Wednesday, February 4, 2015

On Being Finance Minister of a Bankrupt State

On several occasions I have now read statements by the Greek Finance Minister Yanis Varoufakis that Greece is insolvent. In this interview with Die Zeit, he even declares that he is the Finance Minister of a bankrupt state.

I am no lawyer but it seems to me that when the CFO of a borrower, be that a company or a state, declares himself bankrupt, that could have some very, very serious consequences. Anyone who is extending financing to the borrower could become liable for grossly negligent conduct if he made new loans and/or did not call back existing loans immediately.

I am no lawyer but it seems to me that this is a declaration of default.


  1. You are right about the consequences. Who is the official politician however to make this statement official for the world? Is that the minister of finances or the prime minister? Who is responsible for this? Who's task is this?

    Varoufakis talks with his own words about his own insights and his own designed facts.
    I am convinced (I want to feel safe) that all who govern "Europe" know exactly what is going on in Greece, if it is bankrupt, or not, and who should bring that message. Or who should keep his mouth shut, because he has not the right to talk in the name of...

    If not then my sincere wish is that your post, that I take as an utterly serious message, will be shared and commented in and by all media in the world.

    If this is reality, and Varoufakis knows where he is talking about, and it is true, then I accuse him for misleading the world and taking all and everybody on purpose in the dangerous pitfall named Greece. Washing his hands in innocence after, saying that he has said so but that nobody listened. He has no consciousness, does not follow not any ethical law. That is clear and proved. Otherwise he should not even have taken the task of being the minister of finances to represent his country among those who try to help Greece with financing. He should have started his political career with announcing what I read here in the post. THAT would have been fair and been a statement of honor. But he did NOT.
    It he knows that it is not true what he proclaims then he is irresponsible as well. Loving it to shock people. Is it not in posts,TV comments, or dressing, then it is with dirty lies.

  2. If he is quoted correct and has used the word bankrupt, as also in the English version, then you are right Klaus. If he has said insolvent then it is ambivalent, he could have meant cash flow insolvent. If you don't call his loans you are not on thin ice, you are in over your head, also if your name is Mario Draghi. Funny, let's hope the private investors IMF and EZ nations have the same sense of humor as us and don't start calling.

  3. I believe your argument does not make any sense at all... Call back existing loans? The CFO just told you he can not pay the loans!!!
    There is nothing to call back...

    On top of that, he is telling you that he does not want more loans because he can not pay the existing under the current circumstances.

    In other words, he is telling that you need to tell your taxpayers the truth, i.e the policies that you forced upon Greece have failed and pretending that everything is fine is IMMORAL!

    1. Try to understand the following:

      The proper phrase would have been to "call all outstanding loans, whenever they are due, to be due and payable immediately". Since, as you say, the borrower can't pay, it is nothing other than an acceleration of default. And since all loan agreements presumably have a cross-default clause, the entire sovereign debt is immediately in default. With all the consequences thereof.

      The USA (like Germany and most other countries) have to borrow all the time in order to be able to pay back maturing loans. That's called 'refinancing'. Sovereign debt hardly ever gets repaid but it always gets refinanced.

      If he wants the tax payers to see the truth, all he has to do is to formally declare himself insolvent and stop all payments. From what I can tell from the media is that he is trying to pick up money wherever he can (ELA funding from the ECB, T-bills funding, etc.). Not a sign that he doesn't want any more loans, is it?

    2. Following up to my comment above would it happen to know whether and to what extend the commitments as agreed in November 2012 have been fullfilled and to waht extent

      1. ECB has returned to Greece coupons of 5.2% on 19.9Bio holdings of SMP GGBs
      2. Bundesbank has returned the coupons of 5.2% on 7.3Bio ANFA bonds
      3. Further measures to addrees sustainability of Greek debt subject to Greece achieving a budget primary surplus.

      Why is it that any roll-over of the GGBs held in ECBs portfolio would constitute violation of the monetary financing clause while SMP purchases or more profoundly Irish promisary notes convertion of 25Bio? has not been considered such a case?

      What is the current opinion of the troika member called IMF with respect to debt sustainability? What will happen if for example as we speak the program is off track and IMF pulls out?

      Why is it that part of the re-capitalization of Spanish banks went through the European Stability Mechanism while for Greece it was fully public debt?

      I would love to hear your personal opinion on the success of the current policies as directed by Germany on the whole Eurozone
      (1) Unemployement
      (2) GDP growth
      (3) Inflation (rather deflation - ECB managed to "underestimate" deflation leading the continent to a lost decade of Japanese type deflationary spiral)
      (4) Bad debt/banking sector (NPLs still not bottomed in Spain)
      (5) Debt levels (65%2007 -> 91% 2014)
      (6) Consumer Confidence (-0.6!!! at 2009 lows)
      (7) Currency (bibi my hard EUR-> DEM)
      (8) Investor confidence (everyone and my grandma UNDERWEIGHT European assets)
      (9) Dispersion of growth and income between EZ members
      (10) Rise of anti-european sentiment and Lepen-like parties

      Congrats my friend, well done. Makes sense blaming Greeks rather than trully facing tthe fact the medicine is not working

    3. @ Anonymous at 5.56
      I was intending to spend some time answering all your questions but then I read your last 2 lines and, frankly, on that basis I don't think we have a sound basis for discussion.

  4. No, I do not share your view that there are legal implications. Legal personality under national laws is confined to companies and individuals; states are states, and legally speaking cannot be bankrupt.

    Even if one might imagine some complications from an actual formal declaration of bankruptcy of a country, this could not come from a minister in speech. It could not come from a single minister in formal signature. Such a document, with such serious ramifications would normally be signed by a prime minister, finance minister, foreign minister (at the minimum) within the context of an international meeting involving other governments and/or international agencies.

    So, these are the expressions of a slightly offbeat minister. Nothing more. How markets, lenders and others will react to his declarations is a separate issue: I do not know, but presumably he has a strategy.

  5. Indeed for his level and position it is quite immature and unprofessional to make such statements, unless it be taken out of context. (Unfortunately i can not read the interview as there is no english button.) Varoufakis has claimed countless times that his statements are taken out of context by the media which indeed has happened.


    1. No, it was not taken out of context. He also commented on the future fiscal policy as follows: "Greece will never again have a primary deficit. Never, never, never!" SYRIZA has been saying that since their first Economic Manifesto in June of 2012. At that time I thought thay had made a mistake without being aware of it. Since they have now repeated that statement so often, I am beginning to believe that they mean it. Whether they can do it is a totally different matter.

  6. Here is the english version of the interview:

    Not beeing a lawyer but beeing a German I quite liked the interview.

    We have a saying "Einsicht ist der erste Schritt zur Besserung", in english like "A fault confessed is half redressed."
    We al know Greece is tecnically bancrupt, so who cares confessing it.

    With Samaras, Papandreou or Karamanlis I always had the impression they did not really confess how deep was the mess greece had mixed up in the past, hence they were not willingly or able to develop own ideas to get Greece out of the mud and stand to these ideas. The fault was always up to evil Troika, evil Germany, evil money giving people. How can they dare giving not even more money?

    The pressure of the Troika perhaps was the only slim chance to stop Greece wasting money it did not earn by its own.

    But as always with foreign ideas that are not wanted by government and people, there is some stupitiy in it (they do not know the culture) and they have no chance (everybody is free hating them).
    These Syriza people seem to be the first in government to really accept that the old way was bad and to develop creative ideas to reform greece, to work out of the muddle. It is the first time I get hope for Greece.

    I am shure some of their ideas are total bullshit and some are really genious.
    If they have a learning curve steep enough to continue developing the good ideas and stop continuing the bad ones and if their demands toward europe is not extraordinary or agressive against the european idea I suppose they may find a common ground with german people and government.

    Germans dont want to spent money to a country latently corrupt and nonreformable. But I am shure they are willingly to help a society reforming itself, getting rid of a corrupt culture and rebuilding their country.

    Germans are not really niggardly. Western Germany spent really a lot of money to unite with Eastern Germany and to rebuild it. They spent a lot of money helping Eastern European Countries to develop and to enter European Union. I am shure they will be ready to help recreating Greece if they see it entering a path worth this help. In the last years they mainly saw a corrupt and hatred muddle.

    I think its a good start to confess faults and show paths how to make it better in future.


    1. As a German I agree with your thoughts.

      Here may be a chance for Europe's future:

      "... a modern version of the Marshall Plan is needed. Politically, it would be smart if German Chancellor Angela Merkel were to take the initiative in proposing such a grand solution, rather than being forced into piecemeal, reluctant concessions by new governments in Greece, Spain, or elsewhere."

      "A modern Marshall Plan should have three main components. First, sovereign debt in the eurozone would be restructured to ease the pain suffered by Greece and Spain. Second, a collectively financed public-investment program would focus on energy and other infrastructure. Third, a timetable for the completion of single-market liberalizing reforms – notably for service industries and the digital economy – would be established."

      "... Germans should be reminded that, along with Marshall Plan funds for Western Europe, the other big boost to Germany’s postwar economic recovery came from debt restructuring. The London Agreement of 1953 canceled 50% of Germany’s public debt and restructured the other half to give the country much longer to repay."

      "By including the ... components of public investment and single-market completion, the Merkel Plan (or, better, the Merkel-Hollande-Cameron Plan) would be able to restart economic growth while opening countries to more trade and greater competition. ..."

      "Of course, a modern Marshall Plan would face a wall of skepticism and obstruction by national interest groups. But, by standing together, European officials could win that battle. And if it is not tried, tomorrow’s Europeans may never forgive today’s leaders."

      Bill Emmott, a former editor of The Economist, is Executive Producer of The Great European Disaster Movie, to be broadcast by the BBC on February 8 and Arte shortly thereafter.

      As far as I know, also Yanis Varoufakis thinks along those lines ...

  7. Here you can find the English version of the interview, Yanis Varoufakis gave today "DIE ZEIT":

    "Varoufakis: A huge mistake. Greece collapsed under its debts. How did we deal with that? We gave even more loans to an over-indebted state. Imagine one of your friends loses his job and can no longer pay his mortgage. Would you give him another loan so he can make payments on his house? That cannot work. I’m the finance minister of a bankrupt country!"

    But tne newspaper also informs like this:
    "This interview has been edited and condensed for length and clarity. This is the English translation of the original German version."

  8. There are three things going on here.

    1) Tsipras and Syriza think they are still in election mode. Some of them still think they are dealing with the President of the University asking for a room to host a party 'anarhikon',

    2) Varoufakis thinks he still is a blogger who can write and say anything he wants to and the effects are measured with likes, friends and unfriends and not with percentage points in interest rates.

    3) The reality of the EE/Germany/Troika and the rest of the world.

    My guess is that these things are not very likely to merge in the near future. Maybe things will get dire enough and then they might. Two more notes

    1) He said that the he had negotiations with the IMF about the debt and IMF said they,
    2) The French, of all people, came out and said that Greece should not try to turn them against the Germans. I get the sense some serious misstep took place that ticked the French and I am sure the Germans.

    All in all, these guys are amateurs. If it was poker and the Germans did not care about a viable solution they would have taken their 'sovraka'.


    1. I disagree totally with your comments. And if you bother to read the international press, you will find that Varoufakis has gained a lot of attention and credibility for his views on the Greek situation. Some of this support has come from the business community and right wing economics lobbysists (eg the Adam Smith Institute).

      There is also a lot of US discussion concerning his negotiation style. Some criticism, but the consensus seems to be that he knows his game and is marginalising the German government in its austerity insistence. Basically, almost no serious commentator on the issue is supporting the German position by this point.

      The problem with most of the German comments is that they are taken from a position of putative power -- smug in their knowledge that they have wrapped up the debate in Europe. This is looking increasingly implausible, although time is not on the side of Greece. Of course, this is part of the reason for Merkel's arrogance about listening to proper solutions for the eurozone crisis.

  9. Would it happen to know whether and to what extend the commitments of Eurozone members (as agreed on November 2012) have been respected and fullfilled as Greece has to respect commitments?

    1. The ECB has to return to Greece coupons of 5.2% on 19.9Bio holdings of SMP GGBs (Mr V explicitly asked the non disbursed amount of 1.9B)

    2. The Bundesbank has to return coupons of 5.2% on 7.3Bio ANFA bonds (how much of that have they really returned? I know that France National Bank has acted according to their agreements)

    3. Further measures will be taken to address sustainability of Greek debt subject to Greece achieving a budget primary surplus. Why is it that nothing has been done even if Greece achieved the target?

    More questions and food for thought

    a. Why a roll-over of GGBs held in ECBs portfolio constitutes violation of the monetary financing clause, when other SMP purchases or more profoundly Irish PROMISARY NOTES to the Central Bank of Ireland and convertion to bonds (25Bio EUR) are not onsidered direct financing?

    b. Why is it that part of the re-capitalization of Spanish banks went through the European Stability Mechanism while for Greece it was fully public debt?

    c. Is it true that Portugal has been consistenly undershooting all the program targets? Why is it that Troika left Portugal even without the country achieving its obligations?

    d. What is the opinion of the troika member called the IMF with respect to debt sustainability? Is it true that the IMF happens to believe that the program is off track and will soon stop disbursing tranches?

    I would appreciate reading your personal opinion on the success of current European policies as directed by Germany. I hear what US and UK say about them. How do you assess

    (1) Unemployement rates
    (2) GDP growth
    (3) Inflation (rather deflation - ECB managed to "underestimate" deflation leading the continent to a lost decade of Japanese type deflationary spiral)
    (4) Bad debt/banking sector (NPLs still not having bottomed in Spain)
    (5) Debt levels (65%2007 -> 91% 2014)
    (6) Consumer Confidence (-0.6!!! at 2009 lows) - yes the European are feeling very happy
    (7) Currency (EUR = funding currency, reserve status no more)
    (8) Investor confidence (everyone UNDERWEIGHT European assets)
    (9) Dispersion of growth and income between EZ members
    (10) Rise of anti-european sentiment and Lepen-like parties

    Makes sense blaming tha bad Greeks rather than facing the fact that the medicine is not working and will probably kill the patient.

    Your thoughts appreciated

    CP (from HELLAS)

  10. Well, there has been some grossly negligent conduct by lenders long before, so I do not think that his words really shift any perspective?


  11. The Tragedy of the European Union

    The European Union could soon be a thing of the past. Xenophobia is rampant and commonly reflected in elections across the continent. Great Britain may hold a referendum on whether to abandon the union altogether. Spurred by anti-EU sentiments due to the euro crisis, national interests conflict with a shared vision for the future of Europe. Is it too late to preserve the union that generated unprecedented peace for more than half a century?

    This is no mere academic question with limited importance for America and the rest of the world. In the past decade, the EU has declined from a unified global power to a fractious confederation of states with staggering unemployment resentfully seeking relief from a reluctant Germany. If the EU collapses and the former member states are transformed again from partners into rivals, the US and the world will confront the serious economic and political consequences that follow.

    In a series of revealing interviews conducted by Dr. Gregor Peter Schmitz, George Soros—a man of vast European experience whose personal past informs his present concerns—offers trenchant commentary and concise, prescriptive advice: The euro crisis was not an inevitable consequence of integration, but a result of avoidable mistakes in politics, economics, and finance; and excessive faith in the self-regulating financial markets that Soros calls market fundamentalism inspired flawed institutional structures that call out for reform. Despite the considerable perils of this period, George Soros maintains his faith in the European Union as a model of open society. This book is a testament to his vision for a peaceful and productive Europe.

  12. @AnonymousFebruary 5, 2015 at 9:18 AM

    Imho your prediction does grossly dramatize as it has been done by others for at least 10 years now.

    There might be bankruptcy of Greece and Grexit which will finally liberate the Greek population from the hated pressure of reforms and allow it to prosper by it's own solutions.


  13. Mr. Varoufakis tells a lot about the democratic rights of the Greeks and the governments mandate from the election. I find it hard to understand that a 38% mandate from a 10 million nation can give them a right to the money of a 80 million nation. Where does that leave the Germans democratic rights? Where does it leave the German governments mandate of 75% of 80 million people.

  14. Credibility is not a strong trait of Varoufakis, we are back at the bazaar. "Give me some money, and give me some time to make a plan, then I will consider what changes we will make". One would think the plans had had time to mature over the last 2 years. If they don't come up with a plan over the weekend then they are not serious. I mean a proper plan. "These are the things we will do (or stop doing)", with time lines, milestones, budgets and cash flows. One would assume they had made their economy model during the last 2 years, in that case it only takes a few hours to change the input parameters. If they have not made the model they should get hold of TFGR and a good project manager.

    1. Again? This German obsession with bureaucracy and TFGR? I am afraid that you have no idea how economies function, if you think that it is all planned just like that. Perhaps you should go back to the East German model, which is obviously the one that your Chancellor is planning for Europe.