I had a very interesting meeting today with an old friend and I found we agreed on so many things, not least of all sympathy for Greece’s current situation and the strategies of Syriza. My understanding of Economics is not as good as his at all, and I tend to think that the whole story boils down to one larger country bullying another smaller country and that seems unattractive. But let’s have a go at analysing the issues….
The fear-mongers (John Mauldin, for instance, an American pundit, who compares Syriza to the Keystone cops) continue to dominate the press while the Greek Finance Minister is busy clarifying his aims and establishing that what was reported in the run-up to election is not quite what he intends to do- he is, of course, rather brilliantly making use of the natural ambiguity of anything that is translated from Greek, a language notoriously difficult to render with absolute certainty as many Biblical and classical scholars will readily attest. Greece remains the language of poetry and mysticism. German or Latin is the language of rules. I wonder which language best reflects “common sense”? Though in this case, after the election and directly on the BBC, the splendidly telegenic Finance minister can put his case very well in English.
The Greek situation still resembles a stand-off, but actually what Varoufakis says makes perfect sense. At least, it does when I am listening to him! He is admirably convincing. He should really take over here from Mr Osborne. (Osborne might have had a recent haircut but he has rarely spent time in the gym… oh and “haircuts”. More on that as a solution another day!)
So, two points- firstly about the result of a possible default and then about the right of Greece to default.
The first point is that if Greece defaults, it surely does not have to leave the euro or indeed leave Europe, neither of which it wants to do –
1- There are countries, like Britain, that do not use the Euro and yet are part of the EU and there are countries like Kosovo, that are not part of the EU but, nevertheless, still use the Euro; Kosovo and the like can default because they do not have to abide by EU fiscal and monetary policy’s, in the same way, it should be possible and practical for Greece to default and still retain the Euro.
2 – Greece’s economy is much smaller, by some measure, compared to many companies registered in Europe, like, for instance, Deutchebank, BlackRock, BNP Paribas and so on and these can, like all companies, default, but they are not expected to give up the Euro if they do so.
3 – In the US, where the fiscal union is consolidated between the different states (i.e. an isolated default is much more dangerous), Detroit filed for Chapter 11 last year but still, it did not give up the dollar or leave the US union. The problem with Greece defaulting is not the Euro, but that Greece’s national debt is owned by various European governments who do not want to loose their money and have the power to make or bend the rules. It is essentially political and not economic. It is about bullies.
All countries in the Euro pay different interest rates although there is a single monetary policy – Different member states in the Eurozone are perceived by the market to have different risk levels, and so, they borrow money from investors at different rates of interest. The central interest rate set by the ECB is there as a regulator for the banking industry (private not public) and, indeed, all banks across the Eurozone, by law, can borrow at the same rate at the ECB, regardless of their exposure or Nationality. It is the ECB which sets the rate of interest for the financial sector to borrow money, NOT the Governments, no matter how powerful (or self-righteous) they may feel at the moment.
Secondly, and Finally, local democracy must count for more than the authority of a foreign, though powerful state like Germany. The culture or limiting choice because of the repercussions of bad decisions is an invasive one. If the citizens of Greece have expressed a wish in the ballot-box to stop the austerity and default, it is undemocratic to put pressure on them to not do so and it meddles with their rightful and respected sovereignty. Is default a good decision? Probably not, but we must, nevertheless, tolerate their wish to do so and probably more than that, facilitate that wish- in other words, make it easier for them and for us to negotiate the path towards a default.
There are many companies, peoples and governments that go bankrupt over and over again, and the people and businesses and governments that had lent money to them, thereby lose their money. Nevertheless, the right to declare bankruptcy is a constitutional right and the investors must accept their losses – after all, when making an investment, the investor accepts the return while also taking on the risk. Why should different laws apply for Germany! Why, in other words, should it be impossible for Germany’s creditors to default! It sounds to me like Germany is behaving like a Mafia boss in 1930’s Chicago. Time for a flustered Mrs Merkel to embrace reality. In a time of crisis, she could take a few tips from the man who simply comes across as cool- Yannis Varoufakis.
a fashion statement in Downing street
5 thoughts on “More on Greek debt etc”
Some good points there, Tim. I don’t agree though that Greek default would “probably not” be a good decision. On the contrary, I think it is inevitable.
Greek debt is unsustainable. A default agreed by creditors would be preferable to a unilateral one – but Greece will default. An economic rebound should result. See Argentina in 2002.
Also, Greece is running a primary budget surplus (a surplus before interest payments) so in theory does not even need access to financial markets for borrowing.
The problem is for the German and French “banks” who lent the money. My heart bleeds for them.
Well it ultimately comes to German voters. Would Angela Merkel ever reconsider her stance against Varoufakis arguments? How would German voters take this when they know that the past six years they have beem paying taxes for Greece’s funding?
I am not 100% sure of Varoufakis’ strategy but what I am sure of is that the man knows how to transfer a clear message when he talks, both in English and Greek. And communication may be far more important than strategy itself right now.
Good insight, solid economic analysis! The very last “fashion statement” bit is amazing 😉
Also Varoufakis has changed his name from “Yannis” to “Yanis”. No double-n. He says he likes it better that way.
Many say though, he’s just an ignorant asshole who just want to differ.
I like Varoufakis because he seems to speak without dissimulating and to eschew the empty platitudes we hear from everyone else in the political sphere.
Alex Tsipras in an open letter to Handelsblatt describes Europe’s response to the crisis thus: “An insolvency problem (…) dealt with as if it were a case of illiquidity.”, and a policy of “extend and pretend”.
I agree. I believe the bail-out is nothing but a scam promoted by the IMF and the European elite at the expense of the European taxpayer and the Greeks (i.e. the common people), who are forced into austerity (albeit a phony austerity as practiced by the former Greek government).
What usually happens when someone can’t pay their debt? It’s written off and the guy gets to start again. Lenders get punished for lending to someone who wasn’t creditworthy and take the loss they deserve. The borrower begins to live within his means (genuine austerity). That’s how it’s supposed to work.
Since Greece became independent in 1828, it has been in default about one year out of two. Then Goldman Sachs disguised Greece’s debt burden so it could become part of the EU financial community. Suddenly Greece became a decent credit risk backed by German savers.
Naturally this led to a lot more debt. And as Tsiparis tells us the country has been bankrupt — insolvent — since 2010. The European banking community who lent the money to Greece know that if they admit that Greece is broke then they will have to write-down all that debt: billions in losses for them and their shareholders. Better to keep lending so they don’t need to write off any debt and in full knowledge that eventually they will be bailed out by the central bank and the taxpayer.
This is just another example of how government represents the interests of business rather than the people who they claim to serve. It is also pretty disgusting that mainstream news coverage acts as an unthinking mouthpiece for the political elite, without presenting the true cost and benefits of their policies.
PS Tim, I really enjoyed your article and especially like what you say about the Greek and German languages. I also agree with your main point that default does not mean exiting the Euro and to say otherwise is scaremongering.