a hopeless profligate spender is a kind of willful ahistoricism; sure, they’re wankers but homo economicus is an animal driven by incentives, and surely it’s not their fault they were given so much cheap credit. It takes two to tango.

(Not to mention that there’s a strong argument to be made that this whole mess could’ve been avoided had the Germans in fact guaranteed the sovereign debt, as everyone was assuming was going to happen. It’s a funny thing that the mere guarantee would have probably meant they wouldn’t have to exercise it, by keeping interest rates at a sustainable level and thus avoiding bailouts altogether)

And post 2010, the story isn’t so much about Greek incompetence as it is about the destruction of their economy. I believe I recall reading that most of their debt load today stems from their GDP taking a massive dive post austerity. So, what’s the point in harping about damned Greeks when the bitter pill they were forced to swallow is what got them to where they stand today?

I like Varoufakis’ take, biased as I am; this story is primarily about a bailout to northern european banking institutions. Instead of focussing on the morality play, why don’t we restructure things so that everyone can move on?

8 Anon. February 17, 2015 at 12:36 pm

>surely it’s not their fault they were given so much cheap credit

Well, except for the part where they systematically falsified their statistics to make their economy appear healthy.

9 Dan Weber February 17, 2015 at 1:05 pm

But surely they are motivated by incentives. If they were incentivized to falsify their financial statements, is that really their fault?

10 Phill February 17, 2015 at 2:01 pm

>Well, except for the part where they systematically falsified their statistics to make their economy appear healthy.

Valid point, but do recall that similar spreads were offered to less ignoble governments (Spain, Ireland, etc).

The key point here is that bond rates fell towards German levels since with the euro, having been pegged on the deutschemark, default risks were assumed to be backstopped by the largest economy. The music only stopped when that turned out to be faulty assumption.

There’s even a convincing argument to be made that German economic policies, combined with the loss of independent monetary policy, pushed inflation towards periphery countries. If you’re reliant on exports and push up your domestic savings rate, something’s gotta give – and funding the consumption boom in the periphery turned out to be the result.

This is not to say “Oooh, Those Evil Germans”, but rather that explanatory narratives are disingenuously myopic if we pretend this all began in 2008 and not 1999.

So – the Greeks have debts to pay. But it is absurd that the conditions be laid out in starkly punitive terms.

11 MPH February 17, 2015 at 9:29 pm

“If they were incentivized to falsify their financial statements, is that really their fault?”

Dan Weber – Serious question?

12 bmcburney February 17, 2015 at 3:44 pm

“why don’t we restructure things so that everyone can move on?”

This is what exactly what was done to “solve” the previous Grexit crisis but for this solution to be plausible Greece must bring its primary deficit into balance and improve the competitiveness of the Greek economy. Although the previous government had achieved a near balance of the primary deficit, they made no progress on the other. At that point, Syriza was elected on a platform of re-hiring civil servants, increasing goverment pensions and drastically increasing the minimum wage. Although none of those things has occurred yet, the primary deficit is, once again, out of control and Syriza refuses to consider any change in its election promises.

And this has very little to do with “northern european banking intitutions” unless you mean the ECB and IMF. Private european banks were on the hook during the last Greek crisis, they are out of it now.

13 ted February 17, 2015 at 9:25 am

The current marxist government barely won the elections. They don’t have the popular support for leaving the eurozone (as far as I know ~70% of Greeks still want the euro), and leaving the euro anyway would be incredibly painful.

It would necessarily bring about a shock devaluation far in excess of what they’ve experienced so far. Remember that even after the 3rd bailout, public sector employees still had their 13th and 14th wage, and the bi-annual bonus was capped at 1000 euro. Insane, I know, for a bankrupt country, but then the harder the fall will be, when they’ll be paid in worthless drachmas.

At the end of the day there’s no way Syriza can afford to implement anything of substance from their populist program. A bankrupt country cannot possibly increase pensions when Germany refuses to pay. Socialism is wonderful only as long as someone else finances it.

The current collapse in the tax take will make it harder to stabilize the situation until they get a new government and a new bailout. The longer the marxists are in power, the harder will be everything to fix.

14 Moreno Klaus February 17, 2015 at 9:35 am

Insane? Is there any country in EU without 13/14th month? … Greece should exit the euro. It is the only way they will come back to sustainable growth path.

15 ted February 17, 2015 at 9:42 am

Certainly. It’s not a general EU public sector thing. UK doesn’t have it, for example. Nor does Ireland.

Of course it’s insane, to give – essentially – bonuses, when you’re bankrupt.

16 GW February 17, 2015 at 11:22 am

German public employees haven’t had a 13th salary increment in many years; this was a real pay cut when it happened as the bonus was completely struck and not redistribution through the remaining 12 months.

17 Richard Besserer February 17, 2015 at 9:50 am

Actually, a Marxist government would have repudiated the debt of bourgeois governments at once. One of the first acts of the Bolshevik government was to repudiate the debt of the Russian Empire.

(Fun fact: the Tsarist-era dent was actively traded well into the Twenties, by speculators who hoped the Bolsheviks might be persuaded one day to pay up. Of course, Stalin had better things to do with the Soviet Union’s hard currency.)

18 ted February 17, 2015 at 10:55 am

@Richard Besserer

This is basically what Syriza is (unsuccessfully) trying to do: push the debt repayment ad calendas graecas, and load on more “loans” (read: handouts) to finance their left-wing program. Outright repudiation is not possible, since the population wants to stay in the euro, and repudiation means being kicked out of the club.

Even a modern marxist government has to give into reality. At the end of the day you can only do as much as you have popular support for, unless you get Russian tanks to do it for you (as it happened in much of the Eastern Europe). Perhaps Tsipras would like to torture and shoot people who disagree with him in the head, like his hero Guevara famously did for a hobby – and I presume he does, since he’s a marxist by his own account and marxism is necessarily violent revolution and class-based social clensing – but I doubt that most Greeks would enjoy that, so he must temper himself.

19 GW February 17, 2015 at 12:16 pm

Trading in Russian Imperial Debt has never actually ceased and despite the USSR’s repudiation, bondholders have been paid off at several points, including in 1986 in London and about a decade later in France. I have found several stories online, including fairly recent stories, about plans for a final settlement of remaining debt, but it’s unclear to me if this has actually transpired or not.

20 collin February 17, 2015 at 9:43 am

I still say the most significant and important Presidential choice of the 20th Century was Harry Truman’s leadership in the post-WW2 that an economically strong Germany was essential to a long term peace. While you can question the individual various programs, having an economically strong Germany and (later Japan with the Korean War), increased the focus on free trade instead of military gains. Long term, Germany is going to accept their leadership role in the Euro and will have to find ways all members to succeed.

While we can all complain Syriza are not serious people, but I am not sure how much longer Greece can remain in a Depression.

21 Dan Weber February 17, 2015 at 11:04 am

but I am not sure how much longer Greece can remain in a Depression

Before what? It turns to war and invades it neighbors?

Helping someone become an economic powerhouse is great, if they want to do the hard work to become and sustain being an economic powerhouse.

22 JWatts February 17, 2015 at 12:13 pm

“but I am not sure how much longer Greece can remain in a Depression. ”

What does this mean? Ultimately only Greeks can create a functional Greek economy. So they’ll remain on their current path until they change their path. Granted a cut-off in outside money inflows or a drastic increase in private money outflows might well give them the impetus to change, but still, assuming no direct foreign intervention, only Greeks can change the situation.

23 collin February 17, 2015 at 1:59 pm

Maybe it is time to call the Euro a failed political currency and consider the country Greece as a money losing division that will function better without the Euro.

It appears Germany is looking at the Euro as an economic tool versus a political tool.

24 JWatts February 17, 2015 at 3:29 pm

“It appears Germany is looking at the Euro as an economic tool versus a political tool.”

Or perhaps they consider it a political tool, but they’re only willing to spend a certain amount of money on it.

25 Brett Champion February 17, 2015 at 9:44 am

The main thing that I think works in favor of a deal that keeps Greece in the Eurozone, even if only barely, is the parade of horrors that could happen were Greece to fall out. If Greece were to fall out of the Eurozone, there is much talk among people who follow this stuff that it would also have to leave the EU. If Greece were to be kicked out of the EU, then the economic turmoil Greece has faced over the last five years would only be magnified. Greece has lost about $100 billion of output since 2009; it wouldn’t surprise me if leaving the EU caused another $150-$200 billion drop in GDP, which would take Greece’s economy back to its size in the late-80s/early-90s. Greece is, after all, a major recipient of national transfers from the better off EU states. That’s the kind of economic collapse that causes mass emigration. You could see up to 5% of the Greek population attempt to exit in a relatively short period of time. Not all of them would be Greeks, of course, since there are a large number of Albanians, Bulgarians, and other Eastern Europeans living in Greece. Most likely these people would try to get to Western Europe, an area that isn’t all that willing or able to accommodate a mass influx of people at the moment.

There’s also the geopolitical ramifications. It wouldn’t be surprising to anyone to be told that the Greeks are a prickly people. They are also some of the most anti-American people in Europe (they see the US as a primary reason they had to suffer under a military dictatorship from 1967-1974). Throw in the anti-German sentiment that is running rampant in Greece now and you have the makings of a meaningful geopolitical shift if Greece were to be tossed out of the EU. The Greeks might feel that the West doesn’t want them and decide not only to leave NATO, but to throw their lot in with Russia, a country that the Greeks have always had a lot of sympathy for. Perhaps they throw their lot in with Russia to the extent that Russia gains another naval base on the Mediterranean to go with the one they have in Tartus. It wouldn’t militarily be a significant shift in the balance of power in Europe (though it wouldn’t cosmetic either), but it would be significant from a psychological standpoint.

26 Richard Besserer February 17, 2015 at 10:03 am

All I’d add is that it’s unlikely Syriza would hold onto power long under the circumstances.

The reason (for example) that Nicolae Ceausescu was overthrown so easily was that he had made the mistake of imposing austerity on the army as well as on civilians. The sympathies of large parts of the army and police are, frankly, not with the “anarcho-communists” of Syriza. That Golden Dawn would only get five percent of the vote if an election were held tomorrow won’t matter if the army decide to exercise veto power if and when Syriza starts trying to pay them in worthless drachmae.

For his part, Putin seems to prefer extreme-right astroturf (the Front National, Jobbik, UKIP, et al.) to socialists of the more globalist variety. In Hungary, the former communist party is actually the only major party not in Putin’s pocket. Syriza, as far as I can tell, doesn’t want to leave the EU, much less the free world, to become a Russian client. Whatever replaces them—Junta 2.0, Golden Dawn, or a coalition thereof—just might.

27 Bob from Ohio February 17, 2015 at 1:48 pm

UKIP is not “extreme-right”. It is anti-EU and anti-immigration but its other policies are as much Labour friendly as Tory friendly.

28 Art Deco February 17, 2015 at 3:15 pm

extreme-right astroturf

Always amused at the rhetorical strategies the portside employs to persuade themselves they have no real opposition.

29 msgkings February 17, 2015 at 8:47 pm

The starboard side does it too, painting everyone to the left of John McCain as a commie Alinskyite. You seem too smart to fall for partisan nonsense.

30 Bob from Ohio February 17, 2015 at 1:50 pm

Let Russia have the Greeks. Another basket case (like Crimea) is perfect to suck Russia dry.

31 Richard Besserer February 17, 2015 at 9:45 am

Syriza will deal. As with the “troika,” there’ll be a change in vocabulary so they can minimize loss of face, but they’ll deal. They simply don’t have a choice if they plan to remain in power very long.

Not only do most Greeks oppose Grexit, but the sympathies of far too much of the Greek army and law enforcement agencies are, frankly, not with Syriza. Nobody knows if they’ll acquiesce to being paid in drachmae and not deutschmarks by the grandsons of “anarcho-communists.”

Neither, incidentally, do the rest of the EU gain anything from another failed state and/or Russian client in the Balkans.

By now, they’ll have told Varoufakis, in some form, formally (during discussions) and informally (during networking breaks):

“Yanis. We get it. You’ve made your point. Greece is a miserable place right now. There’s a lot of it going around. Listen to us. Please. We secretly care about Greece enough not to want another 1967 or Balkan war. You don’t have to believe that, but it’s true.

“We may have overdone it. Fine. We’re flexible. But seriously—if you walk away we’re looking at another 1967 when you run out of cash. Greece will become an even more miserable place real fast. Do you want our help or not?”

32 Nigel February 17, 2015 at 11:35 am

They simply don’t have a choice if they plan to remain in power very long.

They have little chance of remaining in power of they don’t extract concessions –
“In Greece last week, two opinion polls indicated that 79% of Greeks supported the government’s policies, and 74% believed its negotiating strategy would succeed…”

they’ll have told Varoufakis, in some form, formally (during discussions) and informally (during networking breaks)..

Unfortunately, there is precious little evidence for that.

Unless both sides are prepared to give some ground, then it’s more or less inevitable that this ends in tears.
At the moment, neither seems prepared to make the first concession, both taking the position that the other should give in and then trust they get some kind of quid pro quo in the future. There is so little trust – and so much bad feeling – on both sides that either is capable of calling the other’s bluff, and suffering the consequences.

There is a deal to be done, as the costs for both sides of not doing a deal are high… but I’m guessing the odds are 50/50.

33 dan1111 February 17, 2015 at 12:12 pm

“Neither, incidentally, do the rest of the EU gain anything from another failed state and/or Russian client in the Balkans.”

Gain anything compared to what? Obviously everyone would prefer a prosperous, healthy Greek state, but none of the actual alternatives seem very good. It’s quite possible that the rest of the EU believes that this is a choice between a failed state inside the club and a failed state outside the club. They may prefer the latter.

34 Kevin February 17, 2015 at 3:03 pm

I thought Varoufakis was ready to come to an agreement in recent negotiations but the government back in Arhens told him no.

If true, this implies he is both not the obstacle and is not calling the shots.

35 Anon. February 17, 2015 at 3:11 pm

Varoufakis isn’t even a party member in Syriza. Of course he’s not calling the shots.

He’s a western-educated academic economist. No matter how weird his ideas he has some understanding of how economies work. And this guy is working under a party of uneducated Marxist country bumpkins. Of course he’s not the obstacle, and of course he’s not calling the shots.

36 Art Deco February 17, 2015 at 3:50 pm

Not likely bumpkins. More likely okupiers.

37 John Schilling February 17, 2015 at 9:48 am

Greece defaults without leaving the Eurozone? They are at least within spitting distance of a primary budget surplus, the legal obstacles to a default are smaller than those to an exit, and a post-default Euro would be a stronger currency for Greece to manage its diminished affairs than any neo-Drachma could hope to be, Given that Greece is going to default in any event, I can’t see the benefit for Greece in also leaving the generally successful Euro.

The rest of the Eurozone might want to kick them out after a default, but there’s no legal mechanism for that and trying to change the laws would likely result in EU gridlock.

38 Tim February 17, 2015 at 10:35 am

“They are at least within spitting distance of a primary budget surplus…”

Assuming everyone pays their taxes… Yes, Syriza is at least paying lip service improved tax collection. Good luck getting the populace to agree to it or getting it to actually be implemented by the people doing the tax collection

39 JWatts February 17, 2015 at 12:55 pm

““They are at least within spitting distance of a primary budget surplus…”

And also assuming that the statistics that estimate was based upon were correct and not largely imaginary.

40 Anon. February 17, 2015 at 3:12 pm

There’s no need for any legal mechanism. Greek banks will lose their liquidity if the government defaults. Greece will be forced to either go to the drachma or continue in the euro without a financial system.

41 Millian February 17, 2015 at 10:47 am

Do you think this is mood affiliation? I don’t know exactly what that phrase means, but this belief looks like it would be it.

42 chairman February 17, 2015 at 11:19 am

Syriza not Not Very “Serious” People indeed, not beholden to mindless neoliberal orthodoxy about austerity that effects the “serious” establishment. The Greece situation is very easy to fix: governments and government institutions like the IMF and ECB should forgive Greece of all of its debt and leave Greece only needing to repay private creditors. But that would go against the neoliberal worship of the sanctity of debt which is a very “serious” matter. Syriza have the most sane government perhaps in the world from an economic perspective, not willing to sacrifice their people in the name of the ideology of the “serious” Eurocrats and neoliberals.

43 stuart February 17, 2015 at 11:37 am

Communists certainly have a pretty great track record of not sacrificing their own people in the name of ideology. Neoliberals have much to learn from them.

44 ted February 17, 2015 at 11:52 am

Yes, this neoliberal austerity is awful. What kind of mindless goon thought that a country shouldn’t have a public sector larger than its economy can possibly support? It stands to reason that pensions should be large, and paid for by the Germans, after all.

As for complete debt forgiveness, that is indeed a must-have. Particularly after running such a gigantic debt using deception and false accounting. Only a mindless neoliberal could possibly believe that money borrowed must be actually(*) returned.

(*) except of course there’s already been a 53.5% haircut to the nominal value of all government debt held by private bond owners

45 bigtime February 17, 2015 at 12:22 pm

Greece needs to smash it’s welfare state and cushy labor practices to gain competitiveness and ignite their economy, like they did in Sweden and Norway. A bankrupt entity has no right to keep demanding concessions from it’s creditors, they must cut all unnecessary and extravagant programs including salaries and bonuses to fatcats and their cadres, as the banks did after 2008. A country cannot live beyond it’s means, borrowing to import goods they cannot afford. They must keep honest and lower their living standards to a realistic level, as the U.S. does. Economics is morality, and good examples are plentiful, I like to think.

46 Art Deco February 17, 2015 at 7:19 pm

It does not need to ‘smash’ it’s welfare state. It needs a welfare state of circumscribed dimensions, intervening in few markets, and with as little perverse incentive incorporated into it as possible. You can accomplish that with vouchers, insurance, allowances, and income transfers amounting to roughly 17% of gdp, limiting sector-specific intervention to schooling, medical care, and long-term care.

47 Salem February 17, 2015 at 11:28 am

The Euro is a political project, not an economic one, and the creditor countries are also the ones most committed to that project. Yes, concessions to Greece set a terrible precedent, but a country leaving the Eurozone sets an even worse one.

There will be no Grexit.

48 Bob February 17, 2015 at 12:18 pm

Why is it a bad precedent?
Why do they want to stay in the euro so badly?

49 Salem February 17, 2015 at 1:23 pm

It’s not that Greece wants to stay in the Euro so badly. It’s that France and Germany don’t want countries leaving the euro and wrecking the project of integration.

50 TallDave February 17, 2015 at 5:19 pm

I’m sure they do, but they’ve already given Greece $250B. I’m not sure they have $1T worth of love for Greece.

51 Axa February 17, 2015 at 11:29 am

A Fistful of Euros provide a good recap of Cyprus story: from this document

There’s no hard proof, but it seems that Cyprus government had no intention of getting a bail out because it would have meant an investigation on government officials corruption.

Some things seem borrowed from another story: “The government, in view of the Russian loan, ignored the rating agencies’ warnings, the EU urges as well as the warnings put forward by the country’s opposition parties to take action.”

The story from Cyprus is Tyler’s option 2. For peasants there’s only one lesson: keep the money under mattress or out of Greece.

52 derek February 17, 2015 at 11:39 am

Why are there even negotiations? Syriza won’t pay, Germany and the other Europeans won’t keep sending welfare checks. But they are still talking. There is no positive outcome, only a choice of bad ones.

A first for the EU. As a result of their policy implementation they create a failed state.

53 Nigel February 17, 2015 at 11:39 am

I do not see that (most) extant commentary is properly accounting for the very recent fiscal collapse of the Greek economy.

That’s probably because it’s very recent.
My own guess is that it’s temporary, pending the outcome – one way or another – of the current impasse.

54 Boonton February 17, 2015 at 11:45 am

Fourth, I still don’t think enough commentators are stressing how much the creditor eurozone countries see this as a nested game, where concessions to Greece would have to imply larger concessions elsewhere and embolden Podemos in Spain.

Imagine Greece leaves the EU, it reverts back to its own currency which drops in value against the Euro and other major currencies. GDP bounces back up due to a surge in exports and huge tourism. Yes well off Greek people will find it harder to vacation outside their country or import goods but a lot of people without jobs will be able to get them again. The Greek gov’t can then tell Germany and friends to explain to them why they should not default on their debt, at that point Greece will either get huge concessions or the ultimate concession where they simply stop paying anything towards the debt that the rest of Europe is holding.

Seeing all of this, why would Spain or Italy shudder in fear and say they need to endure many more years of 20%+ unemployment, higher taxes and benefit cuts least they make Germany and France mad and suffer Greece’s fate?

On the other hand what exactly is lost from ‘concessions’? Lower interest income on existing debt?

55 Anon. February 17, 2015 at 11:52 am

All the new debt is under English law. If the Greeks stop paying, they become the next Argentina.

Also, how does Greece pay for its net imports of food and oil under your scenario?

56 JWatts February 17, 2015 at 12:35 pm

Well Boonton does specify, “it reverts back to its own currency which drops in value against the Euro and other major currencies.”

Which naturally implies a substantial drop in real pension payments and civil service wages. I imagine a lot of pensioners will start working again and that the ranks of the civil service will quickly thin out. So, you would reasonably expect an increase in GDP and more earnings to pay for the food and oil imports.

57 Dan Weber February 17, 2015 at 1:08 pm

I’m sure this has been asked before, but which Euros convert to drachma?

If I have 10 Euro note from Germany and a 10 Euro note from Greece in my wallet, how can I tell the difference, and which one goes bad?

58 GW February 17, 2015 at 2:27 pm

Euro notes are issued by the ECB, with no national distinctions. Euro coins, however, are issued by individual national central banks are are marked as to origin, but are tender in all Euro countries and have a maximum denomination of two Euros (this picks up a practice of pre-Euro Germany, in which only the Bundesbank could issue DM notes, but the state made coins with a maximum denomination of 5 DM.) In addition, the individual Euro states can issue commemorative silver and gold coins in higher nominal values, but these are only legal tender in the issuing state. Perhaps such coinage is part of the solution to a Grexit: without any public preparation, Greece would declare only Greek Euro coins and bank transfers to be tender, simultaneously converting all bank deposits to Greek Euros and issuing higher denomination Greek Euro coins in commemoration of the Grexit.

59 Art Deco February 17, 2015 at 3:19 pm

Euro notes are issued by the ECB, with no national distinctions. –

There is an alphabetic code on the back, which indicates country of origin.

60 Dan Weber February 17, 2015 at 5:41 pm

All those coins and notes are perfectly fungible, though. I can change my 10 Euro (Greek) coin into a 10 Euro (German) coin easily.

So which Euros go poof when we hit the witching hour?

61 Art Deco February 17, 2015 at 7:10 pm

Close the banks, sort the vault cash, and sent the foreign-origin currency and coin to the central bank in return for reserves on deposit. Stamp the domestic-origin currency as a mnemonic aid. Going forward, exchange foreign-origin Euros at the month’s official rate.

62 Boonton February 17, 2015 at 1:31 pm

No doubt if Greece simply defaulted its government could use the money it is sending to debt service towards paying pensioners more to come back and work civil service jobs. Ultimately, though, the price of a default would be that it would become very difficult to impossible for Greece’s government to borrow again so while some spending increases/tax cuts would be possible, they’d have to maintain a balanced budget for some time.

I’m not really clear how Greece being in the EU and abiding by EU rules pays for food and oil imports? Did Greeks not eat or drive cars before the EU was created?

63 Cooper February 17, 2015 at 3:33 pm

Domestic Greek banks are heavily invested in Greek government bonds. Defaulting would demolish what’s left of the domestic Greek banking system and starve the economy of credit to expand export oriented industries.


64 Art Deco February 17, 2015 at 3:49 pm

You could try re-capitalizing the banks through a debt-for-equity swap.

65 Boonton February 17, 2015 at 4:15 pm

Let’s say I’m an owner of a small hotel in Greece. I have ten years of proven profitability and I would like to double the number of beds in my hotel. Both my personal credit report and my business’s is spotless and all independent analysises of my business proposal say it should be quite safe and profitable.

1. If all the Greek banks go belly up, why couldn’t I still get a loan from any other European or even non-Eurpean bank?

2. If Greece reverts to a currency of its own, presumably its central bank could and would print enough money to keep at least the domestic financial system intact which means I should still be able to get a loan in the local currency to hire workers to build the additional rooms (and since I’m presumably able to earn more valuable Euros with those rooms, I’d rather have this option as the business owner).

If my expansion requires me to import stuff from Europe or beyond, I could see how leaving the Euro would be a problem for my potential expansion. But then isn’t the EU system fluid enough so that finance can travel cross borders? Are only Greek banks making loans to the Greek private sector?

66 JWatts February 17, 2015 at 5:30 pm

“1. If all the Greek banks go belly up, why couldn’t I still get a loan from any other European or even non-Eurpean bank?”

If you did, the lender would most likely denote the loan and repayments in Euro’s (or maybe dollars).

67 Boonton February 18, 2015 at 6:49 am

Quite possibly, but since my project was economically sound from the time when everyone was using the Euro I should be able to repay the loan in Euros if that was necessary. Likewise if the Greek central bank prints enough new currency for the system to function, I should be able to get Greek banks to loan to me in the new currency as well.

68 Boonton February 17, 2015 at 1:26 pm

When currencies go down exports become cheaper. Greece would then pay for its imports of food and oil by expanded exports (tourism would count as an export in that analysis).

69 ted February 17, 2015 at 12:06 pm

Unfortunately for the Greeks, they don’t export much. Their primary product (tourism) is highly dependent on having a nice, orderly, functioning country. So imagine a different scenario: hyperinflation, civil unrest, paralyzed public services.

Have you been to Greece? I have, in the good times. I remember the nastiest passport control at the airport – I was a lowly tourist, after all. I remember being robbed in Athens. I remember being dragged, in Crete, at gun point and held with hands on the bonnet on my rental, until the police (army? to the day I’m not sure, they were in uniforms but never identified themselves) searched my luggage (and my wallet!). Fortunately I had cards instead of cash, and no valuable objects.

Imagine it much worse, when the armed thugs – pardon me, security forces – are paid in a mickey-mouse currency. I wonder who’d want to be a tourist in a country like that?

70 Boonton February 17, 2015 at 1:35 pm

There’s a lot of resort/vacation spots that are not part of a currency union that nonetheless manage to make a good business off tourism and treat tourists with some respect instead of shakedowns. It is interesting that despite all those problems, you still choose to be a tourist in Greece rather than, say, Libya or Syria or Afghanistan. Why? Presumably all those places have beautiful natural landscapes and you can stretch a hard dollar or Euro far there.

It sounds like you are saying Greece could do quite well for itself if it has it’s own low value currency and combines that with more friendly people at the airport!

71 Art Deco February 17, 2015 at 3:45 pm

Unfortunately for the Greeks, they don’t export much.

Tourism accounts for just north of 20% of their export revenue. Travel services account for a similar share. Merchandise accounts for around 40% thereof. Other sorts of services account for somewhere around 15%.

72 mulp February 17, 2015 at 12:29 pm

Unless Tyler will trade an unlimited number of drachma for Euros indefinitely, it is impossible for Greece to exit the Eurozone, except by getting an infinite supply of dollars from Tyler, or Putin supplies an infinite supply of rubbles the Greece can trade for Euros while devaluing the rubble.

73 JWatts February 17, 2015 at 12:36 pm

“Putin supplies an infinite supply of rubbles

Thread winning typo.

74 TallDave February 17, 2015 at 5:11 pm

First we turn the buildings into rubble, then we make the rubble bounce, then we devalue the rubble.

75 3rdMoment February 17, 2015 at 12:48 pm

I totally love Tyler, but his prediction record is not strong.

Here he is predicting that the 2010 Haiti earthquake would be major factor in 2012 US presidential election:

Here he is predicting an NBA championship for the 2013-14 Brooklyn Nets LOL

I admit his Greece prediction seems more plausible than the previous two….we shall see.

76 TallDave February 17, 2015 at 5:09 pm

That analysis seems accurate.

The counterfactual in which Greece was never a euro country is interesting to consider.

77 Larry February 17, 2015 at 8:26 pm

They wouldn’t have been able to borrow all that money. They wouldn’t have thought themselves so much richer than they actually were.

78 TallDave February 17, 2015 at 9:38 pm

There’s a wonderful graph of EU countries’ borrowing rates where something magical happens in 1999, and then unhappens in 2008.

79 Yancey Ward February 17, 2015 at 5:44 pm

I think the real point is that Greece will never, ever repay the debt they owe externally. That is the hard fact of the matter- the true “blood from a stone”. However, I do think that, eventually, the Troika (or whatever the Hell they call themselves now) will agree to a wink, wink contract whereby Greece agrees not to openly default, but isn’t required to pay anything for at least 20 years or so. That way the various entities get to pretend the debt isn’t going to be written off.

80 chairman February 17, 2015 at 6:13 pm

I don’t know what should be so scandalous about Greece defaulting on the debt. A lender and a borrow both engage in risk — the borrow risks the negative outcomes of not being able to pay and the lender risks the borrower’s defaulting. Well, Greece can’t pay, so nuts for the lenders. The Greek people already paid for the default with years of hardship. So start over. The creditors are now mostly government institutions — if the IMF or ECB don’t get their money back it *doesn’t hurt them at all* and to say that tax payers are “on the hook” is a *totally meaningless* piece of rhetoric.

This whole crisis is born of how terrible an idea the Euro was.

81 Yancey Ward February 17, 2015 at 6:49 pm

No, the IMF and the ECB will likely have to be recapitalized by the member governments in the event of a clear cut default/repudiation by Greece. This will be a huge political matter, and an embarrassing one for Brussels in the case of the ECB. This is why I think the EU will be the one that blinks in this game. A clearcut default will be extremely painful for Greece’s creditors- make no mistake about that.

82 Art Deco February 17, 2015 at 7:07 pm

What are a central bank’s liabilities? What does it mean to say the central bank requires ‘recapitalization’?

83 TallDave February 17, 2015 at 9:37 pm

A desperate shortage of ink.

84 Art Deco February 17, 2015 at 7:14 pm

That is the hard fact of the matter- the true “blood from a stone.

It wouldn’t be if they could balance their books and had a state sector of ordinary dimensions. They couldn’t and they don’t. They’re a ‘stone’ because, well, they have an awful political culture and wretched politicians and civil servants, so the public cheats on its taxes as well. I’d say the distance between Eisenhower and Obama puts us about half the distance between the world of 1955 and the world of Greece today.

85 Larry February 17, 2015 at 5:53 pm

Not matter what concessions they eke out of Germany, Greece’s misery will be basically unaffected. They need to leave the Euro, default on their debts and get a fresh start. The country is bankrupt. The only question is how much more pain they’ll endure before acknowledging it. The creditors should be considering whether they’d like to cave now and prolong their own misery or just get it over with. For years now, it’s been about how/when, not whether.

86 Tom Warner February 17, 2015 at 8:14 pm

These are all good arguments. I agree especially that sometimes leaders don’t know what they’re doing. Many politicians are good at winning elections but don’t know much about running a state. The massive deterioration of the budget balance happened in December-January, during the campaign. It happened partly because Tsipras made populist promises to cut taxes, partly I think because many people sensed pending disaster.

I still think we find out sooner rather than later. Tsipras is going to put forward a proposal tomorrow, apparently for a condition-light six-month agreement to continue rolling over the debt. Perhaps if he promises a high enough primary surplus they will say, okay, it’s not our business how it’s met so long as it’s met, let’s give it six months. We’ll see soon enough. If there’s no deal this week I don’t see the ECB continuing to hand out €5b euro additions to the ELA limit. If they don’t Greek banks are out of cash.

The one thing that’s missing for a Grexit is the popular mandate. There’s just no support for leaving the euro. Syriza promised to stay in the euro, they’ve always been categorical on that. This is a party elected on about a third of the vote, that has been in power less than a month. It hasn’t got the strong hold on power or the broad popular support it needs to do something as radical as leave the euro. I could be surprised: Tsipras could turn out to be a more galvanizing leader than I expect, able to bring people along and change their minds to accept a massive devaluation. But I think it’s unlikely. I think they will be turning against him as soon as they can’t withdraw euros from their bank accounts.

87 Barkley Rosser February 17, 2015 at 8:19 pm

Pollyanna Rosser here again,

So, Tyler, all of your points have some validity, although I continue to find this use of non-VSP to be sort of distracting and non useful. Point 4 may be the most important, and one you brought up when this all got going when you argued that the German elites are prepared to let there be a Grexit to avoid a further unravelng, particularly with Spain. It may well be that this is the bottom line. OTOH, we may just be seeing more dancing and hard nosed game playing, even as Varoufakis in the NY Times claims he and his government are not playing games, an obvious move for an old game theorist to make, :-).

So, one area where I think they might do better than you think, and others above have said this, is that they may be in better shape fiscally coming up than what has happened in recent months. They are making loud moves and some actual moves in policy and personnel to collect taxes from more people, especially the rich. They may not succeed, but they may at least partly succeed. They were running a primary surplus, and that might return. The more likely collapse, if it happens, will be through the banking system, with the real key still being the ECB and its remaining ELF.

As it is, the markets seem gloomy, but are still not panicking. Greek stock and bond markets are drifting down, but not at all collapsing.

The weird element you have not mentioned, indeed I have seen nobody mention, but that I think might be playing a part and could lead to the clash/disaster outcome, is personalities and style. Personal interactions become very important in these sorts of negotiations, and I think Varoufakis has really ticked off some of the players on the other side, perhaps crucially that Dutch fin minister who heads the Eurogroup, the one with which negotiations most recently broke down. He really has gotten in their face, and I think it has gotten as petty as his clothing. He does not wear a tie and does not tuck his shirt in, and then he has the nerve not to kowtow!!! I fear that some really silly and irrational stuff along these lines may be going on, but I hope that if it is, these people grow up and deal seriously.

88 Jazi Zilber February 18, 2015 at 8:11 am

An additional cost for conceding to Greece, is a destruction of the whole EU goverance.

EU does not have a police and consensus is needed. Yet, surprisingly it works. The reason is because everyone follows a known set of behaviour and megotiation unwritten rules.

Once you break this, everything is up for grabs. Nothing will be workable anymore.

I think this part is.missing on the Greeks.
1) that the cost of giving in is HUGE for Europe.
2) that their smart-ass style is not only a positive but also a large negative. Beside breaking EU behaviour standards, there is also the thought:
“If they can over smart us, maybe we prefer not to deal with them altogether…..”

My 2cents

89 Floccina February 18, 2015 at 3:39 pm

I wonder if the Greek Government could have decreed that everyone’s salary public or private be cut by 20%.

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