Tuesday, November 1, 2011

Plebiscite - a wonderful negotiating tool!

EU-elites must be having a bad morning today after hearing about Mr. Papandreou’s bombshell of a plebiscite. No need to feel pity for them! Perhaps that will motivate them to start thinking what “real help” for Greece would be instead of only focusing on what help for banks is.

Obviously, to actually hold a plebiscite is nonsense. What would it achieve? If the result were “yes”, there would still be close to 50% of the people vehemently opposed to the government’s plan. And if it were “no”, it would be a fast route to poverty and perhaps even anarchy. Apart from the fact that one cannot even envisage what question the voters should be asked.

However, the threat of a plebiscite which would bring down the stage of a carefully crafted bank rescue plan for which Greece would be making available her balance sheet is an excellent negotiating tool. Congratulations on that, Mr. Prime Minister!

The big shortfall of all measures to date is that the Greek government is being forced to radically reduce its expenditures without, at the same time, implementing measures to stimulate growth in the economy. The expense cutting on the part of the public sector cannot be avoided. When the public sector shrinks, the rest of the economy must grow in order to keep the overall result bearable for the population.

So the stage is set for a wonderful new approach: the EU has become accustomed to throwing around 3-digit billion EUR numbers in connection with what they call “help for Greece”. With those dimensions, it would truly be “chickenfeed” to throw in, say, another 10 billion EUR for growth projects in the Greek economy. While the 3-digit billion numbers don’t do Greece any good, 10 billion EUR for the Greek economy, if invested well, would produce wonders.

The question would be how that 10 billion EUR are best spent in such a way that one gets “most bang for the buck”; i. e. the maximum number of new jobs and new income for Greeks out of productive activities. If the monies are handled by public entities (be that the EU or the Greek government), the risk is that they may to a large degree end up in the wrong pockets. The ultimate test of what a good investment is is whether or not a private investor would also make it voluntarily.

The EU should consider the following: make the 10 billion EUR available to serious investors (inside and outside of Greece) who have convincing investment plans for value-generating new investments in Greece which create jobs and income for Greeks (and income taxes for the Greek government).

And when the EU has finally decided to help the Greek economy, the plebiscite can be called off.


  1. Great post, Klaus! Just read this as well



  2. Mary, you can bet all the money you have (and which you can borrow) on the fact that the final haircut will not even be close to 50% of the nominal total sovereign debt. Three reasons: (1) much of the debt will be excluded from the calculation base (i. e. debt held by the ECB; perhaps even debt held by Greek banks); (2) the 50% calculation is not based on nominal but on net present value instead, and the NPV calculation includes interest margins (profits) which the banks would forgo; and (3) many banks will not participate. So if they come out with 20% on nominal at the end, it would be realistic. If they come out with 30%, it would be a grand success. But it won't be more than that.

    Common sense no longer seems to be a valuable commodity at the high levels of EU-elites. You don't need a complex rescue plan to make banks take losses. One simple piece of paper, not requiring any special approval, would accomplish that overnight.

    Each country has a banking supervision institution with the authority to issue directives. These institutions generally report to the national Central Banks and the national Central Banks are together in the ECB.

    If ECB and national Central Banks agree, the respective national banking supervision authorities send out a short letter to all member banks telling them something like:

    "Effective today, you are required to establish loan loss provisions against all sovereign assets in the following amounts: Greece 50%; Portugal x%; Spain y%; and Italy z%."

    And then the banks will be on the political carpet the next day, with hat in hand, to politely request governments to bail them out.

  3. After Cannes...

    What a missed opportunity for Mr. Papandreou! At least we know that he is not a Mrs. Thatcher.

    According to media reports (official confirmation is not available), Merkozy gave Mr. Papandreou sort of an ultimatum: fulfill the October-Agreement or else be prepared to leave the Eurozone!

    What an empty bluff! Instead of caving in, Mr. Papandreou should have expressed severe concern about such a posture instead of caving in. He might have said something like the following in a very polite way:

    "Before you take rash actions, please remember that Greece owns 1,9649% of the ECB. The same day that you allow Greece to run out of cash, the ECB will have to close its doors (or get immediately massive capital infusions from its owners). The ECB holds more than 150 billion EUR in Greek assets which compares to a capital & reserves of the ECB of approxiamtely 10 billion EUR. If the ECB had to write-down only 10% of the value of its Greeks assets, that capital & reserves would be wiped out. If it had to write-down 50% of its Greek assets (the same proportion which is being requested from private lenders), the ECB would require an immediate capital infusion of over 60 billion EUR.

    Incidentally, Greece is not in a position to inject new capital into the ECB.

    Thank you for your attention!"