The pending Greek default

A few of you have asked what I make of the pending Greek default.  I would prefer to call it the “Greek resolution,” since I am not sure it matters much whether there is a formal legal default.  You hear some “CDS settlements will go crazy” stories but right now they are just that, stories.  And there may yet be an agreement for Greece, although no agreement will stop their money supply from shrinking sixteen percent a year (or more).  In any case, I see two significant events on the way:

1. Other countries will start asking more vocally why they are not getting some form of the Greek deal.  Ireland in particular is picking up all of its bank debt, or what if Monti wants some real debt relief, asked for quietly but firmly under the table?  Since he is making serious efforts to deliver on responsible policy reform, and he is quite credible internationally and with investors, this in some ways makes him a more dangerous player in the game.  (Such a rebalancing of power in the bargaining game is a neglected aspect of putting in those technocrats.)  These scenarios start looking ugly quickly.

2. After Greece the market will likely focus on Portugal.  It is one thing to say “Greece is an exception,” much tougher to hold the general Eurozone line with “Greece and Portugal, they are the exceptions.”

It boils down to what kind of focality the Greek resolution will have.  Since theories of focality are not very precise or predictable, this is a tough one to call.  I’ll stick with my longer-run view that the Eurocrisis can be solved if a) the 17 countries act in a roughly unified way, and b) Italy shows reasonable prospects of growing at about two percent a year or more.

In other words, I’m still a pessimist.


One wonders how German reunification would have gone without a forced marriage to Europe. Both parties, regret.

I am wondering if this European crisis will have any effect of the 'prestige' of the Union. Seems like despite the ongoing troubles, the Croatians voted for accession, Macedonia is still pushing to join, so is Montenegro and Serbia. Turkey and Iceland are in negotiations.

I am also curious in your opinion, in the worst case scenario of Euro crisis, what would the recovery process look like?

Sprogs, yes. Cogs are hesitant.

Interesting dynamic with Turkey now being one of the world's stronger emerging successes. Up until say 5-6 years ago they were begging to be included in the Eurozone, now I'd imagine they are much more attractive to stagnating, aging Europe.

Turkey is the next shoe to drop-one of the biggest credit bubbles out there that is already showing signs of strain.

I'm probably overrelying on Michael Lewis' reporting, but Greece does seem to have been exceptional both in the degree of the corruption there, and in how little there was of an economy that could produce goods and services apart from the corruption.

And you can make a strong case that Greece should never have been part of the ECM/ EC/ EU in the first place, if only for cultural reasons. If you are looking for the next Greece, I would look at some of the recent accessions from the former Eastern Bloc. Portugal is less corrupt and has more of a "real" economy, albeit heavily based on agricultural and fishing. Its more analogous to New Zealand than to Greece.

Portugal had agricultural and fishing some decades ago, not now (I think that today, the only significant "export" of Portugal is tourism).

Falling living standards are not a "solution" to the economic problems any more than failing health or death is a "solution" to not being able to afford health insurance. It's the outcome people want to avoid.

Falling living standards are an excellent solution if it is someone else's living standard.

"... no agreement will stop their money supply from shrinking sixteen percent a year (or more)."

Tyler, is money supply a meaningful measure for a member of a currency union? If Soc Gen has a branch in Athens, the currency in its vaults in Paris count toward Greek money supply? How about a demand deposit by a Greek citizen - which can be withdrawn outside the country? For that matter, what do they money supply growth rates look for California, Texas and Alaska?

As far as I can see, most of the law-abiding, hard-working Greeks emigrated to Australia 30 years ago.

That has to be a gross exaggaration. It takes only a tiny percent of corrupt people ( in the right places ) to undermine the whole system.

Pretty much every public sector employee is corrupt in Greece. Even if they don't take bribes, they are almost certainly corrupt simply by virtue of having acquired a job in the public sector. That's over 10% of the population right there.

In others, more people believe in space aliens than are corrupt.

The other day on This American Life they interviewed a woman in Greece who has not received a salary since September or October, yet she still goes to work every day.

Has she ever voted for PASOK, ND, or KKE? Has she ever paid and not requested a receipt? What about money from any of the dozens of absurd government welfare programs?

These people are all complicit. Don't feel sorry for them, don't admire them.


What political party do you typically vote for that your hands are so untainted by vicarious wrong doing?

This should not be interpreted to mean that all the Greeks who went to Australia were law-abiding or hard-working.

Not based on my brother-in-law.

Greece is an exception but if the EU wants to encourage responsible government in the EuroZone then it should be helping Greece less not more. Greece should be assisted to leave the Euro and the EU with perhaps some kind of middle status that would allow a return if they should get their act together. Otherwise, the members who have followed and continue to follow the rules become third class (after Germany, France, etc. and "exceptions" like Greece) members and are encouraged to become "exceptional" in the same way Greece did so that they can improve their status in the community.


Greece can't default. The Greek pension system is flooded with Greek debt. The Greek banking system is flooded with Greek debt. Just rescuing those two would be enormously costly, and for what? 5% of GDP yearly if they do a COMPLETE default. That still leaves a deficit in the budget! How is that going to be covered?

What you've shown is that it would be disastrous for Greece to default. This does NOT mean they can't default. It doesn't even mean they won't default.

Me I'm finding it harder and harder to envision a resolution for Greece that doesn't involve violence. What is rarely pointed out in most discussions of Greece is that enormous amounts of that bailout money have been going to Greece's bloated military to keep it on side. If army officers' paycheques start bouncing, Greece won't be just leaving the eurozone or even the EU---it'll be leaving the free world. Not for the first time, either.

I wouldn't be surprised if that were the plan in some circles of the Greek elite. Pull as many assets as you can out of Greece, sit in London safe and sound while the army do the dirty work of polishing off the anarcho-communists (juntaspeak for "anything resembling a liberal opposition") once and for all, and when the dust settles return to rule the post-Ottoman kleptocracy that they made a good living off before the Germans showed up, with all their business debts hyperinflated away.

Meanwhile, it's clear that what the major powers in Europe are truly afraid of is another belligerent Balkan dictatorship like Milosevic's Yugoslavia on their doorstep. That's why they've gone to such lengths to keep Greece afloat. French banks would be hard to bail out. Greek liberty would be even harder to make whole, if it ever could be.

The idea that a military coup is possible in a European country seems rather absurd. If it gets to that, why not conquest by Turkey? Intervention from Europe seems trivial.

Also, the anarchist/communist block (actual anarchists and communists) control 10% (and got 24.5% in a recent poll of the Parliament and have a LOT of power in the unions, which are the most powerful special interest groups and partly responsible for the whole mess. Not to mention all the anarchist/communist terrorist groups that plant bombs all the time (2 years ago they even killed a 15 year old boy).

A leftist coup is less improbable than a military one in Greece.

'A leftist coup is less improbable than a military one in Greece.'
How quickly we forget about the American security state - one American direction whose budget most certainly has not suffered over the last decade.–1974

I didn't know the Cold War was still going on...

Nor is there any evidence that America was involved in the coup. From the source prior_approval linked:
"Although there have been persistent rumors about an active support of the perpetrators of the coup d'état by the US government there is no evidence to support such claims."

So really the whole statement is just meaningless.

Even if they didn't support the regime directly they certainly didn't do much against it. The Europeans were a bit pissed off about it but they didn't really mind too much either. And the Truman Doctrine and the intervention in the civil war was the foundation for the whole Junta business anyway...

The Irish are getting what they deserve, they don't cheat on taxes and they trusted their government, now they will pay taxes to their banking overlords. The Greeks still have a shot at the Iceland route.

Iceland has its own currency, even now has lower debt as % of GDP than Greece, a real economy, little corruption, etc.

Their problems were the result of a banking crisis. Greece's problems are a result of three decades of mismanagement, complete lack of foreign investment, lack of competitiveness, etc.

The situations are not comparable.

Either that or the Irish are much BETTER at cheating on their taxes. All we can say is that tax cheating doesn't show up on the books.

'since I am not sure it matters much whether there is a formal legal default'
Well, this says a lot about the sort of consulting work you perform. The German university professor I know in this town is paid a lot of money (and spends days on a single contract) to be able to answer that question with a fairly high degree of confidence. Of course, she works in finance, not economics.

And admittedly, she tends to thing it is all a scam in the end anyways - an opinion that your off hand comment seems to support.

Hard to tell, but given the full circle you just did, I suppose you were sincere at first: "Well, this says a lot about the sort of consulting work you perform." and not sarcastic.

Surely the expression “Greek resolution” has an unsuitable air of finality? This one will run and run.

Indeed. Perhaps "the Greek iteration?"

Is "focality" a made-up word meant to remind us of "fuck all"? If so, it succeeded.

First, all the people talking about Croatia et al need to remember that the EU is not the same as the eurozone. It is the latter that is having the problems, not the former, although many hysterics proclaim that if Greece defaults somehow this is the end of the EU. Not.

Second, Greece had a special problem not mentioned by anybody so far, although hinted at by a few, that separates it from the rest of the eurozone, including even Portugal. It engaged in massively fraudulent budgetary accounting to meet the standard to join the eurozone in the first place. It is easy to forget that the crisis began when the now departed George Papandreou admitted that this had been the case after becoming PM, revealing that the budget deficit was more in the range of 13% rather than 6%. As it is, with deep enough haircuts, still a matter of much debate, Greece might still muddle through without a total collapse or total default, although things do look pretty ugly right now, and I think a removal of Greece from the eurozone remains highly likely.

Tyler is right that whatever the outcome in Greece, Portugal is next under the microscope, and while in better shape than Greece, it might also end up out of the eurozone.

The real firewalls are Spain and Italy, and in those places prospects look a lot better, and I have argued better than what most of the media discussion has been. As long as the high saving Italians continue to buy their own country's bonds, they might manage with only a 1% growth rate rather than the 2% Tyler says they need.

Italy, yes; Spain, well maybe.

Rewarding failure will work as well as it ever does.

Look, I have next to no idea how government finances work (or don't) but surely Greece has defaulted already? The 50% 'haircut' (love those buzzwords) IS a default by another name? Why Greece was accepted as an EU member was ever a mystery, given its archaic / chaotic economy and crazy welfare system.
As for Italy, no mention is made of the mafia's black economy- what proportion of GDP/taxes disappears down that black hole?
I may well be talking rubbish but can't think how else to frame my questions!

On the broader scale, surely the parlous state of US debt and the collapsing dollar is just as worrying, if not more so; semi-paralysis in Washington seems to indicate that all they can look forward to is ever more 'quantitative easing' (more bollocks) until hyperinflation takes over. Is this whole situation the start of the failure of capitalism in the west??

It would be if government finance had much to do with capitalism. As it is, government finance is about taxation, government spending, and crony special deals.

Taxation is the major/only source of revenue for gov't (obviously!) so there ought to be a limit for spending; but not, because government credit cards have (almost) no limits; well, 15 trillion is the latest 'limit' on the US card. Meanwhile the free-for-all that was the US banking sector caused the 2008 crisis, resulting in the fat cats being bailed out by the US taxpayer. 'Too big to fail' was applied to companies and now the label applies to entire economies- and taxpayers all over will suffer. Needless to say the FC's will escape again. Powerful self interest has brought capitalism to the brink- where next?

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