Monday, April 14, 2014

Should Greece Default Now?

"Now contemplate the alternative. Greece defaults on all its foreign debt. It establishes a new currency that would immediately devalue. To lock in the competitive gain – to turn it into a real devaluation – would require a central bank with a credible inflation target and sufficiently deregulated labour and product markets. This is not a soft option, and would require a lot more structural reforms than Athens has so far undertaken. While such a scenario would freak out foreign investors when it happened, they could be relied upon to forget it quickly, and come back quickly. After all, the probability of a default is lowest right after you have defaulted. At that point, a reformed Greece should be very attractive to foreign investors, not just financial investors. I am not advocating exit. Greek voters and foreign investors should however know that Greece is now in a position where there is a choice".

I emphasized the last sentence in bold because that, to me, is the key. Four years after the first rescue loan for Greece, the EU is still acting on the premise that 'there is no alternative'; that 'if the Euro fails, the EU will fail'. A much more convincing scenario is that, if this premise is blind-foldedly pursued, the Euro may very well fail in the longer term and with it the EU.

If the EU were to take off its blind-folds and act as a fair arbiter, it would be the EU - and not a financial journalist - who would advise Greece that the country now has an alternative. That the Greek government should comprehensively inform the Greek population about these alternatives (continue on the present course or follow Münchau's suggestions) and that the Greek government should possibly put this to a national referendum.

The word 'default' has such a bad taste to it. In reality, default is a legal event which occurs when a borrower can no longer fulfill his financial obligations. Corporations can, in such a situation, declare bankruptcy because there are bankruptcy laws for corporations. Since there are no bankruptcy laws for countries, the legal event of default is the only honest alternative. Default is not a unilateral debt repudiation (that term justifiably has a bad taste to it). Instead, default simply says 'we would like to but, sorry, we can't pay our debts'. If creditors continue to make loans to an insolvent corporation, that is, in most countries, a criminal offense. Regrettably, there are no laws which make new loans to insolvent countries a criminal offense.

When I started this blog 3 years ago and for the first couple of years, I was an adamant supporter that Greece could and should make it with the Euro. Nearly 28% unemployment and nearly 60% youth unemployment after 4 years of adjustment prove me wrong. Yes, Greece is now financially stable with both domestic and external accounts in balance (or rather: in surplus). But how long will Greece remain politically and socially stable with these kinds of unemployment ratios?

I cannot judge how quickly Greece's employment situation would improve if the country switched to a default/exit course but I am certain about the following: with the Euro, the Greek employment situation will not return to more or less satisfactory levels for a very long time.

If default were to become a serious point of (confidential!) discussions, its timing would also be of significant importance. Greece is having a run on international capital markets these days and there is a good chance that Greece could raise another few billion Euros there before the end of the year. And Greece still has about 8 BEUR to draw under the rescue program. Possibly by the end of the year, when Greece would have exploited all possible sources of funding, the time might be ripe to put a lid on it and call it quits.

Malicious tongues might suggest that this could be used as a political ploy: set the timing in such a way that it yields maximum benefit at next year's election. Well, actually, why not if it is good for the country?


  1. There is an established legal principle that people should not have to repay their government's debt to the extent that it is incurred to launch aggressive wars or to oppress the people.

    Further reading on the economic reality in Greece (german):

    1. The article from querschuesse seems excellent after first reading. I will have to look at it in detail and maybe I will write a post about it. Thank you for alerting me to it.

      The issue of odius debt is, in my view, misplaced in Europe. The EU is a union of socalled first-world-democracies. There are no tyrants in the EU. If people felt there were tyrants, they could vote them out of office.

      BTW, odious debt is some form of debt repudiation. If a country wants to become an outcast in the world of trade and finance, debt repudiation would be an effective first step towards accomplishing that.

  2. Is this really what the majority of Greek people wants ...

  3. Another intersting point from Munchau:

    "And this brings us back to the fundamental problem: who in their right mind is going to make a long-term investment in a country with unsustainable long-run debt?"

    Ι have been arguing the same for years, together with GrExit. Now seems the german overlord plans to extend greek debt from 30 years to 50 years period and call it "permanent solution". Many greek analysts already have analysed the scenario and found it "insufficiehnt" to say the least.

    It is unfortunate, that the only possibility for a default, comes through SYRIZA. Most probably national elections will be held in Greece next year in spring. I may have to vote SYRIZA, although being a center-right voter.

    1. I would not belittle the alternative of "extending". In fact, my point all along has been that the only viable solution is to reschedule maturities of principal and interest way out into the future. Perhaps even a 99-year bond (like Mexico) or a non-redeeming bond.

      Suppose all Greek debt over 60% were refinanced with a 99-year bond with interest being capitalized during the first 25 years. Economically just like a haircut except legally it wouldn't be. And in 25/50/99 years from now, the world may look different. If everything fails, one can still make a haircut in 25 years from now when the first interest payment falls due.

    2. Dear sir,

      A 99 year bond is another story. All greek articles, indicate that the current debt, which was already postponed to 30 years, will be further extended to 50. A banking sector journalist had a couple of months ago a detailed article, calculating the net profit for Greece from this further extensions and the conclusion was that "it wasn't remotely enough".
      The other probability, of say, extend to 50 now and who knows, maybe when time comes, if the wind blows from the right direction, the stars align with Jupiter and Germany gives her blessing, is a possibility, but, politically, it doesn't work. A population can't live forever as prisoner of an imminent doom, where each generation will pray for Germany's mercy.

      In a way or another, things must get clearer now. Already, the current youth generation, will pay a heavy price. We can't condemn the grandchildren of this generation with a similar faith or fear. Greek politicians have played dice with the fate of the country for the last 30 years. It's time to stop playing.

    3. Another thing you may not know, is that this "troika program", has reached a limit. Recently, exports fell 7%. In your blog, you may say "that's strange!", but simply because you 're not greek. If you were greek, you 'd know why... According to the troika program, Greece must increase the primary surplus to 4,5% of GDP in the next 2 years and maintain it there till 2022.

      In the meantime, businesses close. Let me give you a taste of how "exports fall".

      The representatives of the greek industry, have repeatedly launched "S.O.S" to the goverment, due to the 50% increase in industrial electricity, as per troika's demands.

      After several months, the goverment tried to take measures to decrease cost of industrial electricity. Result? The EU Commission, threatened with fine, because it would constitute "indirect help" and thus against EU competition laws.

      Viohalco, the biggest value company in the greek stockmarket (it's a copper mining company), has many months ago abbandoned the greek stockmarket and moved its base to Brussels, because they couldn't raise any capital in Greece.

      Other big, well known companies, with international sales (like Petzetakis), failed, due to impossibility to draw liquidity from the greek banking system, which is always under recapitalization and never ready.

      In the first 3 months of 2014, 3 more bln euros were withdrawn from the greek banks (1 each month). You 're a banker, i need not tell you what this means and whether it will help refinance business.

      20 years of more extension (with meagre results in net gain in debt reduction), is not worth this vicious circle.

  4. A good up-to-date analysis of the greek budget and the "hidden" liabilities:

    I don't think Greece has anything like a balanced primary budget. It seems to be really desperate.