The Explosive Scenario – Can Europe switch off funding to Greece?

This week has seen an escalation in the conflict between the new Syriza government and representatives of the Troika, with the meeting of Prof Varoufakis and Mr. Dijsselbloem yesterday not having gone particularly well. The result is domestic and international panic about a breakdown of relations leading to Grexit. Before considering apocalyptic scenarios, let us revisit the ability of the Eurosystem to shut Greece out if politicians fail to secure some compromise on continued funding.

 The following can be found in the illuminating paper of Whittaker (2011)

 What if payments from the loan facility cease? Besides funding financial outflows, loans from the EU/IMF and/or the EFSF also help to finance the Greek government. But if these loans cease, there is another avenue by which the Greek government can continue to finance its deficits: it can resort to borrowing more from its commercial banks (a scenario discussed by Garber, 2010). Indeed, although the Greek government is unable to raise long-term funding on the bond markets, it increased its borrowing by means of short-term treasury bills by €22.8bn in the year to June 2011.

The Greek government is able to borrow from its banks because those banks can borrow from the BoG and, in turn, the BoG can borrow from the ECB so long as Greece remains in the euro. The banks themselves would be in no position to object to taking on more government debt, especially if their existing holdings of government debt are written down and this leads to larger state ownership.

The ending of EU/IMF lending to Greece would therefore not be a binding constraint on its government budget or its foreign borrowing. It would be as if Greece had obtained ‘bailout’ lending from the loan facility or EFSF after all. Hence, if EU/IMF loans cease, as is repeatedly threatened, this will cause a faster rise in eurosystem debt.

Although the ECB would not condone an increase in backdoor funding of the Greek government via the eurosystem, there is little that it could do. It could make it hard for the BoG to refinance its banks, by ruling that Greek government debt is no longer eligible as collateral. Such a prohibition would presumably extend to assets that have gained eligibility by means of a Greek government guarantee. Making Greek government debt ineligible would also cause difficulties for other NCBs that are holding it as security for refinancing their banks. But then the BoG could extend its use of Emergency Liquidity Assistance which is not subject to ECB collateral rules.

Although ELA is supposed to be for short periods, the Irish central bank has been using it for the past 2 years and is currently lending some €50bn to its banks via this route. The ECB Council could order the BoG to cease ELA, but this seems unlikely given the Irish precedent. If the ECB did prohibit ELA, depriving the BoG of any approved means of lending to its banks, the BoG would have no option other than to defy the ECB and continue to lend anyway, given the consequence of not doing do: the closure of its banks for the want of liquidity.

The only way for the ECB to stop this indirect eurosystem lending to the Greek government would be by ordering other NCBs to refuse further credit to the BoG, shutting the BoG out of the TARGET2 system. This scenario is considered by Boone and Johnson (2011) who make comparisons with the breakup of the post-USSR ruble zone. But this would prevent clearance of cross-border payments out of Greece and amount to the expulsion of Greece from the euro. The free flow of credit between Eurozone NCBs is an essential feature of monetary union. It is what keeps a euro in a Greek bank equal to a euro in banks elsewhere. As long as Greece remains in the euro, it cannot be excluded from eurosystem credit, so Germany an any other euro countries that still have sound finances will keep lending, whether or not the Greek government defaults. If this is not done via an official loan facility, it will go through the eurosystem (ECB), and it will increase if uncertainty about Greece remaining in the euro accelerates the flight of capital. The ECB cannot avoid continued lending to Greece or any other troubled country that remains in the euro. The ECB (or, more accurately, its owners, the NCBs that constitute the eurosystem) is the lender of last resort whether it likes it or not. If it were prepared to play this role more explicitly, this would do much to help confidence in peripheral sovereign debts.




Syriza declares war on energy markets

The new Syriza government in Greece has started with wide ranging policy changes, including in the energy field. According to press reports, the new minister of Reconstruction, Environment and Energy Panayotis Lafazanis announced on 28.1.15 the government’s intention to halt the privatisation of energy firms and to change course in liberalisation in the energy field. This is a momentus policy u-turn for Greece, that has been going down the liberalisation path for some time and it is likely to bring Greece into conflict with private investors and the EU which has legislated energy liberalisation.

The previous policy framework

In a paper in the Journal of Energy Security in 2012 it was noted how the IEA pushed Greece towards the” completion of necessary reforms mainly in the area of privatization and unbundling of system operators in both gas and electricity from the vertical integrated companies”. Greece’s main objective under Samara’s government was advertised as attracting foreign capital and expertise to the energy field. Liberalisation started with the process of privatization of the natural gas groups DEPA and DESFA and continued by reducing the public sector’s share in Hellenic Petroleum (responsible for the privatization process was the Hellenic Republic Asset Development Fund (HRADF) that was established on 1st July 2011 (L. 3986/2011), under Greece’s medium-term fiscal strategy).

Within this context and with an orientation towards attracting investment, the main pillars of Greek energy policy were:

1) Encouraging energy market liberalization and private sector participation of international private investors in the Greek market through the attraction of productive investment in order to reduce the delivered price for power to consumers through healthy competition

2) Introduction of renewable energy sources in the country’s energy balance in order to achieve the national goal of 20% renewable energy production by 2020.

3) Expansion of natural gas networks to other countries in the region

4) Promotion of national development programs for the exploitation of hydrocarbon deposits in order to reduce the country’s energy import dependence and to reduce national spending outflows on oil imports amounting to 12 billion Euros/year.

5) Creating the conditions necessary for the transiting of international oil and gas pipelines in order that the country could become an energy hub in Greece’s wider region and in doing so become a key lever in supporting European energy security (including establishing close cooperation with both Cyprus and Israel.)

A key motivator for the previous policy was reducing the allegedly over-sized public sector which was perceived to hinder the development of healthy competition. This effort started in 1999 with the enactment of Law 2773/1999, aimed at compliance with European Union legislation in order to boost private investment and competition.  A new energy law was introduced in 2011 to achieve amongst other things the implementation the EU’s Third Energy Directive.

Foreign investors in Greece

A series of companies had expressed interest in the acquisition of the DEPA/DESFA including the Russian giant Gazprom, Azerbaijan’s SOCAR, Japan’s Mitsui, Span’s Enagas, Italy’s ENI, Algeria’s Sonatrach, Russia’s Neguneft, Holland’s Vopak, and the Israeli Israel Corp. The Norwegian firm PGS was selected as the contractor from among eight of the most important international companies that expressed interest in seismic surveys for offshore Western and Southern Greece. According to Enterprise Greece, US Third Point Gas has entered into the share capital of Energean Oil & Gas (a Greek based Oil & Gas producer and explorer) through an equity capital injection of $60 million; Qatar Petroleum International (QPI) and the Greek company GEK Terna have signed an agreement to acquire an interest in the Heron II power plan. Canadian investment fund Fairfax Holdings has become the third-biggest shareholder of Greek industrial energy group Mytilineos, acquiring a 5 percent stake worth about 30 million euros ($41 million). US York Capital Management had announced 100 mn € investments in Greece’s energy group GEK Terna, acquiring a 10% share of the firm.

Is Greece the next Spain?

There is concern that the sudden policy change will be perceived by foreign investors as a violation of investment treaty protections, in a similar fashion to Spanish regulatory changes in relation to solar energy generation. Foreign investors in the Spanish Photovoltaic market have not taken the radical changes to the regulatory environment and the deconstruction of incentive schemes for renewables with good grace. They have resorted en-masse to investment tribunals seeking redress, for what many perceive to be the end of solar energy generation in Spain. The Energy Charter Treaty secretariat registers 11 cases against Spain, with ICSID having registered 8 cases since 2010 -all still pending. For example Allen & Overy is involved in actions, one of which is by 15 PV Investors claiming in 2011 in an UNCITRAL arbitration for losses upwards of 600 million Euros, with another involving a claim in 2013 at the Stockholm Chamber of Commerce Arbitration Institute for 60 million in annual losses, both for alleged violations of Energy Charter Treaty obligations.

While one has to applaud the rapid application of Syriza’s electoral platform, there are significant legal risks associated with wholesale policy reversals that will require the new government to tread carefully.



A win for Syriza in Greece is a win for rational economic policies in Europe

Greece tonight has rejected the orthodoxy of austerity and shows the way to a better future for all in Europe.

To appreciate the importance of Syriza’s victory see the collection of results above. From the humble beginnings of 4+% to nearing 40% (according to estimates at the time of writing) is a triumph for Tsipras and also a total condemnation of austerity and retrenchment.

Let us hope that Europe will see this result as an opportunity for a change of course.



I posted this picture this morning on Twitter to protest the exclusion of Greeks abroad from Greek national elections. We do participate, we are involved and we would like a say on how our country is run, without enriching airlines in order to do so.

I urge the political establishment to consider the rights of expatriates, as happens in many other countries in Europe.


Το ’81 της γενιάς μας

Στις εκλογές της 25/1/15 στηρίζω Σύριζα για τους εξείς λόγους:

Ο Σαμαράς προδίδει το λαό και την βάση της ΝΔ με την απορόφηση των εθνικιστικών, φασιστικών και φανατικά θρησκόληπτων στοιχείων της άκρας δεξιάς που ανέδειξε στο κόμμα.

Το ΠΑΣΟΚ εκπροσωπεί τον κρατισμό, την αναξιοκράτεια, τις μίζες, τα ψέματα, τις κομπίνες (όπως και η ΝΔ άλλωστε).

Ο ΓΑΠ… Ήρθε, κατέστρεψε, έφυγε.

Τα κόμματα της υποτιθέμενης λογικής δοκίμασαν και απέτυχαν.

Ο Σύριζα έχει προβλήματα, κανει λάθη, έχει λάθος προσεγγίσεις σε πολλά. Ο Τσίπρας συχνα απογοητεύει.

Ωστόσο ο Σύριζα είναι σήμερα η τελευταία ευκαιρία της χώρας. Η μονη επιλογή σε συνθήκες καταστροφής.

Ίσως ο Τσίπρας θα μας φέρει το 81 της γενιάς μας, ίσως όχι, αλλά πρεπει να προσπαθήσουμε.

Ίσως οι Ευρωπαίοι χρειάζονται επίσης την ευκαιρία να αλλάξουν ρότα.

Ας δοκιμασουμε κάτι καινούργιο και ας ελπίζουμε να πετύχει γιατί αλλιως μας μένει τι;



European sclerosis and the need for plasticity in policy making

Where should we place law in debates about the financial crisis? To a degree, the place of law in contemporary political economy has been misconceived. Law is either blamed for creating the preconditions for the crisis, due to its absence (lack of regulation, severe de-regulation), or seen as a technical fix (better or more pervasive regulation post crisis). Law however is at its core the meeting point of politics and economics and it should be celebrated as such. Law is not simply the background to market operations but the conduit of popular will through political decision making onto economic systems and processes. One way of viewing contemporary capitalism is as an incidence of disequilibrium between the economic and political. Market-based rationality and supposedly scientific ‘technical’ solutions shape our political economy and use law as a tool to implement ‘orthodox’ solutions disregarding political imperatives. The crisis therefore can be seen as being the consequence of the dis-embedding of the political from the economic, and it is this distance that causes legal frameworks to operate in unsatisfactory ways. It is, in other words, the flawed conceptualization of regulation and not the actual implementation of technical rules that lies at the core of the problem. The sovereign debt crisis in Europe is the prototypical incidence of disequilibrium.

The European debt crisis in general and the plight of Greece in particular show
why plasticity in policy making is necessary and also reveal why current orthodox
solutions to economic calamities fail. The inflexibility of the neoclassical understanding of the state-market relationship does not allow for avenues out of crisis that are both theoretically coherent and politically welcome. Such realizations form the basis of the examination of the rules framing the Eurozone.

We should condemn the current institutional framework of the EU, and especially the EMU as inflexible and inadequate to deal with the stress being placed on Europe by the crisis. The one-size-fits-all structure of the Eurozone and the assumptions of permanence of economic and political structures is to blame for the sclerosis of Europe and its unwillingness or inability to respond to shocks. While the introduction of an EU exit clause by the Lisbon treaty inserts a degree of flexibility in the European monolith, it is too little to address the core of the problem that stems from Euro-membership. When the current economic and legal framework fails, when a political demand becomes prevalent for a change of direction, an inflexible institutional system can only serve to de-construct the European project. I am not anti-European and not anti-Euro. I am rather pragmatic in acknowledging that if the people of Europe (or Greece for that matter) wish no longer to be part of the European project, they will not be constrained by institutional arrangements. Would it not be better one wonders, if policy making had sufficient plasticity to accommodate the popular will, instead of being determined by preachers of orthodoxy?


For a full analysis of the points made above see the latest issue (2014 Vol.16.4) of the European Journal of Law Reform

A Road to Salvation or Fiscal Authoritarianism?

We are all aware of the troubles of the Eurozone, but as with all systemic economic events we are not always able to critically evaluate the proposed solutions. Eurozone’s problems stem from the fact that an economic project (European Monetary Union or EMU) was used as a carrier for a political project (European federalisation). At the time of the creation of the monetary union it was obvious that countries with significantly different economic capacities and at different stages of the economic cycle were bunched together.

The Maastricht rules were meant to deal with this problem by encouraging convergence within strict criteria. This did not happen, and in addition there is a lot of evidence suggesting it was not even tried in earnest. Europe ended up therefore with a fair-weather monetary arrangement, lacking fiscal co-ordination. The consequence was every incentive to use the newly low interest rates to borrow for both states (Italy, Greece) and private actors (Spain, Ireland) and no incentive to be fiscally responsible. What happened next we all know, the problem is what to do about it now.

The situation points to Germany proposing the solution. The German government has two choices. One is to bite the bullet and accept that the Eurozone cannot survive without transfers of wealth from the rich to the poor. This can only be achieved effectively by allowing the European Central Bank (ECB) to act as a lender of last resort (akin to the Bank of England and the Federal Reserve). Another solution is to reduce Eurozone membership to countries on convergent fiscal and macroeconomic paths. This second option means that Greece, and perhaps not only Greece, will exit the Eurozone. The current situation of ineffective transfers from the ECB to national central banks via purchases of bonds in the secondary market is unsustainable and does not address the underlying problems. Perhaps the newly approved (by the ECJ) bond buying operations will fare better.

However, Germany making its choice is not the end of the matter. A smaller Eurozone can be achieved with less legal and political problems within Germany, but with potentially destabilising consequences for the markets and the entire European banking system. A Eurozone with the full faith of the ECB behind the debts of all its member states however is a totally different proposition. Accepting ECB support will come with the price of fiscal supervision by Brussels and by extension Germany. The introduction of legally binding fiscal restraints supervised by Eurozone authorities (or EU authorities as the UK allows it) perhaps in the form of constitutionally embedded ‘debt-breaks’ means surrender of economic policy to something equivalent to a federal government. This is a crucial political issue for every citizen in a euro-member state.

When the choice is between poverty or domination, voters may opt for domination. It is possible to envisage the Greeks electing to have foreign functionaries peering behind the backs of local decision makers and approving each decision, considering the utter failure of the national political class. Is it as easy to imagine the Italians and the Spanish doing the same? Even if people accept the argument that economic meltdown is at the door, and that help comes with the price of outsourcing policy to external actors, one cannot accurately predict what citizens will choose if asked.

Should the choice be taken away from them? Is the survival of the market more important than the survival of democratic political process? We live in an era where economic orthodoxy time and time again trumps democratic choice. This is rationalised in a number of ways and so far the public (even in this country when faced with austerity) has acquiesced. The point however is that there is a level beyond which economic policy determined outside the political process is perceived to be illegitimate. When a significant portion of the population feels ignored, then there is real danger of civil unrest. What do we choose therefore? To do what appears economically prudent (if the Germans propose it) or to do what is politically legitimate? Does the political class in Europe dare ask the people? Does it dare accept the response of the Greeks on 25.1.15?


euros in greece

This entry previously appeared at the University of Reading Forum blog