Greece would probably benefit from devaluation and default

Yesterday came some good news for Greece as her Parliament approved plans for a new property tax. Indeed the vote of 155-142 was more comfortable than many had speculated as all members of the ruling PASOK party voted in favour. It is hoped that the tax will yield a revenue of just over 1% of Greece’s economic output as measured by Gross Domestic Product. This has been required because yet again Greece was facing the prospect of missing the fiscal deficit target set in return for the bail out package that she is in the process of receiving.On current trends it looks as though she will find herself with a fiscal deficit of over 9% of GDP this year compared to the target of 7.6%.

Greece still is not fulfilling its side of the bargain

Unfortunately other issues remain unresolved and it looks now as if legislation for them will be delayed until late October. This is a problem because they are part of the deal that will allow Greece to access the next bail out tranche of some 8 billion Euros. So yet again Greece is failing to meet its commitments. The detail of these moves involves a further state pay cut of 20% and a reduction in the tax free personal allowance to 5,000 Euros from 9,500 (with exceptions for those under 30 and over 65).

I also notice that the Greek Finance Minister has called for Greeks to produce more receipts when they return their tax forms in an attempt to deal with tax evasion. Up to now they only had to produce 25% of their receipts and he wishes to increase it to an unspecified amount! Being used to the UK tax system where I collect receipts for virtually all business expenditure I have to confess I was a little bemused by  this.

The Private-Sector Initiative for Greek bonds is going badly

Back on July 21st grand plans were set in place for private-sector holders of Greek bonds to take an average 21% reduction or haircut in their holdings. This sort of thing has happened in the past and has been successful, for example Argentina used it as a way out of its debt problem in the last decade. However the Greek version has struggled and an interim deadline of the 9th of September came and went with us nowhere near the 90%+ acceptance that was originally hoped for.

The situation changed fundamentally last weekend with the proposed suggestion that Greece would take a 50% haircut in its debt in early November. Plainly a 21% haircut suddenly looked rather attractive as I pointed out on twitter! Even the most innumerate banker can spot that losing 21% is preferable to 50%. Rather oddly the deal has still showed signs of struggling and whilst there are leaks from time to time that it is approaching 90% participation official sources have refused to confirm this. I think that this is one of those situations where is it had been a success it would be shouted from the rooftops so we can conclude that it is not working. In reality many bond investors seem to be fans of Carlos Tevez.

In the meantime events have moved on as the implications of the fact that Greece is not hitting her fiscal targets and indeed did not hit last year’s either has got the Euro zone revising its predictions. Indeed not only the Eurozone as the International Monetary Fund now forecasts that Greek gross national debt will hit 189% of GDP next year. When you consider that in June it was telling us that the figure would be 172% you can see the scale of the change and in truth it does question their veracity in the past. However if we add in that the IMF now expects the Greek economy to shrink in 2012 by some 2% then there is a clear implication for the bail out package. It will not be enough and will run out. Back in July we were informed that Greece would need to borrow some 172 billion Euros over the next 3 years and the 110 billion Euro aid package was set to help deal with it.

Accordingly not only is the bail out package now too small but even if the 21st of July deal survives the haircut for private-sector investors will have to rise possibly substantially. As they were struggling to get them to agree anyway I would like to wish them good luck with that! So it does not surprise me to see the Financial Times reporting that seven of the seventeen nations involved in the Euro want a change in the terms.

The European Financial Stability Facility: never has so little been touted as so much

This week the EFSF has found itself touted as some sort of behemouth to terrify financial markets. It has been suggested it could go to 2 trillion Euros (an amount recommended by Willem Buiter some time ago) then 3 billion and this morning I have heard Kenneth Rogoff mention 4 or 5 billion. This oddly repeats the hyperbole around plans for further credit easing in the United States this time last year when there was a race to suggest larger numbers! A little reality can be added to the situation by checking the size of the bond issuance that it has made so far and discovering that it is only 13 billion Euros.

Even sillier are the ideas that the EFSF could use leverage to magnify its impact. There are 2 plain flaws with this. The first is that if it only guarantees 20% of sovereign losses (and accordingly leverages itself five times) what happens if losses exceed 20%? If this crisi has taught us anything it is that losses would probably shoot straight over 20% and imagine the instability and panic as we approach 20%. We are back to my image of an unstable lifeboat.

The second is one of logic. When the financial crisis began European politicians were very critical of what they called Anglo-Saxon financial engineering such as securitisations and collaterised debt obligations. As this as a minimum would be a collaterised debt obligation or CDO and in practice would be likely to be what is called a CDO squared ( CDO piled on CDO) i think you can see the hypocrisy and illogic at play here.

Greece’s bond yields still imply default

As I type this article then Greece’s government bond yields are 134% for one year bonds and 70% for two year. Accordingly we can conclude that some form of default is expected and if you look at the prices which are often below 40 as opposed to a par value of 100 they are pricing in more than the proposed 50% haircut.

So if Euro zone officials such as President Barrosso and Jean claude Juncker really belive that Greece is doing well there is plenty of scope for them to invest in Greek bonds and make a profit. Has anybody ever asked them if they have done so?

Greece is reaching the point where defaulting and leaving the Euro may be preferable to remaining

I raise this issue because much of the main stream media tells us that doing the above would be a disaster for Greece. An example of this is an “A-list” Article in today’s Financial Times.

But such an exit would be terrible news for Greece, and equally terrible for the eurozone.

Unfortunately it is full of ill-thought out hyperbole and surmise presented as fact. For example.

Post-exit, the rest of the eurozone and EU would punish Greece by imposing tariffs, while Greece would also lose EU structural funds.

So there you have it, or perhaps you don’t as when the UK left the forerunner of the Euro back in 1992 she remained in the European Union. Accordingly she does not faces tariffs and still receives structural funds when appropriate.

If Greece were to return to a new Drachma then it would be logical for her to default at the same time as otherwise she would be giving herself an even larger burden as much of her debt is Euro denominated. A more competitive exchange rate would be likely to boost her economy and help it recover from its present depression. There would be losses for savers as their savings would be reduced (if they have not had the foresight to move the money out of Greece) but frankly all roads forwards are tough.

When I first began to discuss Greece’s situation some eighteen months or so ago I thought then that the costs of a devaluation would be too high. However as John Maynard Keynes put it “When the facts change I change my mind”. In this instance it may be a sad state of affairs that the alternative of remaining in the Euro now looks worse but it does.

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  • JW

    Shaun, can I ask a simple and probably stupid question; who in the global economy makes money if Greece defaults and leaves the Euro? I am asking because ‘market pressures’ are forcing this eventuality. If Greece somehow stays in because the German public are persuaded to foot an endless bill, who makes money in this situation? 

  • Andy zarse

    I’m guessing the Greek people? They’re the ones who benefitted from ten years plus of economic partying based on cheap borrowing.

  • Anonymous

    Hi Shaun,

    In the past I’ve travelled Africa and Eastern Europe in the 1990s – the local currency bought locally produced food, if you want an airplane ticket, a hotel room, a rental car or business machinery you pay in hard foreign currency.

    If Greece reintroduces a new drachma, it is unlikely to remain valuable
    so why should sellers of real goods accept this paper ?

    The black economy will continue to take euro cash. Wages will be denominated (maybe not paid) in worthless funny money.

  • Bkester

    Unfortunately we come against the issue of contagion.  If Greece, why not Portugal?  If Portugal why not Ireland? If Ireland, why not Spain?  If Spain, why not complete panic?

  • Anonymous

    Hi,

    With all the defaults lining up, maybe there is scope for a new ’ex-€uro currency’, so that a new ‘common market’ can be founded by Greece/Portugal/Spain/Italy/Belgium/….. ?   The growth potential could be impressive.

    And given that the EU has 2 HQ complexes already, I’m sure there would be instant economies to be made, if it were decided to not build 2 new ones.

  • Anonymous

    Hi Shaun,
    I couldn’t agree more with the concept that Greece simultaneously leaves the Euro and defaults. I have in fact advocated this many times under my old moniker on this blog…

    It has to leave the Euro because, even if all its debt is paid off, it still won’t be able to live with a non-depreciating currency union with Germany. A default would obviously be necessary at the same time as it cannot pay its debts now, let alone when they represent an even greater amount after depreciation of the drachma.

    The thing that I just don’t get is why anyone believes that Greece can stay in the Euro in the face of mountainous evidence to the contrary. How much more proof than the mess Greece is in is needed?

    You probably heard the Today programme this morning, where a Greek spokeswoman said that leaving the Euro is not an option and, indeed, had never been discussed “except in corridor talk”. When asked why it is not an option, she brilliantly explained that this was “because it is not an option”.  She also said that Greece leaving the Euro would be the end of the Euro etc etc. This is the quality of the debate that we now have.

    The real agenda of the euroelite is exposed by something else said by Barroso yesterday:

    Mr Barroso also argued that eurobonds would be “advantageous” for the EU.
    “Once the euro area is fully equipped with the instruments necessary to ensure both integration and discipline, the issuance of joint debt will be seen as a natural and advantageous step for all,” he said.

    The federal dream is just around the corner. Let’s pretend that we have to issue these new instruments and, hey, before you know it, we have a full union.

  • Anonymous

    excellent comment. Of course, I believe that the old-fashioned entities formerly known as nations may already have parliament buildings of their own…

  • Anonymous

    Indeed so. There are no easy options now because:
    1. The Euro was a crazy set-up to start with, with a fixed currency but separate fiscal systems
    2. The Euro elite failed to deal with Greece promptly.

    This is what happens when electorates are entirely deprived of the right to stop a juggernaut project. We have been led down a pth without our consent to a place where we cannot get out. 

  • Anonymous

    Perhaps people who shorted bank stocks with a big exposure to Greece?

  • http://kkalev4economy.wordpress.com/ Kostas Kalevras

    The biggest problem with reintroducing the drachma is the fact that people would run to exchange drachmas for euros. An exchange rate set by foreign trade in goods and services is a good thing. An exchange rate set by a run on the drachma would be a real problem which would be self reinforcing.

    I cannot really imagine a reintroduction without capital controls. The scenario would actually only work if a mechanism was setup (in cooperation with the Eurozone/ECB) that would only allow a small corridor of fluctuation in the drachma exchange rate. Moreover all obligations (national debt, private debt, bank reserves) should also be denominated in the new currency if things are to become sustainable. That would also provide an incentive to foreign creditors to maintain the drachma value and not allow a large devaluation.

  • Anonymous

    I dont think there is any intention on the part of the Germans to see a leveraged EFSF trampling over the moral hazard worry that it would encourage fecklessness, counter the conditionality of bailouts and neuter the Six Pack.Put aside the resistance from the ECB on fiscal financing. Add to this Merkel’s comment that she would like to bring forward the ESM to next year, 2012 with  new debt eventually incorporating collective action clauses to control private creditors. The only clever thing coming out of Washington was the publicity for a 50% haircut, incentivising the private creditor sign-up on 21 July agreement. German banks are probably more resilient to Greek default than others and the SMP is socialising losses in the EZ which it will want to pass over to the temporary EFSF.

    Shaun, I think politicians are not so stupid as they are sometimes said to be. I doubt even the ESM will have supranational firepower in the Geitner-mould.

  • JW

    Question is, will Merkel support the ‘populace’ both in Germany and Greece etc and plan and enact an orderly withdrawal from the EZ for Greece OR will she support an increase of some dubious ‘financing package’ that will leave Greeks falling into serfdom and her own populace paying for its costs through taxes?
    We all know the answer, she will do what her ‘bosses’ want and support the financial elite and continue an extraction of wealth from the general populace.
    So, much as I think your analysis is logically correct Shaun, the people making the decisions are following a different agenda.  

  • Anonymous

    And that’s one reason for which it won’t happen or it will be tried not to be allowed to happen (an accident could happen). The other are psychology (even with this suffering Greeks continue to want to stay in Euro, it will be considered as the ultimate failure), geopolitics, the hope of the fiscal union down the line and the illusion or not that this will resolve the underlying problems, the immediate pain resulting from the bank run etc. etc.

    The break up of the almost the whole EZ including Greece is of course a viable scenario. It could happen at a point where there is no other option. But I do not see (for the reasons above) Greece moving out voluntarily or made to move out from Euro as very likely.

  • Anonymous

    Wish I’d thought of the name!   But was it the Greek people who benefited?    If they did then they should have a lot of Euros secreted away.   I’m just guessing, but I’d say the banks and their hench men.   This was supposed to be a reply to Andy Zarse who suggested it was the Greek people who benefited and partied on cheap money. I remember reading something about Goldman Sachs being heavily involved in collusion with the Greek government, but other people here are certainly better informed.

  • Anonymous

    I am guessing, Vassilis, from your name that you are Greek and therefore defer to your judgment as to Greek opinion.

    I just don’t see how the pressures are not going to build up again in Greece while it is part of the Euro. The lack of competitiveness against Germany will get worse even if the debt disappears. You will continue to have the wrong interest rates for your economy. You will continue to have to make huge cuts in the middle of a recession.
    You are not alone in this – I believe that both France and Italy have lost about 30% of their competitive edge since the Euro started as measured in terms of trade.

  • Anonymous

    Point 1 that you make is I know standard belief, but doesn’t the world do it every day when they accept the USD as the currency of trade?    I know that in Zimbabwe since the collapse of their own currency the USD along with the rand are the two currencies of choice.   
    If I say the Euro would have been stillborn if they had waited to get a common fiscus then you’d say “Exactly what should have happened”.   But for the long term how would Europe ultimately compete with all its separate currencies and separate cultures raring to have another go.   Don’t say it just couldn’t happen, for where I was born, N Ireland, they are still in a time warp fighting battles settled over 300 yr ago!    In fact there is a large minority/ small majority of people in the UK just too willing to write Europe off and get on with “never forgetting”.

  • http://www.facebook.com/profile.php?id=1589543439 Mark Stevenson

    Hi Shaun,
    Another good analysis. 
    It is interesting that over the last 18 months you have gone from advocating IIRC a 30% haircut (when few others were) to now advocating a 50%+ haircut and withdrawal from the Euro.
    You might not have been completely right, but your opinions have been a damn sight more accurate than most.
    I think that a disorderly default and exit is now looking more likely than ever and possibly the only question will be whether Greece will jump or be pushed.

  • Anonymous

    DLinneridge,Like the ex-Euro Union, made up initially by the PIGS.  I’m thinking though that it would be something a country could return from, like a penalty box or the minor leagues… .In the meantime, a devalued Euro B currency means cheap vacations for EU citizens and austerity for the citizens of the member countries.

  • Anonymous

    Berlioz58 – totally agree. My view of elections is  that “every election is a sort of advance auction sale of stolen goods”. In the case of the EU, even  this has been disallowed and we have as you say an unelected elite with NO skills available except that of having their noses deeply in the trough! 

  • Andy zarse

    Hi Mcgrathr! You only need to take a look at all the flashy new(ish) Toyota pick-up trucks knocking around the Greek islands with a solitary goat in the back - driven by blokes who seem to spend all day sat outside a cafe and do what for a living I have no idea - to see where at least some of the money went.

    Then factor in that at least 25% of loans from Greek Banks are in serous arrears then you see where some of the money went. The rest was spent, I’m guessing, on public sector pensions and salaries, corruption, Olympic games and other vanity projects like exploding power stations and generally living beyond their means. The money has gone and it ain’t comong back.

    PS I have no objection if you want to call yourself Mcgrath Zarse, it has a certain ring!

  • Anonymous

     A country with no cash and no ability to borrow cannot pay pensions, civil servant salaries or politicians salaries. Default will be painful for the Greece and especially the Greek citizens who depend on money from the government.

    In regards to contagion, Northern European taxpayers money has been misspent to enrich irresponsible bankers. Bankers made money from speculation against Greece, Portugal and Ireland, they can make more money speculating against Spain, Italy and Belgium …. a default that costs them financially will dampen their enthusiasm.

  • http://kkalev4economy.wordpress.com/ Kostas Kalevras

    Right. The good old ‘Spanish, Greek, Italian, Portuguese, you name it’ living beyond their means and just sunbathing while hard working Germans did everything.

    Actually Greece had a 20% increase in productivity in the period between 2000 and 2008, same as Ireland, while Germany only had half (most of its productivity increase happened in the manufacturing sector).

    The clear difference was that Germany implemented a decade-long deflationary policy with real wages staying at the levels of 2000, thus lowering its labor costs. If wage increases do not follow productivity then only foreign sector can increase demand and that can happen only if other countries are willing to increase their wages more than productivity or borrow in order to spend their way. Add to that the fact that periphery countries had almost negative real interest rates (due to ECB lowering its rates to combat Germany’s 5-year long stagnation) and you get real-estate bubbles.

    Germany implemented a beggar thy neighbor policy for over a decade and now is reluctant to let wages follow productivity and increase its domestic demand. I ‘m sorry but that is not how an optimum currency area is implemented. 

  • Anonymous

    Check all your facts and do not believe in myths.
    http://stats.oecd.org/Index.aspx?DataSetCode=ANHRS
    You can compare very easily Germany and Greece.
    I have worked and lived for years in 4 countries, including Greece, the numbers in OECD agree with my perception.

  • Anonymous

    I am not saying that this can continue for ever, something has to give. I think that it will be other things and not the exit from Euro of Greece alone.

    My personal opinion. The Euro is madness! Greece should have never joined.

  • Sovjohn

    In my point of view, at least with the structure in place right now (can’t know if new tools, SPVs or instruments will develop in the future), any country, including Greece, leaving the Euro is correctly identified by the BBC ( http://www.bbc.co.uk/news/business-14977728 – nice chart) as “Global meltdown”.

    Why so – Let’s take two outcomes into account -

    a) Greece leaves, and all hell breaks loose for Greece: The government would have no choice (presumably a national unity government) but to adopt a fiercely “Can’t pay, won’t pay” stance, leading to haircuts which would far exceed 50%. I’d wager them “pulling an Iceland”, with far greater consequences of course, given that Iceland is indeed tiny.

    This scenario might evolve into Greece being summarily kicked out from the EU altogether, and perhaps even in civil war / actual war taking place, where Greece would be further destroyed.

    Geopolitical matters notwithstanding, the “markets” would probably pose a correct question: If the EU and the Eurozone can’t deal properly with a country consisting of 2% of its total size, why not have the same behavior towards other countries?

    Portugal, Ireland, Spain, and Italy would be reeling, then quite possible France, even Belgium, and other countries as well, under the grounds that they are “larger than Greece” and as such pose a “larger systemic risk”.

    Bank runs in half of the EU, rushing to take their money outside the EU, or inside “safe havens” aka DE / NL / FI wouldn’t help.

    b) Putting aside the mayhem described in a), let’s assume that somehow Greece’s departure was coordinated in the best possible manner, and was guaranteed in terms of bank liquidity, et al – Say, Greece becomes an extra cheap tourist resort (it certainly has the capability to do so, I may not love my country’s political class and behavior of many of my compatriots, but it’s certainly a beautiful country), and gets a massive boost in its economy.

    Say it becomes the new “Tiger of the Mediterranean”.

    Why would Portugal, Spain, Italy, Ireland, and others want to continue staying in the Euro, and not “pull a Greece” in that case? I’m sure that if I were a, for instance, Portuguese citizen and contemplated “IMF presence vs going back to escudo, with Greece pulling it off..hmm…” I wouldn’t pick the “stay” option.

    Once again, Eurozone (and perhaps EU) radically changes in nature.

    In both outcomes, the real risks, a la Lehman Brothers, are unaccounted for. What may seem as a once-off damage of 50-100 bn. Euros could once again be trillions before anyone knew it.

    As such – Even if reissuing a GRD would be the BEST OPTION OF THE CENTURY for Greece, I just don’t see it coming. Even the positive scenario has far too many caveats.

    However, two points which may interest you:

    a) There has been an ongoing discussion here in Greece by former members of the new, independent statistics agency ELSTAT, claiming that the deficit in Greece’s case has been calculated using rushed and non-scientific methods, in order to make it “larger than even Ireland’s” and “justify reforms and measures shoved in the throat of the country”.

    This may be a load of bulls*it, but considering nobody, outside of Eurostat and ELSTAT / the government entities know exactly how the 15%+ deficit was calculated, it may well be true, partially or completely.

    Note that the people accusing ELSTAT chairman, mainly, for foul play do not claim the actual deficit is half of 15% (2009 figures), but they claim a real figure around 12% being artificially inflated to 15+% for political reasons.

    This comes along with b) nicely.

    b) Strauss-Kahn has admitted that Papandreou had been secretly meeting with the IMF many months before he officially requested assistance from the EU / IMF.

    It may sound like a conspiracy theory, but it’s not really – PM Papandreou has been known for years for his (and his family’s) close US ties, and miraculously the US, as the IMF greatest stakeholder, has been firmly inside EU political processes since 2010, with Greece, Portugal, Ireland bound to, among others, IMF’s will, and the rest of the countries “bowing to IMF demands” so that it will continue to finance EU countries out of crises.

    Considering the recent events at the IMF summit last weekend, I am inclined to believe the points a + b to be interesting, to say the least.

    Any solution which may come will be decided in top levels, EU / USA / and others, and not by the Greek government, which is a mere observer at this point. I believe that the country will be allowed to stay in the Euro, but placed under heavy international control, with or without a formal “default”.

    There is another plan discussed, which supposedly claims that the EU / ECB can supply Greece with large sums once-off in order to buy debt back from ECB and / or the markets, with collateral some 125+ bn. of state assets (essentially all state assets…)

    I don’t know what will happen, although I think that we’ll know more within the Fall ’11.

    -Ioannis

  • Pavlo

    I do wish we could abandon this idea that the Greeks are a lazy bunch who have spent all the money loaned to them and now want more. I have many Greek friends and I can tell you they work very hard – often holding two jobs to make ends meet. The Public sector can be quite different and some folk there do indeed ‘take it easy’ but again at lower levels the salaries are not great and a second job is often needed. The Greeks ( like the Irish and Portuguese ) were sold a vision by the politicians that somehow the Euro was a financial panacea to all problems. The government spent on infrastructure, creating public sector jobs to keep the voters happy. The banks were awash with Euros and so pushed loans and not surprisingly ( thinking that jobs and salaries were stable ) the Greeks used them to take out mortgages, buy a new car etc – who wouldn’t – we all did!! The problem lies in the concept of the Euro and a one size fits all economy and fiscal plan. It was unworkable from the start and it is the weakest countries that have shown up the fault lines in it. Please stop blaming the Greek people – they did what we all would have done and are now paying a terrible price.

  • Anonymous

    Hi JW

    Both answers you have received are correct.The biggest gainer would be the Greek government which in this example would have sold bonds at 100 and implicitly bought them back at 50 and gains would be made by the Greek people who benefitted from the spending.

    Those who have bet on Greek defaulting via credit default swaps or put options or warrants would also gain or simply selling firms short exposed to Greek problems. If we just look at cds the market is in fact much smaller than you might think so it would be dwarfed by the gains for the Greek government.

  • Anonymous

    Hi Bkester

    Actually the response as it is from Europe’s “elite” is often one of panic..

    However it was beyond my scope today but if Greece were to default I would expect Ireland to do so (in many ways she is the most logical choice to go first) and probably Portugal. They would all presumably leave the Euro at the same time.

    I do not see that as panic I see it in many respects as helping to  break the downward spiral that these countries are in. Should it look like it is working others may join in. This would leave the remaining countries in a “hard” Euro which would be much more stable.

    Devaluations are by no means a pancea as the UK one of 2007/08 proves but in this situation I believe it can help.

  • Anonymous

    Hi Shire

    I think some of them are…. As to the ESM much remains to be decided as it’s start date of summer 2013 looks like it might become summer 2012. But its early introduction combined with its acceptance of default possibilities creates its own problems…

    Some politicians clearly believe they will get their united Europe this way. More and more disequlibrium and unrest to which they can then offer a solution…

  • Anonymous

    Hi Mark

    Thank you. It was outside the scope of today’s update but I never ( and still do not) saw default as a magic bullet as there was always the moral hazard risk of Greece just returning to the same behaviour. For me its role is to buy the time for reforms to take place but for that to happen there has to be sufficient reform and so far there has not been.In many ways reform seems to be the hardest nut to crack

  • Anonymous

    Hi DLinneridge and welcome to my blog.

    As the countries concerned seem to like the idea of a joint currency there would be possible gains from this.The main danger is that it would run the risk of instability as they would be likely to hit the same problems at similar times and continually devaluing very rarely works. But you never know!

    The other route which is much more rarely mentioned is for Germany and those who wish to go with her to leave…

  • Anonymous

    Hi Owkrender and welcome to my part of the blogosphere

    If it works perhaps they might not want to return and if pressed to return might do a Carlos Tevez!

  • Anonymous

    Hi Ioannis

    I took a look at the Roland Berger plan earlier and it has various flaws but the main ones are.

    1. It assumes a Greek national debt of 145% of GDP when the true figures are much higher and the IMF has walked its peak estimate up 160,170,180,190% with no sign of a halt yet.

    2. This collateralising of 125 billion of assets is 2.5 times the privatisation amount which caused Greece so much angst. Also the potential of being “owned” by foreigners is a recipe for causing unrest if things go wrong.

    3. I think that the ECB exposure to Greece is much higher than allowed for here as I pointed out on Monday.

    They keep rolling out plans with a half-life of a day or two…

  • Anonymous

    Hi Pavlo and welcome to my blog

    You make some valid points.My theme on this issue is that Greece spiralled downwards because of a combination of over-spending by her government and its misrepresentation of the figures.The previous New Democracy government was particularly guilty here.

    To a greater or lesser extent this happened in most of Europe and some elements of this sort of thing happened in the UK too.It is a probelm for democracy in general right now.

    If it seems unfair you are probably right, financial markets apply their punishment not on an arithmetic scale but a geometric one.

  • Zak

    “The thing that I just don’t get is why anyone believes that Greece can stay in the Euro in the face of mountainous evidence to the contrary. How much more proof than the mess Greece is in is needed?”

    Perhaps ‘they’ dont believe that Greece can/should stay. Perhaps its just that they cant actually find a way to kick them out of the club without causing a financial catastrophe of enormous proportions? By default they therefore have to keep paying to keep them in.

  • Sovjohn

    Why, I think that they could make BIG MONEY off this. Picture a EU-wide reality show where the voters would call 0900-type of numbers to vote for the plan to take with Greece. Perhaps even politicians could be put to “trials” to win “sympathy points” for the country.

    The revenues generated could go towards reducing Greek debt. If the voters also participated to something like Euromillions with each vote, it would be a massive hit!

    We just lack the proper business sense to do that, tsk tsk tsk… :)

  • http://kkalev4economy.wordpress.com/ Kostas Kalevras

    Dear Shaun. Actually, Greek government debt was rather stable around 110% of GDP from 2000 till 2008. It increased due to the recession in 2009 (4% GDP fall in exports and investment, small fall in private consumption).

    On the other hand private debt skyrocketed from 40% GDP (2000) to 105% (2008). Greek citizens took advantage of low cost loans for imports and real estate speculation, while real wages increases also played their part.The same thing happened in most of the periphery countries. It was the only option available apart from walking the deflationary road like Germany did. Of course if everyone walked that road we ‘d face a fallacy of composition and a Eurozone recession/depression.

  • J.Wright

    The comparison between Greece and Britain in the 90s doesn’t match up. Britain didn’t had to close down the border to prevent a run of money from its banks. That’s exactly what will happen with Greece when they announce a switch to the Drachma (or South Euro).
    This goes against Schengen agreement and freedom of capital is one of essential parts of the single market.

    Furthermore wouldn’t a hard Euro be a bad thing for Germany and its like-minded export fiends? The hard-Euro would turn into the new CHF and North Europe will end up in a recession. Imagine ECB pegging its currency to the Italian Lira, so that the North can continue with its competitive advantage and export unemployment to the south!
    It sounds so absurd, it can’t happen right

  • JW

    Hi Shaun
    Thank you. That is what I had thought. The populace of Greece ( and indirectly Germany/France through not facing higher taxes) would gain from a right down/default. The losers are the European Banks and the US Banks who have ‘insured’ their debt.
    Whilst a slow lingering ‘death of a thousand cuts’  through the EFSF etc would just continue the extraction of wealth from the populace across Europe.
    As I remarked previously its unlikely the best option for the general populace will be taken, especially as the vested interests of the Banks lines up with the wishes of the Brussels beaurocrats.
    Not only is this a mess because of the lack of fiscal integration, its also because of the ECB serving its only masters, the commercial banks who are the only providers of ‘money’ in the Euro system. But then it was set up deliberately this way.

  • Anonymous

    Hi J.Wright

    Plenty of things that seemed absurd only a short time before have happened in the Credit Crunch…

    I agree that even Germany might balk at a hard EuroDm but as it is also balking at more aid for Greece and the other peripheral nations in trouble it needs to choose.

  • Anonymous