Why Greece cannot be allowed to default

From: Euro-sclerosis
By Alasdair Macleod


Lets assume for a moment that Greece defaults. In that case the Greek banking system would certainly collapse (assuming the ECB suspends its emergency liquidity assistance (ELA) because bad debts already on their balance sheets exceed tangible equity by a substantial margin. If that assistance is withdrawn, some €80bn of ELA will be lost. Furthermore, TARGET2 2 settlement imbalances at the other Eurozone central banks, which have arisen through capital flight from Greece and which are guaranteed by the ECB, total a further €42bn. This leaves the ECB in the hole for €122bn. Unfortunately, the ECB’s equity capital plus reserves total only €96bn, so a Greek default would expose the euro’s issuing bank to be woefully under-capitalised.

Therefore, if Greece defaults we would at least expect the validity of this relatively new euro to be challenged in the foreign exchange markets. Even if the ECB decided to rescue what it could from a Greek default by rearranging the order of bank creditors in its favour through a bail-in, it would still have to make substantial provisions from its own inadequate capital base. For this reason, rather than risk exposing the ECB as undercapitalised, it seems likely that Greece will be permitted to win its game of chicken against the Eurozone, forcing the other Eurozone states to come up with enough money to pay off maturing debt and cover public sector wages.



I would like to thank the German people (a letter to Germany)

The Greek and the German government have been both complaining about a propaganda war that is obstructing the truth and makes the successful conclusion of negotiations difficult. Talking to a German friend today, I realised that what is considered obvious on the one side, is far from clear to the other. I thought therefore of laying out my personal take on Greece’s recent history, in the hope that this will give the German public a different narrative from the often hostile rhetoric of Greek media and (many) politicians.



The Greece I grew up in was a very different place form the one you see today. I will not bore you with statistics that you can easily see elsewhere, but I can tell you this: It did not feel like Northern Europe. Things were basic, but progressing steadily during the 1980s, and despite the occasional hiccup, people got progressively richer and life was gradually becoming easier.

Still, the best thing you could wish for your kids, was a job with the state. Why? Because in a sluggish economy the steady salary, permanent employment offered by the state was the best insurance against poverty. Were Greeks opting for state jobs because they were lazy? No, they were opting for state jobs because permanence made up for boring bureaucracy and modest salaries. This is a pattern explained by historical factors in states with weak institutions making the transition from agrarian to city economies.


The political system both exploited and bred the desire for state jobs. Nepotism and clientist politics were the norm. There is nothing surprising about this, as a wide literature on emerging economies suggests. Local politicians made careers by finding jobs for their supporters and the state mechanism was closely connected with the party political machine. While things were not exactly ‘soviet’, there was no such thing as an independent civil service.


The 1990s brought with it some maturing of the political system, but also a deepening of corrupt relationships and backslapping cozy deals. Kostas Simitis embarked on a project of modernisation and Europeanisation of the country aiming to make Greece part of the ‘core’ European states, with the ultimate aim to join the planned Eurozone. Of course modernisation in this context in the mid-1990s meant a particular type of oligarchic neoliberalism that imported some semblance of modernity, yet entrenched elites and a deeply corrupt political establishment.

Volkswagen Polo (3)

This brings us to Germany and her role in all of this. This is all well documented, but the Euro created the following situation. The South of Europe (Greece in this case) by joining the Euro was able to borrow at a much cheaper rate than was previously possible. Who lent them and what did they do with the money? Northern European Banks (many of them German) were happy to lend money to the new markets in the South. What did the Greeks do with the money? They spent it on goods produced in the North, primarily German goods. Indebtedness in the European Periphery is the mirror image of industrial success and growth in the North. This is what people mean when they say that Germany benefited from the distortions of the Euro area, both when its banks raked in profits, and when its industrial production found willing buyers close by.


The Greek state for its part, masked the lack of real economic growth, modernisation and progress by borrowing cheaply and allowing tax evasion to mask stagnant real wages. Who would complain about their salary not being enough to buy that Volkswagen, when they could subsidise their teacher’s salary with the undeclared income of a few rent-a-rooms by the sea?

Would this go wrong? Of course it would and we knew at the time of the Athens Olympics that something was up. Sudden wealth spread across the country, large infrastructure projects were being built everywhere, there was a consumer boom and a lot of conspicuous consumption. How could all these young men drink coffees at 7 Euros a cup in the middle of the day, apparently not working? And it did go wrong, it went badly wrong. It took a worldwide financial collapse to expose the rotten core of the Greek economy, but the party came finally to an end.


The question is what to do now? The Greeks are not lazy scroungers any more than the Germans are cold-hearted capitalists. Germany benefited in the same way as Greece during the boom years and now there is trouble for both, albeit Greece is ahead on this one with a depression more pronounced than the Great Depression that has fundamentally changed many lives already.


It is worth thanking Germany for their support and the German taxpayers for funding that support (for two bailouts already). We all need to realise however that at a time when the ECB is creating billions and pouring them into the European economy to fight deflation, it is a morally repugnant thing to ask Greek pensioners and workers to suffer more cuts in their incomes. This problem is not a problem for faceless markets, it is a problem for real people. How would you feel if your salary went down 10% or 20% or 40%? How would you live? How would you explain to your kids the change in lifestyle? Would you say it is the fault of ‘governments’ so its ok that YOU pay? Can the German taxpayer really say that Greek families need to pay for the faults in the design of the Euro, the manipulations of Goldman Sachs, the actions of predatory elites foreign and domestic?


There are many things wrong with Greece, and many things wrong with the Greek leadership at the moment. Yet, in a rotten system, rotten policies like the deflationary, recessionary austerity that the German government is insisting on are not pointing to a path of prosperity and peace for Europe. Blame not the Greeks for the current troubles and allow some of the money printed out-of-thin-air by the ECB to actually invest in the real economy, as opposed to making profits for financials. Greece needs a change, but families do not deserve to suffer for historical and institutional failures. Why are the workers of Europe blaming each-other instead of the machinations of elites?

Thank you for keeping an open mind.


Come on Grexit lovers, let’s talk specifics


The advocates of ‘pride’, ‘resistance’, ‘honour’ and such like (even if it leads to ‘rupture’) know not what they do, nor what they speak of.

A common response to my resistance to the “Kougki” rhetoric of the left in Greece (Kougki meaning blow it up in pride, rather than capitulate) is that I don’t understand how bad it is in Greece.

I fully understand how it is in Greece and what a new ‘memorandum’ will bring. I have written about it aplenty. I have written a whole book on how undemocratic and shortsighted and damaging neoliberalism and austerity are.

Yet there is something that sets me apart from the revolutionaries of Syriza. Revolutions are built on the corpses of existing people to benefit an abstract future generation. I care about the people living in Greece now, get it? The people who will need to survive the first post-euro year or two. I agree in a way with Lapavitsas when he says that the growth prospects of Greece would be better after Grexit. They will be, but the ‘better’ will be a long way off.

Let’s talk then about what is to happen in June if Greece starts defaulting, first to the IMF and then more generally.

If Greece does something that is classed as a default in ANY of its contracts this will trigger cross default clauses in all other agreements. This means that selective default is not possible on the kind of debt that Greece’s creditors now hold. Will failing to pay the IMF on 5.6.15 have this effect? Not immediately, but if the payment is not made within a month, then probably.

What happens then? The key issue is liquidity and bank capitalisation. The advocates of default claim that if Greece doesn’t pay the Troika, then no problem, there will be money to spend internally. Wrong! Greece still has a primary surplus (it seems) but such surplus cannot be used to capitalise the banks, it isn’t enough! If support is lost from the ECB as may well happen post default, the banks will collapse due to lack of capital to fund outflows.

People often ask whether Greece can default yet stay in the euro. If ECB turns off the ELA tap, then the banks close down. What will Tsipas do? Two options exist: 1) nationalise the banks and bail in depositors. All deposits gone, or a Cyprus style haircut. Anyone fancy that? It may not even be enough. Bye bye to everyone’s money. 2) print own money which means of course Grexit. And what’s wrong with that? Paying for your supermarket shopping 40-50% more after devaluation is what. Fancy paying for the baby formula (now €20 for what I pay £8.50 in London btw) the equivalent of €50?

But the ECB might not stop ELA, it may wish to protect citizens even if the state has defaulted? This cannot happen as the inevitable bank run will render the banks insolvent and cut them off ELA anyway.

To get to the chase. How does the left faction and all those prideful Greeks deal with all this? Come on Mr Lafazanis, let’s hear it. What will the government do with the banks? How will it buy essentials, how will it pay salaries and pensions post default? Time to cut the nonsense about Greece’s geopolitical significance and talk specifics. Do you have any clue what you are about to unleash?

Syriza, the Holy Bones and the Lost Faith


I always had trouble with faith, in everything and especially politicians (in Greece and abroad). At the end of 2014 though I tried to believe that things could be different. I tried to believe that Syriza could bring about some change for the better in Greece.

Having researched and written about the Greek crisis since the very beginning, I came to the conclusion that the orthodox advice of austerity would lead to 20 years of stagnation. This felt excessive in 2009-10, but look at us now, already 5 years into a crisis worse than the Great Depression. Is it too much to think that doing the ‘right’ thing as our lenders advise us to do will lead to another 5 years of this and then another 10? Oh yes, the Troika will argue, but look at Ireland. Mr Dijsselbloem has no trouble pointing to the successes of other states that kept up with the programme. Sure, but ‘success’ is a fluid concept. On a neoclassical measure Greece too could succeed this way, but you wouldn’t want to live there.

The conclusions of my work and my call for allowing democracy to determine economic governance meant that I had to support Syriza in the January election. Reading the works of Tsakalotos helped in explaining the European commitment of Syriza’s leadership and offered some balance to the Grexit desires of the left factions (and authors like Lapavitsas). I felt at the end of 2014 that the time was right for Europe to rethink austerity and that a push was needed for a relaxation of the programme. This push could well have come from a left government in Greece that would act as a focal point for anti-austerity voices from across the continent. Syriza (at least in its official versions) is pro-european and pro-euro, but anti austerity and recessionary programmes. Who can argue with that? All major economists in the world agree.

I supported Varoufakis in his European Tour in the first couple of weeks after the election. It was necessary to explain to the European political elite, and the public, that the programme was not working for Greece and why it could not work. Even though the super-star style was not great, it helped generate some media buzz that brought the issues to wider public attention.

Where things started to go wrong for me was the 20 February agreement. It was obvious that a bridge programme was needed for Greece to deal with the liquidity problem. Repayments to loans were continuous and Greece had not received any bailout funds since the summer of 2014, so something had to be done. It would not be entirely consistent with the Thessaloniki programme, but no-one expected it to be. A comprise is that -a compromise-. Everyone gives a little and everyone lives to fight another day. In February there was still some desire in Europe to ameliorate the programme, without deviating from its main objectives. Syriza and Varoufakis were right to ask for major amendments, but it quickly became clear that this would not happen. A key reason was the lack of support from other Periphery nations. Why did they not support Varoufakis? It is quite simple in retrospect: acknowledging that something different to austerity was possible, would undo the elites in Ireland, Portugal, Spain that pushed austerity as the only option for reform. Varoufakis could not hope for assistance, and this was one of the major mis-calculations of the European-leaning team at Syriza.

After February though Syriza committed a series of cardinal mistakes (of which I present the main 5) that have caused me to lose faith in them and have brought Greece to the brink of default (and possibly worse to come).

1. Varoufakis failed to present a credible list of measures.

troika flag

Relying instead on constant calls for a grand ‘political’ bargain Varoufakis progressively lost support in the Eurogroup by a) excluding monitors, so that the lenders have no independent view on what is going on and b) presenting partial, unlikely and fiscally dubious proposals (including the farcical secret tax inspectors and online gambling tax schemes). These negotiations are in essence technical and there is no desire from anyone on the lender side to reach political agreements ignoring the details.

2. Varoufakis continued to tour and preach.


Even after it became obvious that no-one was convinced by Varoufakis analysis, he kept at it, touring the world, making speeches and writing about it on his blog. The problem here is that Varoufakis is almost 100% right in his analysis, but very wrong on charting a route to success in practice. In the process he alienated almost everyone, leading to his eventual side-lining.

3. Syriza declared war on the Germans

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A momentous mistake has been linking the bailout negotiations to the War Reparations discussion. This was felt necessary by Tsipras in order to maintain a combative front internally and appear to fight tooth and nail in the face of (primarily) German resistance. It has however been incredibly foolish and has lost the support of public opinion in Germany. Almost all interaction I had with German citizens through my work has brought up the issue of the War and the unfairness (in their view) of blaming Germany who is trying to help now for the crimes of the Nazis. Of course I do not think Germany is trying to help at all, and I also think that there is an open legal dispute on reparations. What I am saying though is that this was the wrong move at the wrong time.

4. The self-defeating blackmail


I have written before on this blog about the utter stupidity of a referendum on Grexit. Launched as a ploy by Tsipras to blackmail the lenders, it soon became obvious that a referendum would be disastrous economically, impossible legally and dangerous politically. The whole idea collapsed when none other than Schaeuble himself endorsed it!

5. The internal default


The liquidity situation has become so critical that the government has had to turn out the pockets of the entire public sector and state sponsored enterprises to get together the funds to pay pensions and public sector salaries. This hides the internal default that is taking place. There is anecdotal evidence of state suppliers, contractors, various types of employees going unpaid. While Syriza is preaching against the lenders vowing to default on the ECB and the IMF to protect the Greek workers it is already failing to pay large proportions of people dependant on state disbursements. This will become very noticeable soon and may trigger all sorts of unpleasant responses. I wonder, is it a good idea to avoid a credit event, yet spark a run on the banks if people panic?

The conclusion of all this is that Syriza has squandered its chance and brought the country to the edge of oblivion. I hate to say this, but this ended up playing out like that horrible election ad of New Democracy where the negotiations fail and all hell breaks loose. There are no options left (in any case no good ones, if there ever where any). A deal is needed NOW. Am I a traitor for suggesting this? I don’t care what the Syriza trolls, or German hausfrau think. We need to face reality: a default and collapse of the banking system (with or without Grexit) will bring horrors on the Greek population. This needs to be avoided at all costs, unless Prof Lapavitsas has a plan for Grexit that can avoid the interim 10 years of chaos (before things start getting better – in theory).


Parading the ‘holy bones’ of Agia Varvara with state sanction will not do!

EU tsipras


Fact checking Jens Wedmann – deflation and ELA edition

Real-World Economics Review Blog

As the head of the Bundesbank Jens Weidmann has a large responsibility. His acts and remarks influence the lifes of millioins. But he’s not up to this task. He at least does not seem to know what he is talking about. In a recent interview in the German Handelsblatt he makes, as far as I’m concerned, two major mistakes.

1) He states that the weekly increases in ECB ‘ELA-money’ (Emergency Liquidity Assitance’), which keep the Greek banks afloat, are not to be accepted as the freshly printed money is used to ramp up lending to the Greek government, which means that these increases violate the ban on monetary financing of the government by the ECB. Probably, somebody told Weidmann that the net position of the Greek government vis-a-vis the Greek banks is deteriorating. Which is right. But balance sheets have two sides. And looking at both of these shows that…

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We rely on economics too much

I have struggled as well with the contradictions and circular logic of economic discourses. It gets worse when economic objectives define legal reforms.

Real-World Economics Review Blog

from Peter Radford

I think I am with Tony Judt on this one. I am reading the new collection of his essays written between 1995 and his death in 2010, and have had my memory jolted: he gave us many very considered critiques of modern economics, although they were usually dressed within the context of a book review. The point I am agreeing with is this statement he gives us in his 2009 speech called “What Is Living and What Is Dead in Social Democracy?”:

“But how did we, in our own time, come to think in exclusively economic terms? The fascination with an etiolated economic vocabulary did not come out of nowhere.”

Etiolated? Lovely, but I disagree. Our economic vocabulary is both robust and way too vigorous to be etiolated. On the contrary, economics has become a weed infesting society in every corner, and our use of it is…

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