Thursday, October 16, 2014

Greece - Why Go For Self-Destruction?

"It is impossible to imagine why the government, instead of stressing the increasing instability in Europe and the country’s good fortune at already having secured a loan from the IMF of 12 billion euros at a rate of 4 percent, insists on borrowing from the markets, where the yield of Greek 10-year bonds has skyrocketed to 7 percent" - Ekathimerini, October 16, 2014

"Typically, the more stable and reliable funding is more expensive while the 'hot' money may often be cheaper and less cumbersome to obtain. With Greece's sovereign debt, the opposite is true. The stable and reliable funding comes from EU institutions and, as far as I know, it accounts for almost 80% of Greece's sovereign debt by now. Its cost, if I am not misinformed, is 2% at the most; perhaps even closer to 1,5%. The cost of the anonymous bond money has been down to 5% earlier this year, albeit only for a 3-year tenors. 10-year bond money, which is still rather short-term, would probably cost today 6-7%. Somebody needs to help me out with logic: there is 2% stable and reliable money available but the current government does everything it possibly can to switch to anonymous bond money for shorter terms and at 5% more cost? There must be a reason for doing that except --- I can't fathom it!" - Klaus Kastner, October 2, 2014

There couldn't have been a better example than the last couple of days of what can happen if one throws one's luck into the hands of anonymous bond markets! This only re-emphasizes the question why the government is so eager to throw its luck into the hands of anonymous bond markets. My understanding is that the government's desire is driven by Alexis Tsipras' promise to 'tear up the memorandum' (Greek translation: 'get rid of the shackles of slave owners') once he is in power. So the government seems intent on pre-empting that promise, not by tearing up the memorandum but, instead, by letting it lapse.

The various, extremely painful downsides of the memorandums (if not to say their mistakes/errors) have been debated ad nauseum and I will not belabor them here. However, there has been far too little focus on the infinitely more valuable aspects of the memorandums. I will now be rather controversial and argue what would have happened to Greece if there hadn't been those memorandums; if there hadn't been EU-support; if there hadn't been support of the Euro financial system. Those who think that I am exaggerating are invited to look at Argentina. There it happened more than once during the last 30-40 years. 

Without the memorandums; without EU-support; with the support of the Euro financial system ---

1) The Greek state would have had to default on a large portion of its domestic liabilities (wages/salaries, pensions, etc.).
2) Capital controls would have had to be implemented including a domestic deposit freeze.
3) The banks would have had to be nationalized.
4) Imports of many goods would have come to a sudden stop.
5) Within a short time, Greece might have had a GDP only half the size of what it was before.
6) Etc.

This is assuming that Greece would have decided to hold on to the Euro. Had Greece opted for the Grexit, the situation would have been even more dramatic.

Why does the Greek government fall for Alesix Tsipras' tactics instead of pursuing a self-confident and constructive strategy. A strategy which focuses on the positive aspects of the memorandums and which promises to correct the mistakes/errors of the memorandums which have caused unneccessary pain? 

My sense is that, in the present situation of the Eurozone, Greece could get from the EU just about everything it wants as long as it is within a constructive and controlled framework. If Greece wanted to reprofile its debt to official lenders with a significant extension of maturities, it would get it. If Greece wanted a reduction of interest rates on the debt to official lenders, it would get it. If Greece wanted some financial room for maneuver to establish a social safetey net for the one-third of the population in poverty, it would get it. Etc.

My sense is also that the only thing which the EU does not want is a Greece which returns to its former ways. A Greece which becomes destructive and uncontrollable, and - frankly - a danger for the Eurozone and a nuisance for the EU. Isn't that a legitimate case?

Even if that were not a legitimate case, it is still in the selfish interest of Greece to continue on a constructive and controlled course. The energies must be used for striking better bargains with the EU; not for self-destruction!


  1. Mr. Kastner, while i don't disagree with the general spirit of your suggestion, i think you miss the political tension in Greece and some recent events.

    Why do you think that Samaras went to Germany to see Merkel? Rewind. In 2 Europgroups, there was in the summit conclusions, more or less, the following clause: If Greece arrives to primary surplus, a new debt relief discussion will open. Samaras has been waiting since last winter. At the beginning the EU told him "we must wait for troika to confirm, then for Eurostat to confirm". They all confirmed, nothing. Klaus Regling and Deiselbloem, have said last week that to their opinion "the greek debt is viable as it is". Samaras went to Germany to meet Merkel, again, nothing. Now they tell him to wait for after the new troika report. In the meantime, ND is dropping and SYRIZA is going up. Articles start multiplying citing sources in Brussels, saying that the EU wants to drag her feet and wait to negotiate debt relief with SYRIZA.

    So, Samaras, feels like the village idiot. He took on his shoulders all the burdeon, only to have Tsipras take the glory of "debt relief" and going to snap elections with a "success story", with 1/3 of population in poverty line and 26% unemployment. Samaras has seen what a similar "success story" did to PASOK. So he attempted (foolishly maybe, but panic is always a bad counselor) to "disengage" from the IMF/troika to show something that mediatically could count "look, the success story is here, that's why there is no more troika!".

    So, it's not that odd...

    As for what would have happened to Greece with Grexit back then, the opinions differ. At the time, a scary economic model used by Ant1 TV to promote the troika program, was saying that had Greece exited, GDP would drop to 180 Beur. The video is still somewhere to youtube. Well, we know now where it ended. On the bright side, it would have cleansed the current political system, dealt with debt and competitivity. Greek income fell average 33% in salaries/wages , but to that you must add the more recent data, where first need goods increased by 13% since 2011. To that, you must add the tax pressure and you may see that the result isn't as rosy as just saying "GDP is XYZ".

  2. "The EU does not want a Greece which becomes a danger for the Eurozone."

    Oh come on.

    The Eurozone is perfectly capable of blowing up by itself. It's inane policies are testament to that (no Eurobonds, no debt forgiveness, systematic fiscal austerity). It doesn't need Greece to do that.

    1. Maybe Samaras isn't as idiot as we think. Maybe he wanted to send a message that Greece can still bring worries to EU stockmarkets and so, time for his allies to give him debt reduction, instead of waiting for Tsipras.

    2. Samaras is a genius! He wasn't happy with the powers that be and decided to send a message; and the stock market tanked. As soon as he saw that the message was received, he brought the stock market back up again. Not bad; not bad at all!

  3. From the newest articles, seems you worried too early, Mr. Kastner. The memorandum will be baptized into "precautionary funding line" (alis PLCC) and instead of having troika coming to Greece every 3 months to inspect the papers, Hardouvelis will be bringing the papers to the troika to Brussels every 6 months. One of the terms of said PLCC, will be to meet the previously agreed targets

  4. Klaus, you are totally exaggerating. Here is my reply to the five points you raise.

    1) Why would the Greek state default on it's domestic liabilities? Reduce them, yes, default, why? And didn't it reduce them anyway under the memorandum?

    2) Yes, capital controls would have to be implemented. So what? That's a plus, not a minus. How many times have you accused the ECB of financing the exit of Greek deposits? Well guess what, that wouldn't happen now.

    3) The banks would have to be nationalized. Excellent. To be honest, that's what they should be now. It's scandalous that they aren't. The Greek banks were the first to be shut out of the markets (2008), way before the Greek state (2010). It's a shame that the Greek governments sleepwalked into this.

    4) Maybe, maybe not. They would certainly be reduced, but they've also been reduced under the memorandum, while they've come to a stop for a significant part of the population due to lack of money.

    5) What, you mean like how it happened under the memorandum?

    Overall, the Greek governments chose to prioritize their external liabilities over their domestic ones. It's not surprising at all that they pay the price for this with the electorate.

    1. There is a huge difference between something happening over a period of 2-4 years and something happening overnight. In the scenario which I described, things would have happened overnight (figuratively speaking).

      For 2010, Greece could still post a trade deficit of 28 BEUR and a current account deficit of 23 BEUR. That would have been reduced to zero. Just think where the cuts of 23 BEUR in foreign expenditures would have been made. There would have had to be a rationing of imports. There might also have been a rationing of foreign travel, by the way.

      For 2010, Greece could still get by with a primary deficit of 12 BEUR. That would have been reduced to zero. Just think where the cuts of 12 BEUR in government expenditures would have been made overnight.

      The overriding point is that if things happen overnight, there is panic and panic only feeds upon itself.

      The Greek government definitely DID NOT prioritize external liabilities over domestic ones!!! I don't remember when Greece's primary account turned positive but until such point, there was no prioritization possible. Only when you have a primary surplus do you have the choose what you spend the surplus on - on domestic payments or on foreign interest. Certainly throughout 2012, Greece did not have that choice (now it has that choice).

      I agree that points (2) and (3) wouldn't have been all that bad per se and, yes, I have often argued in favor of them. But they become terrible when they hit a country by surprise and overnight. As I said, panic is the key word and the most terrible things can happen when panic breaks out.

      I agree with you that Greece, now that it has the choice, should not prioritize foreign liabilities over domestic ones. I have written serveral times about this issue and here are 2 articles which I could find quickly:

      One more point (and with the benefit of hindsight): if all of these bad things had happened overnight, it probably would have been better to have added Grexit to them. Once there is a real shock, it matters less how much else goes to pieces and I would guess that that a Grexit would have enabled Greece to adjust more quickly and less painfully.

    2. How can you say that Greece didn't prioritize external liabilities when bailout MK1 essentially was just that?

    3. Here are the numbers: from 2010-12, Greece received bail-out funds of 247 BEUR, of which 206 BEUR went to debt service and 41 BEUR was at the disposition of Greece.

      You seem to argue that Greece received 247 BEUR and prioritized 206 BEUR of that for debt service. That is wrong!

      The 206 were disbursed UNDER THE CONDITION that they would be used for debt service. I would guess that Greece didn't even have control over most of those funds. Oftentimes, such funds go into escrow or other accounts so that they are 'protected' from misapplication.

      If I give you money under the condition that you use it to repay your debt to my friend instead of using it for your family, you are not prioritizing debt service over family needs. If you would use my money for your family instead of repaying your debt to my friend, I would sue you.

    4. I was more of referring to the current goals of hefty primary surpluses.

      I know you already said that now that it has a choice Greece shouldn't prioritize foreign liabilities over domestic ones but here's the thing: this goes against the logic of your post, which argues that Greece should continue borrowing from it's official creditors.

      Obviously, if Greece continues to borrow from it's official creditors then it clearly prioritizes it's external liabilities over it's domestic ones because the goal of big primary surpluses stands as it is.

      Now, I suppose this is a bit of a moot point, because if market borrowing costs rise sharply then Greece can't get credit at all (in euros), but we're talking about how things stand in principle, and in principle Greece prioritizes it's external liabilities over it's domestic ones.

    5. Yes, with a primary surplus, Greece now has the choice of how to apply it. Put differently: Greece no longer has to borrow funds over which it has no control in order to pay interest. Greece now generates (almost) all the funds to pay interest on its own.

      I don't know what the current agreements say exactly but it looks like they require Greece to spend most (if not all) of its primary surplus on debt service. Agreements are not only there to be complied with, they can also be negotiated in a constructive and controlled way. This is what I mean when I say that the energies should be used to strike a better bargain.

      When the head of the EU Task Force Reichenbach says publicly that "this is really a dramatic situation in which the activities of extreme parties can prosper by offering part of the solutions to these problems and if Greece is not, as a state, and in solidarity with Europe, is not able to address these problems head-on, there will be a very difficult situation", then I would suggest that this is a good basis to begin constructive and controlled (re)negotiations of terms.

      Borrowing from official lenders does NOT automatically translate into prioritizing foreign versus domestic liabilities. While that has been the case so far, there is no natural law which says that it always has to be that way. Again, energies must be invested to deal with that.

      It is an illusion to think that exiting the Troika automatically translates into complete freedom of action. Obviously, the leverage of lenders is greatest when the borrower needs new money and that leverage has declined. But don't think that lenders who sit on loans of about 250 BEUR have no leverage at all. Of course they will monitor the situation and observe compliance with agreements. The (theoretical) threat is always that loans will be called due if and when agreements are not complied with.

      I think you referenced the Macropolis analysis which showed how much Greece will have to refinance until 2020. Suppose Greece managed to refinance all of that via capital markets. Would everything be fine?

      I think recent events have shown how quickly a Greece-boom can turn into a Greece-bust; hopefully only temporarily. Things like that will undoubted recur over and over again. What will Greece do if financial markets chase for the exit door and there is no back-stop?

      My point is: what Greece needs a lot more than access to (expensive) markets is stable and reliable funding at low cost. Wherever I look, I don't see such financial partners anywhere but among Greece's official lenders.

    6. Until the goals of big primary surpluses (4% of GDP) are no more, then borrowing from official creditors does not only mean prioritizing external liabilities, it also means choking the economy further (since those surpluses are going to come by increased taxation and decreased spending).

      As for exiting the troika, you know perfectly well that I am an avid supporter of exiting the euro altogether.

      Did you read about the EU's investigation on Ireland's tax deals with multinationals? They said that they constitute illegal subsidies. So, great, members of the Eurozone were left wtith two freedoms, to borrow (even if from the markets and in a foreign currency) and to tax. Now the Eurozone has removed the one freedom (next year the European Commission will be able to veto budgets), and it's about to remove the second.

      This isn't a democracy anymore. This is a dictatorship and the dictators are the Commission, the ECB, and Germany.

      I literally can't believe my eyes when I read that separatists in Scotland and Catalonia want to adopt the euro. What a crazy world.

  5. 2 new polls.

    - Kathimerini newspaper (pro-ND) gives 7.5% lead to SYRIZA
    - To Vima newspaper (pro-PASOK) gives 3.9% lead to SYRIZA

    Who to believe? Considering that the pro-SYRIZA newspaper recently had 11% lead, it is plausible to expect that the real lead is 8-9%. Which is a plain disaster for ND. Samaras will end his political career after such defeat. He won't be able to stay leader of ND.

    Basically, Kathimerini, was always a pro-ND newspaper, but despite the conflict of interest that all media owners have (that's why they own newspapers after all, not for charity), it was always keeping a sober profile and some dignity and had more serious editors.

    To Vima, like most pro-PASOK newspapers, while not the worst, it was more "fierce" in supporting its protege party. In fact, also here, Kathimerini gives PASOK to 4% and the River to 7.5%, while to Vima gives PASOK at 5.8% and the River at 5.6%.

    One can be reasobly certain, that Kathimerini is closer to the truth, albeit a bit on the side of ND, but to Vima is fighting hard to show SYRIZA low and PASOK high, because after all, SYRIZA drains voters from PASOK, so one must keep the spirits of PASOK voters high and curb more the enthusiasm of the SYRIZA crowd.

    The problem is, if SYRIZA keeps widening the gap, he may actually get 151 seats and be able to rule without the need of a "sidekick" party. This will be a total blow for the current governing parties and establishment, as well as for Greece i am afraid (someone needs to keep SYRIZA on a leash).

  6. Irrelevant