Greece should stop the “cunning plans” and instead default and devalue this Christmas

One of the features of the economic crisis affecting Greece has been the  way that the so-called rescue of her always has hitches and glitches before disappointing again. The latest example of this is the Greek debt buyback plan that I have mentioned several times on this blog. Let me start with the simple mechanics about which we were told this by the Reuters news agency.

Athens has no plans to extend the deadline for bids beyond Friday, finance ministry officials said…….A second official confirmed the 1700 GMT deadline.

The words of Sir Humphrey Appleby are echoing in my ears at this point.

Never believe anything until it is officially denied

Because it is now Monday and we have a new deadline of 12pm tomorrow (December 11th).

The Greek buyback plan

What is trying to be achieved here is for Greece to take advantage of the fact that her government bonds are trading in price well below par of 100. For example if we use the current plan we see that buying them back at 33 and then cancelling them reduces her liability on these bonds by 67 (100-33) or two-thirds. So to use the numbers for the current scheme she can spend 10 billion Euros to cancel 30 billion Euros of her bonds.

Put like that it seems an outstanding idea does it not? Unfortunately there have been issues along the way.

Problems with this

1. I have pointed out before that this should be done at as low a price as possible and yet authorities have dithered whilst bond prices have risen. Let me give you an example of the consequence of this. Back in May Greece’s ten-year bond was trading at a price of 24 and now it is at 38. So back then she could have retired the same amount of bonds for only spending 7.2 billion Euros or 2.8 billion less than the current theoretical plan. I say theoretical because as you may have noted the current price is well above the 33 assumed.

As we consider the 2.8 billion Euros we might like to consider how much Greece needs that and we see that the answer is desperately. Instead the money has gone elsewhere of which more later. Some will have gone to vulture funds who saw a chance and took it but there is an even deeper malaise and problem here. If you think that Vultures preying on Greece is bad enough an image I am afraid that there is something worse to come.

2. Greece has to borrow an extra 10 billion Euros from the EFSF to do this. So still a gain as she retires 30 billion of bonds? Er not quite as many of the bonds will be sold to her by her state owned banks which will then need yet another bailout. So of whatever is gained here some will have to be given back to the banks or they will collapse. Any extra funds here will need to be added to the 25 billion and 23.5 billion Euro bailouts they have already received or been promised. So there will have to be extra borrowing from the EFSF to finance this and the gains from the scheme start to dribble away even further.

Is this just another disguised bank bailout?

This is a chilling conclusion but if we examine the events we see that the evidence does fit such a scenario. Greek banks start with Greek government bonds priced at around 20 and end up with them priced in the mid to high 30s. A “nice little earner” particularly in percentage terms as Arthur Daley used to say. They then exchange paper with the Greek sovereign stamp on it for paper with the Euro area’s stamp on it (EFSF) which with apologies to Greek readers is another gain.

A very cynical game which gets worse if you consider the fact that the Vulture funds were if this is true a required part of the process and the authorities have connived in their populace being ripped off. When you consider the state of Greece’s finances that should be shocking in its concept. But someone or something had to  drive the price higher for the gaming to work.

Meanwhile the Greek nation becomes ever more indebted as even plans to reduce it end up having such a small effect. Regular readers will recall that the debt haircut or PSI scheme of the spring had a similar effect. By the time it was over the gains were much smaller than the promised ones.

Has Greece already had her own “lost decade”?

On Friday Greece published an update on her economic growth figures. The latest numbers were a little better as her economy shrank at an annual rate of 6.9% in the third quarter of 2012 rather than 7.2%.

However we see also that the area which has been doing best is beginning to struggle too.

Exports decreased by 4.5% in comparison with the 3rd quarter of 2011

In case you were wondering how this can be a positive influence as reported by many this is because imports fell much faster (-21%). It is one of the flaws of the GDP system that collapsing import levels improves the number.

If we look at the third quarter of 2012 we see that in real terms the recorded GDP was 12.2% below that of the same period in 2005 (the earliest year in the report). Unfortunately as we look back we are not comparing like with like as changes to some Greek data only go back to 2005 but one cannot help but feel that we are back to the levels of ten years ago. If we consider that due to the import effect described above that GDP numbers are likely to have an upward bias compared to reality we see that things are probably worse than even that.

Today’s industrial production numbers

The way that they are presented does allow a brief basking in the sunshine.

The Production Index in Industry (IPI) in October 2012 compared with October 2011 recorded an increase of 2.0%.

A turn at last? If you think that you need to address two issues. The first is that output has in fact fallen by 6.5% between September (78.8) and October (73.7),and this is not in the headlines but in the detail. The second is that October 2011 was a particular trough in output where it fell by 14.8% on the month before.

Also as we review an underlying index of 73.7 compared to 2005 being 100 we can indeed be sure that a lost decade is sadly well underway here.


Last Christmas I recommended that Greece should default and devalue and take advantage of the Christmas break to do so.

If you consider the implications of a default and a devaluation then a lot of organisation and actual work is required. At the simplest level you need to have printed a new currency and there are many other changes that would be required.

If we examine the calendar we see that there is an opportunity again especially if one includes Christmas Eve which many nations in Europe treat as part of Christmas anyway. So having sorted the timing let us examine the why.

However if we move from rhetoric to reality we see in my opinion a situation that is so desperate that we may already be seeing a nation in a 1930s type depression. Accordingly if I was involved I would put it on the agenda for tonights meetings and I would vote yes.

As you can see my fears of a 1930s type economic depression in Greece have come ever more true as 2012 has progressed. The worst part of this is that there is an exit door. It would not be what economists call a “free lunch” as there are dangers such as the risk of inflation from the currency devaluation but rather than the hopeless future that Greece now faces it does offer hope. Rather than being a bankocracy Greece would have the opportunity to regain control over her own destiny.

In essence what Greece has to do is explained well by these lines from the song Hotel California.

Last thing I remember,

I was Running for the door

I had to find the passage back

To the place I was before

Last year I pointed out that this was a rare view.

I do not recommend this lightly as there are many costs and risks in such a move and I realise that there are hundreds if not thousands of commentators who reject the very idea.

As I wonder about how much they all must regret that, as after all the economic collapse that they predicted post-devaluation has occurred on their watch so to speak I issue the same challenge this year. Greece needs to devalue and default if she is  to have a chance of recovery.

What Greece certainly does not need is any more of the “cunning plans” which have hit her in 2012.

This entry was posted in Euro zone Crisis, GDP, General Economics, Greek Financial Crisis, Manufacturing, Recession, Uncategorized and tagged , . Bookmark the permalink.
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  • JW

    Hi Shaun

    Poor Greek people.

    I came across the attached today, it is a good study into the decline of the rewards of labour over capital in the US , especially over the last decade. Its true of course in Europe/UK as well. Without a reversal there will be no recovery.

  • Drf

    “As you can see my fears of a 1930s type economic depression in Greece have come ever more true as 2012 has progressed.” Well yes, but why only in Greece, Shaun?

  • forbin

    Well, he had to start somewhere……..


    PS: and it wasn’t going to be Iceland , was it ? ;-)

  • forbin

    Hello Shaun,

    On Minitru I read this about the banks if they fail again

    “Shareholders would lose their money and people who had lent the bank money would end up owning it.”

    Apart from the obvious trick of making the lenders hold the poisoned cup and all liabilties

    would this make a good Greek plan ??

    The show must go on …


  • DaveS


    Surely the exit door would just lead Greece to the same position as the UK i.e. not in the Euro, a bankrupt service economy, with an unaffordable welfare state and labour costs which are far too high not just on a European scale but on a global scale.

    Why has being outside Euro not worked for the UK ?

    To me it seems much more likely that if Greece exited it would do the same as the UK i.e. press the big red QE button. It may be close to eliminating its primary deficit but only because of Troika imposed austerity. Without that constraint I think its extremely likely that a democratically elected government would purse a “growth” agenda i.e. spend lots more money and run a deficit. I think the IMF would step back (may have to step back) and let them print – after all they would be in good company with US, UK & Japan – all the best central banks do it.

    But if you combine QE with a devalued Drachma then I’m afraid the Greeks might become the first Western Europeans to experience hyper-inflation since the Weimar. I think this is a genuine risk. And with Golden Dawn the resonances of history don’t end there.

    I suppose hyper-inflation may impoverish the Greeks sufficiently so they can compete in a globalised world – but that is my point they will still be impoverished – potentially much more than living on strings-attached German welfare.

  • DaveS

    Yes, I’m afraid the poor Brits will be joining the poor Greeks much sooner than we think.

  • forbin

    Agreed , followed by the split up of the Union as the Scots and Welsh seek to distance themselves from the mess….

    only to end up in a bigger one themselves.

    Esp that Salmon guy , he’ll have the Scots out of the UK Union into the EU one in a blink of an eye and the filling of his boots with Euro gold ;-) ( and Scots end up still not being free …. )


  • pavlaki

    Outside of the straight jacket of Euro membership, Greece could position itself as a low cost, low tax manufacturing base on the doorstep of Europe. It would require a cleaning up of the corruption inherent in Greek politics and the unbelievable bureaucracy but that is possible. There could be a future for Greece, but I do not see one if the status quo continues.

  • Rods

    Hi Shaun,

    I agree with you and the longer it is left the worse the Greek position will be.

    I saw over the weekend that UK banks exposure to Eurozone bonds has dropped from a peak of €1tn to €201bn, which I think tells a story in it own right, where a major part of the support and bailouts from the Trokia is about decoupling cross border risks and saving the banks with major exposure in any defaults!

    Because any default would have implications and costs for the German tax payer and Merkels 2013 reelection chances, she will make sure that Greece stays in the Euro until next autumn.

    It also doesn’t fit in with the “The Project” of ever closer union. The devastating effects of the current austerity I’m sure are just viewed as collateral damage by Brussels. After all they must be good and right they have just collected Nobel Peace prize to prove it. :-( My dog has now got to an age where he no longer chases cats, so hopefully he will win it next year! :-)

    So the chances of Greece defaulting and leaving the Euro this Christmas is anywhere you choose between nothing and zero, there is more chance of you becoming the next president of the Greek central bank!

  • Noo 2 Economics

    So, just to round up, that’s:

    1. European Financial Stability Facility
    2. Project Merlin
    3. European Stability Mechanism
    4. Private Sector Involvement
    5. Funding for Lending
    6.Outright Monetary Transactions
    7. Greek buyback

    all for your financial lexicon Shaun, Oh, I forgot “bank bailout” aka the tax payer gets ripped off once more whilst the bankers get richer. This is an economy of the banks, financed by the taxpayer for the banks.

    I believe the US banks have repaid all their loans and they’re the ones who are supposed to have started this off. If they have paid off their loans from the taxpayer why haven’t the UK/EZ banks paid off their tax payer funded loans?

  • Shaun Richards

    Hi JW
    Thanks for the link and some fascinating numbers. For those who have not looked at it labour has been losing ground since the 70s and more particularly in the last decade. Karl Marx must be spinning in his grave at Highgate! The ideas from Das Kapital would get traction from such numbers.
    Also it would be fascinating to replot the numbers which use US CPI with the ShadowStats versions as the gap would widen further.

  • Shaun Richards

    Hi Forbin

    In my opinion the new banking plan goes wrong right at the beginning when it accepts the too big to fail concept for banks. We even have a Windscale to Sellafield switch as they are now Globally Active, Systemically Important, Financial Institutions or G-SIFIs
    For those who are unaware of the UK nuclear power industry the renamimg of the reprocessing plant above allowed management to say that Sellafield had not had any leaks, which was true as when it had them it was called Windscale…..
    For Greece such a plan is too late and frankly the concept of bondholders becoming owners looks and sounds bizarre. Under certain circumstances they should lose some or all of their money but making something convertible is usually because you expect good times not bad.

  • Shaun Richards

    Hi DaveS
    I am more hopeful for the positive effects of a devaluation and default which would also involve as complete a re-jig of the Greek establishment and as fresh a start as possible. She does have businesses and can export but simply needs more of them.
    As to Golden Dawn is it not thriving right now? The historical parallel to my mind comes from Hitlers claim that Germany had been suffering from being badly treatly at Versailles which sooner or later someone in Greece will claim about the EU plans which leave it ever poorer and more indebted.

  • Shaun Richards

    I sincerely hope and believe so. Indeed the changes to her establishment if they come as I hope and plan could easily be more significant than the devaluation.

  • Shaun Richards

    I do like the line that possibilities for satire ended when Henry Kissinger won the Nobel Peace Prize! So perhaps times change less than we sometimes think.
    As to dogs my parents one when he got older and was unable to chase squirrels (after the one dash he was still capable of) used to look at me and I used to think that he was saying go-on your turn….

  • Rods

    That’s what your running shoes are for then! :-) )

  • Shaun Richards

    I have some more

    Special Liquidity Scheme (which we ended too early hence the need for Funding for Lending)
    Securities Markets Programme
    Extended Collateral Term Repo Operations (Announced to a grand fanfare in the summer but as of January individual results will no longer be published by the BofE….)

    The US situation is different in that whilst support programmes like TARP have been heavily wound down and are claiming a profit so far, that hides the fact that support went from the US Treasury to the Federal Reserve. It bought Mortgage Backed Securities during the crisis and in the new version of QE is buying them again which of course helps the banks..

  • Noo 2 Economics

    Thanks Shaun,

    I’d somehow forgotten about the Fed MBS activities and it’s implications, there’s so much the Central Banks get up to these days it’s impossible to keep up! This is why I like reading your blog – you bring all the noise and confusion back into clarity.

  • Anonymous

    Hi Shaun,

    I agree in principle that Greece should default and exit the euro, but I disagree with timing it at christmas. People deserve a proper holiday and christmas is already very busy (hopefully) for small businesses – also I suspect the Greek bureaucracy would be even more disfunctional if asked to work over christmas. Much better to schedule a bank transaction freeze over a few working days while a new currency is put in place.

    Also I think it would be impossible to ban possession of hard currency without a dictatorship – as well as undesirable. Communist laws banning hard currency resulted in a black market and priviledge for the nomenklatura.

    Big transactions like cars and property are likely to be priced in euro after a Greek exit. Greek business would be very hard hit if they cannot use hard currency to import essential items. A Greek exit would likely cause some wealth redistribution to the benefit of the very rich who can snap up bargains from distressed sellers.

  • SGreen


    Personally I think it would make complete sense for Greece to default and it is inevitable anyway (even if it is just by endless haircuts).

    One question I have never been able to get the answer to is why Greece defaulting means that they have to leave the Euro (not taking a position on whether they should or shouldnt leave), as surely the Euro is just a currency? The US could default on its debts, they wouldnt need to find an alternative to the dollar, surely the Greeks could just say “Sorry cant pay the debts” and still use the Euro as its currency?