How the necessary Greek devaluation and default should and hopefully would happen

Yesterday was a day of great shame for Greece. However I wish to distinguish myself from the rolling 24 hours news coverage of the protest and the separate riot and firebombing. For me the great shame was Greece’s Parliament approving a set of austerity measures that no-one who has observed the Greek crisis so far can have any belief will actually happen. Even worse is the plain fact that whatever elements of the austerity package are implemented will only deepen Greece’s economic depression as I explained only last Monday.

Indeed some senior Greek politician’s are saying this openly. Here is Antonio Samaras the leader of the New Democracy party.

the measures should be renegotiated after national elections expected in April

So there you have it he does not expect the measures to last.

Even worse we had the technocratic Prime Minister of Greece who replaced an elected leader talking of Greek “democracy” when he is involved in no such thing. At least 74 deputies mustered their courage and voted no.

How would a default start?

The opening move in this situation would be for the Greek govenrment to declare that in future its currency would be the New Drachma and that it going forward would be legal tender rather than the Euro. There are difficulties here in terms of having bank notes printed and the pricing structure of the Greek economy which would have to change very quickly and in some cases overnight.

What would be the new exchange-rate?

There are two main factors at play here. The first is that Greece needs to choose a level which makes her much more economically competitive. The second is that it looks credible with financial markets as she wishes to avoid volatility and extra turmoil if she can. These two issues do of course overlap to some extent. If we look at the situation there is bound to be some turmoil and volatility but a well-constructed plan will keep it to a minimum.

No doubt you are wondering how much? The European Central Bank calculates a competitiveness indicator which shows Greece to now be at 106.5 versus an index calculated at 100 when the Euro began. If we look at the successful German economy we see a competitiveness indicator at 82.3 so my suggestion would be for Greece to announce an opening exchange rate for the New Drachma some 25% lower than the previous Euro exchange rate.

If we look at the likely effect of such a move it may well be stronger than many would have you believe. If we look at Greece’s latest set of trade figures for December 2011 we see that 59% of her imports and 48% of her exports were with the European Union. So a large proportion of her trade would see an immediate economic benefit as she would be 25% more competitive with her Southern Meditteranean Euro zone peers overnight which should give quite a boost. I do realise that the figures above are for the European Union and not the Euro zone but lets us break that down. The gain for trade with Euro zone countries is clear but my contention is that if the UK pound sterling is any guide then EU currencies will mostly move with the Euro on this.

Looking further afield then we have an interesting concept to face because “uncompetitive” Greece actually exports 52% of its products outside the European Union according to its figures. There is a little ray of light there is there not? A more price competitive Greece could over time perhaps do a fair bit better than this. So there is some hope for an improvement from an area which contradicts somewhat the stereotypes which have circulated.

This is not a panacea

The terms of trade will move against Greece

The initial effect of the move will be to make Greece’s position appear even worse. This is because at day one Greece’s exports will earn less per unit and her imports will cost more per unit because of the 25% devaluation. Whilst financial markets can adjust virtually instantaneously the real economy will take time. So there will be a period where the numbers look worse as the underlying real economy begins to make adjustments to the new more competitive situation. This is the logic which underlies what is called the J-curve in economics.

Inflation will rise

There will be an inflationary impact from the devaluation as Greece will have to get some products from abroad and their prices will rise in  New Drachma. Obvious candidates are raw materials and oil as well as other imported goods. But it is a sign of the scale of the crisis facing Greece that I feel she needs to take this risk. I am also aware that the risk is bigger than the devaluation as a 25% devaluation means that the prices will be 33% higher in the New Drachma era.

Those holding bank deposits in Greece will lose out

Another casualty of this process is that savings and bank deposits in Greece (those that are left….) will be reduced by 25%. Those who hold physical Euro notes will probably be okay even the ones with the “Greek” stamp on them. I do not know this but I suspect that the trouble of wiping them out would be more than it is worth for the European Central Bank. In my view it is probably bright enough to figure out that if it did not accept Greek euro notes there would be a flight from the Euro notes of other countries in danger such as Portugal and maybe Spain. It does not want that….

What else does Greece need to do?

As hopefully this will be a once in a lifetime moment for Greece I believe that the package needs two other features.

1. A real push for supply-side economic reforms. Whilst there has been plenty of talk about this under the various plans under the auspices of the troika ( EU/ECB/IMF) there has been much less action. Even the IMF now admits this (it has not told the truth up until now) in its latest survey on Greece.

Structural reforms have not yet delivered expected results, in part because agreed reforms are not being implemented. For instance, two flagship reforms—on collective bargaining and liberalizing restricted professions—have yet to deliver substantial results.

If Greece is to suceed she needs to find a government and the national will to make the necessary changes here.

2. Greece needs to collect her taxes. One of the issues of the Greek crisis has been the fact that her position would have been a lot better if she merely collected her taxes. After nearly five years of supposed reform she looks as if very little progress has been made.

Accordingly in the new era this would need to change. One possible route would be to tax assets rather than income in some form with perhaps an extension of property taxes,although it we do not know how much income tax would be collected if a more efficent motivated body tried to do it.

The default itself

I have deliberately left this part to the end as I feel that for too long the interests of the creditors and banks have been emphasised at the expense of the Greeks. Actually I feel that the danger of this would be that they end up with nothing as the dangers of a revolution in Greece and a complete default on everything are growing as time progresses.

As in my new system all debts would be in New Drachma I have already provided a 25% haircut on any foreign debt holdings in Greece and this would apply not only to her national debt but to many private debts too. There are issues here as no doubt there will be legal disputes and litigation but I wish to point that out and move on.

However in debt terms for Greece this merely restores a status quo where she has much too large a national debt burden for even a new (hopefully) improving economy. Accordingly I suggest an additional 40% reduction in her public debt to reduce her new national debt ratio to economic output from around 160% to just under 100%. Foreign creditors will be hit hard but there is no other realistic way.

There will be serious damage to Greece’s banks which the Bank of Greece will need to address and it is my view that it should protect retail depositors but not give the same protection to the banks. This would be a reversal of current policy but I think that making an example of one bank would do some good and establish a new better tone. There will also be damage to Greek pension funds which I regret but cannot figure out a way to avoid. In a way this shows the seriousness of the situation.

Comment

Because of the seriousness of Greece’s situation the problems with a devaluation and default strategy have been outweighed for some time by the way that the current troika austerity programme is failing. Last year the Greek economy shrank by around 5% and this year looks like being the same or worse. So we see a country that is getting weaker and weaker in economic terms and in my view it is better that she acts now before the current policy structure makes her weaker still.

To my mind those who argue for the current status quo fail to take into account the utter failure of current economic policy in Greece. Also one scaremongering tactic that they use is to claim that Greece would be thrown out of the European Union. Whilst this is possible under the rules does anyone actually believe that the Euro-federalists in Brussels would eject a country? As this would involve the risk of ejecting others in their turn this would be an own-goal for their strategy and is accordingly an empty threat.

As ever I will be interested to read your thoughts too…..

This entry was posted in Banks, Euro zone Crisis, Greek Financial Crisis, IMF, Quantitative Easing and Extraordinary Monetary Measures. Bookmark the permalink.
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  • JW

    Hi Shaun
    I agree with your rationale. There have been too many articles/blogs recently about how the Greeks ‘deserve’ this and its time they ‘had a plan’ to buckle down to Prussian austerity. Greek politicians and bankers are far from blameless, but neither are the (mainly) French and German banks and industrialists who overlooked the Greek ‘problems’ while the going was good to extract as much value as possible.
    Now before its too late the vast majority of the Greek population need to grasp their chance. Germany is using them as ‘examples’ to frighten other countries and assuage their own voters. If Germany wont realise that transfers are part of a monetary union then not only Greece but also Portugal ( and I suspect Ireland and Spain) should remove themselves from EMU.
    As you point out Shaun, the percentage of Greek exports outside the EZ is indicative of the flaws of the EZ , not that Greece is incapable of surviving outside. I suspect that Germany will try very hard to get them ejected from the EU if they left the EZ otherwise their control over Portugal et al will diminish considerably.
    As you know from previous posts I am generally supportive of the EZ and the EU, but not when it seeks to serve just the financial sector to the detriment of the populous. Most of the pain falls on ordinary people, most of the benefit is with the creditor banks. This is not just.  

  • http://www.facebook.com/jason.aris Jason Aris

    Sean all well and good but how would limit the devaluation to 25% (surely any response in International markets will be see the currency drop like a stone).

    The other issue is the Greeks don’t actually produce much of any value to seel in their newly devalued currency. Although it could boost tourism I doubt many people will want to visit as it will revert to a third world standard pretty quickly and I think will be dangerous for visitors especially Germans! (maybe in self-contained resorts but as we see elsewhere very little of this activity reaches the ordinary people).

    I am not saying this is the route that should not be taken (I think this should have been done two years ago and then the real culprits i.e rich tax avoiders and greedy European banks would have felt the pain) but we are where we are .

    I see no easy solution to this situation (and a Greek default could not be ring-fenced this will spread rapidly to Portugal, Spain and Italy, Ireland may just survive in a re-consituted sterling zone)

  • economymad

    Nice article shaun, I agree with you. but a drop of currency of 25% would probably not increase competitiveness by 25% due to higher relative prices on fuel, raw materials etc, unless of course tax on fuel was temporarily scaled down to get things moving.

  • Andy Zarse

    I was only thinking yesterday I wish Shaun would run through what the alternative would be for Greece… so thanks!

    My view is that the devalued New Drachma  would boost the number of holiday makers and importantly the amount of money they spend due to perceived value for money. MY girlfriend was in Crete recently, she paid Eu3.50 for a squeezed orange juice in a tiny bar in a little village, this is more than she pays in chilly Rotterdam! The oranges were literally rolling down the hill and into the road.She didn’t have a second glass… Until they sort out their pricing they are screwed…

    I’ve a pal who’s a captain for a large UK charter airline; pre the Euro they had almost countless flights per day from Gatwick to the the Greek islands. These days it’s about three!! 

  • Space Man

    I’m not sure that the ‘Greeks ‘deserve’ this’ is the right way of putting it, but they are certainly responsible for their own situation. 

    Also you mention that it’s unjust for the creditor banks to benefit whilst the ordinary people suffer the pain – lets not forget what we are talking about – the Greek governments, elected by the Greek people, borrowed the money for the Greek people and spent it on the Greek people. The creditors ‘benefit’ is the repayment of that debt – it doesn’t sound too unjust to me.

    Having said that, any creditor sometimes makes bad lending decisions and has to write off their loans. I think it’s fair to say that Greece is in that situation and needs to have it’s slate wiped clean.

  • Space Man

    Andy I too was hoping that Shaun would cover this! 

    I was also thinking about the high prices that I paid on a fairly recent trip to Greece. Most food is imported into Greece (OK maybe not Oranges?)  but Shaun mentions that the devaluation would increase prices by 33% – that’s a big hike in peoples bills and I’m not sure where they would find the money – the Greek government certainly wouldn’t be able to borrow it on their behalf for a while!

    You mentioned the boost to holiday makers from a devaluation, but I’m sure that there’s also a fair bit of pent up investment for Greece which is currently being held back as investors want to ‘wait and see’ what will happen. I imagine that the construction industry would see a boom as well, from people building villas whilst the exchange rate is good.

  • Anonymous

    Hi Shaun, I admire it when you set out your stall like this. First, if I were Greeks thinking of leaving the Euro I would gather together other countries within the EMU of like mind to create a critical mass of allies – see following points. Second, the devaluation could be more severe than you say and inflation more extreme. Third, I am not sure why you point to external trade advantages of Euro exit when Greece is so uncompetitive and ‘closed’. Fourth, you need to explain what you would do about bust banks and pension funds in your scenario.Fifth, how would you unravel the Euro claims, reserves and liabilities of the Greek central bank in the Eurosystem. Sixth, capital controls and freezing of assets/deposits would break EU law. Seventh, Greek debts denominated in Euro issued internationally would need to be repaid in Euro which could bust Greek corporates – you need to have an answer – hence my suggestion of a critical mass. A unilateral Greek exit would leave her isolated whereas if she found allies she could strike a better bargain. Eighth, to hold the lid on a Euro exit would Greek democracy survive ( perhaps I should move this back to the front of this comment, although it might not survive anyway).

  • Anonymous

    Splendid article Shaun. On a more mundane note, it would take about 4 weeks to print the necessary amount of new currency plus perhaps another 2-3 weeks to distribute throughout the country. In the opinions of you and commentators and based on your comments above, would this length of time allow Greece to overcome many of the initial difficulties involved in a currency swap?

  • Sovjohn

    Hello Shaun,

    Great article once more – In my opinion, any such “moves” will only take place by another (new?) Greek government. The current government is fragmented and powerless – I remind you that the combined electoral power of PASOK and New Democracy in the 2009 elections used to be 78% of total, and in today’s polls it seems to fall to below 40% for both parties combined.

    In fact, I expect them to fall even further, now that New Democracy signed the “yes” of MoU #2.

    Of course, due to the nature of the left-wing parties here, I do not expect them to unite and form a government (although they could do that, a possible coalition of Coalition of Radical Left, the Communists, and Democratic Left would actually command more votes than a PASOK-N.D. coalition nowadays), mainly because they have deep rigidities rooted in their attitude towards other leftist parties.

    However, the next elections, whenever they take place, will be interesting to watch…

    I believe that from the balance of power of those elections (the Greek electoral law gives a 50 MP bonus to the first party, which helps it quite much, but would not be enough to form a government without a coalition based on the numbers we’ve seen) the general policy will be shaped.

    If EU and the Troika maintain their current stance which translates roughly to “force them out”, then I predict that in one of the next quarterly “fights” about the implementation of measures vs the money needing to be repaid, all hell will break loose, and your scenario will become quite…viable.

    Although I believe that the 25% nominal devaluation you propose will not stand, and market forces will push this currency to below 50%. Of course, this may not be “needed” if this “departure” takes place in an orderly manner, and the new currency is pegged to the Euro somehow…

    But will it be orderly and pre-arranged? Hard to answer. Presumably from now until 2015 there are going to be quite a few “quarterly reports” to be made, and judging from the past, they will keep noticing “budget holes here and there” which will be required to be closed with, surprise, “more cuts”.

    The EU plan (confided in private by a high ranking EU official) is for Greeks to “be paid little enough in order not to import products from abroad, and make their own competitive prices abroad better”. I somehow suspect, especially with a Parliament which will have radical left in many forms as its primary opposition, that this will not hold until 2015…

    And my personal “scenario preference” – I don’t mind about the currency – after all the country is doomed to earn little and the best and brightest so to speak will not stay in Greece and beg for 800 EUR (which will be considered a “good salary” in a while, for a graduate with good skills, while it’s only “mediocre” now).

    But I think that problems affecting Greece will affect other countries as well, southern countries mostly, and I would like Greece to “hold out” until it is able to see any political change in the horizon (say, France, Germany…Both due to hold elections until mid-2013), which would affect the steering of EU in general.

    If no such change happens, Greece should unite with other porcupine acronym members and bargain collectively, not become (more) isolated in its plights. But that’s just me.

  • Rods

    Hi Shaun,

    A great thoughtful blog.

    The size of the default haircut needs to reduce the debt financing sufficiently, so the Government is running a small budget surplus as they will not have access to the markets to borrow money for two years or more, otherwise the alternative will be printing money to cover any deficit with all of the inflation implications this implies.

    I’m very pleased to see you are trying to help the Greek people, unlike some areas of the press that think the Greeks voted in the Governments so they deserve it!

    Personally, I think this is very unfair to the ordinary Greek person, who is suffering the most and is meant to take the blame where he gets the chance to put a cross on a ballot paper every five years. It is like saying the ordinary English man in the street ‘deserved’ the 1991 / 92 recession due to the ERM saga when both main parties supported this. 

    I think it is inevitable that Greece will have to default (or worse) as I can’t see the austerity measures working, so the Government will still be running a deficit, until the bailout money runs out. My guess is that will be at the end of the year when they hit trouble (money withheld, due to lack of progress etc) when the German elections are safely out of the way.

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

    If someone takes a look at the Greek current account statistics for Jan – Nov 2011 and makes some conservative projections for December he will come to some interesting results. Goods and services deficit excluding energy is more or less balanced (the deficit is close to 0,5% GDP). The Greek current account deficit is attributed only to energy (5% GDP) and debt interest payments (4% of GDP).
    Since debt payments in a new currency will only be made to Bank of Greece accounts in local currency (compared to the current situation where external payments are moved to other accounts in the Eurosystem with the Bank of Greece marking a liability towards the Eurosystem) – as long as debt are redonominated to the new currency – the only demand for foreign currency that will exist is for energy imports close to 5% of GDP. I really cannot think of a scenario where such a deficit can result into large exchange rate problems and inflationary bias for the Greek economy.

  • Nointerest

    Good article Shaun, and one that I have been waiting for in order to stimulate an informed debate.  My biggest concern is that the Greek administration just does not have the skills and competences to manage the sort of “planned default” you describe, and I think that the “official” predictions about chaos and widespread social unrest reflect this.  In short, whilst there is demonstrably no capability to see through the required changes (tax evasion, opening closed occupations, etc) there is even less likelihood of successfully executing a Plan B.      

  • http://www.topnewswebsite.com/2012/02/eurozone-crisis-live-greece-begins-cleanup-after-protests-over-austerity-package.html Eurozone crisis live: Greece begins cleanup after protests over austerity package | Top News

    [...] the move for devaluation, by announcing that that New Drachma would replace the euro. He explains here how a 25% devaluation, along with a 40% cut in Greece’s public debt [to around 100% of GDP] [...]

  • Anonymous

    Hi Shaun,

    I think that the Greeks need to really demand effective honest government. Corruption and state monopoly graft generators need to be stopped cold. Corruption is hugely impoverishing for the ordinary people – the net effect of a few bribes knock the economy for large amounts. It has a poisonous effect on businesses. It attacks the basic wealth generating process.

     Look at Russian business people, they don’t bother reinvesting profits to make employees more productive – they rush the money outside Russia double quick so it cannot be expropriated Khodorkovsky style.

    A simple question for the  Greek politicians – how much have you cut your OWN PAY ?

  • http://hottestnewsfeed.com/eurozone-crisis-live-greece-begins-cleanup-after-protests-over-austerity-package/ Eurozone crisis live: Greece begins cleanup after protests over austerity package | HottestNewsFeed.com

    [...] the move for devaluation, by announcing that that New Drachma would replace the euro. He explains here how a 25% devaluation, along with a 40% cut in Greece’s public debt [to around 100% of GDP] [...]

  • GES

    Excellent piece.

    “…for too long the interests of the creditors and banks have been emphasised at the expense of the Greeks.”

    This is really not about Greece. It is about the solvency of the French and German banks. Because the amount of Greek CDS outstanding is multiples of actual Greek debt, the hit to the banks who have written the insurance is huge. That is why the powers who have arranged the “voluntary” writeoff of private debt are not regarding it as an event that triggers CDS contracts.

    I think Greece should do what you suggest. Effectively take their ball and go home!

  • Anonymous

    The role of the finance sector in the develpment of the Greek situation has been quite pernicious in Greece: http://www.independent.co.uk/news/business/news/goldman-sachs-the-greek-connection-1899527.html

    The report I link to is quite mild – may be this was in the early stages of the story – the cross currency swap is also a way of creating further money for expenditure.  Arranging the transaction for a fee and then shorting Greek debt as well.  Business as usual. 

  • JW

     Hi Space Man
    You have identified an issue which I think is central to the injustice of much around the world. I have no problem with shareholders taking the pain for bad investment decisions, after all its part of the risk/reward balance of investment/ownership. So Banks that are insolvent should be allowed to fail in a managed exercise, without bailing out shareholders. However when the debt is sovereign there are different issues. The voters are one of many stakeholders, their ability to manage their risk/reward is very limited. They can vote maybe once every 4 years , but that can often have little or no effect on their personal circumstances. They can always emigrate. Other stakeholders, like Bondholders can be overseas and yet exert considerably more leverage.
    In the case of Greece, the French and German Banks and the ‘shadow banking industry’ has done well since it joined the EZ by looking the other way about economic problems. Now I think it is fair that they pay their share of the pain. However the desire of Germany to create an example of Greece is unbalancing the share of the pain towards the Greek populous who are and have been the relatively least benefitted and now the most hurt by the EZ ‘rescue’.
    I don’t know whether the Greeks have the capability to negotiate a ‘planned exit’, however I’m sure ‘the vampire squid’ would do the job for a fat fee. It always seems to me that its very arrogant to think others can’t do something your own country could do. I don’t buy this idea that an exit has to be totally disruptive. I cannot remove the thought that the Greeks still hold a few cards in this game. Germany would lose a lot of control if the Greeks made a concerted, planned exit because of the effect on the some of the other PIIGS. Perhaps this will become more apparent after an April election.

  • Anonymous

    If a country cannot balance its books, it makes no difference what currency you adopt, you still cannot balance your books. You can print your own money, as several do, but each time you do, you deflate your own economy, and pretend that you have balanced your books. You could also try to match your public expenditure to the net receipts to public purse. This was/isn’t the case in Greece as it is, to a greater or lesser extent, elsewhere.

    The EU “visionaries” [actual word removed] and their governments migrated beyond this equilibrium, resulting in cheap money aka confetti, aka bail-out funds, aka credit, aka debt aka ……
    Their cure / bandage more confetti. So I rest in the knowledge that money has now been replaced by confetti and real money has gone to roost.

    KoH, pp Governor of the European Confetti Bank Gmbh aka ECB

    The serious impact that this is having on the people of Greece and others in the world is far from forgotten. You, and others, may also have to have another re-think and perhaps be even more radical.

  • Sylvester

    A new drachma may well be the least painful answer but not for the reasons you give. Your whole rationale shows that you actually don’t know what you’re talking about. The whole reason the protesters are on the streets is because they don’t want labour market reforms but also want to keep their pensions.

  • Mike

    Interesting that you believe a 25% devaluation against the Euro would be sufficient, given that the UK experienced a c33% devaluation against the euro 3 years ago (recently reduced to c25%), which has made little difference to our trade with the rest of Europe over that period.
    Surely to get the tourists flocking in, and other trade booming, they’re going to need a devaluation of 50% to begin with, at least.

  • Nemesisforpredators

    Thanks once again for a helpful blog.
    Like many people I so much sympathize with the Greek people. They must feel very isolated. And that is what the Brussels-led troika want them to feel – desperate. The remedy suggested by several of your respondents is to join up with other countries in potentially the same situation and so end their isolation by forming a counter-bloc to the northern undemocratic divide-and-rulers (another name might be ********). Together they could force a common protection, even a New Euro, rather than a New Drachma or a New Peseta or a New Lira etc.
    Anyway we should be finding ways to support their struggle against offshore predatory finance.

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

    Current account imbalances get fixed through FX adjustments. A country using a foreign currency (peg, Eurozone) cannot adjust through FX but only by not honoring its debt obligations to foreigners (or by starving its own citizens).

    When the US pay Chinese bondholders the payments end up in a Fed account. They can only use them to buy more bonds and assets or sell them in the FX market. They never leave the Fed though.

    When Greece pays German bondholders the payments leave Bank of Greece and are transfered to accounts in Bundesbank (with Bank of Greece marking a liability to the Eurosystem).

  • Alinewton

    Surely the end result of such a move would be an immediate flight of hot money out of Portugal, Spain & Italy with disastrous consequences right across the Eurozone. Although not likely to happen, the tidiest solution would be for Germany and the other rock solid economies to leave first, thereby slamming the door before the carpetbaggers can get out of the starting blocks.

    But then again I have been preaching the same message for more than a year and no-one has been listening.

  • Space Man

    “Now I think it is fair that they pay their share of the pain. However the desire of Germany to create an example of Greece is unbalancing the share of the pain towards the Greek populous who are and have been the relatively least benefitted and now the most hurt by the EZ ‘rescue’. ”

    He who pays the piper calls the tune. The Greek rescue is most definitely hurting the Greeks, but again I think you are losing sight of the fact that the rescue is a result of massive past borrowing which most certainly benefited the Greeks at the time, however short sighted it was.

    There’s two sides of the argument – if you were a German would you think that Greece should be let off scot free from their debts to you?  Remember that Greece has failed to implement the reforms they have already promised to secure previous bailouts. What message does this give to the other countries with massive debts?

  • Anonymous

    Hi Sean

    How did I guess the Vampire Squid (Goldman Sachs) would be the prime player? Just psychic I guess…..:)

  • Anonymous

    Hi Shire

    I take your first point but feel that in many ways being on your own with the hint that others may/will follow is a good bargaining position…

    Point 2 : I agree and in the short-term there are possibilities of this but I would be hoping to minimise this by presenting such a structured programme that would be seen as viable in the way that current ones are not.

    3: With the devaluation I am looking for Greece to be more competitive and this comes on top of a recently weaker Euro and internal adjustments in Greece that make the overall move larger than my 25%.

    5. net them off and consider haircuts in them if necessary.

    6. I did not suggest introducing capital controls….

    7. Agreed there is a possible/probable issue here and litigation would go on.

    8. I would hope that this would enhance Greek democracy, frankly I do not see it surviving under the current route in fact with the techniocratic government some of it has gone already…

    As ever thanks for a thoughtful reply.

  • Anonymous

    Hi ExpatInBG

    There have been various assertions about Greek MPs pay and expenses and I have to confess I cannot remember the figures right now! However one fact that is clear in my mind the 300 of them is a lot for a 10 million population.

  • Anonymous

    Hi Ali and welcome to my part of the blogosphere.

    However this plays out there will be issues over what is called “currency flight”.However if you look at the numbers it has been happening in many of the problem countries in the Euro zone for quite a while. There are various measures.

    1. Deposit reductions
    2. Increase in the activities of the ECB
    3. Rise of the Swiss Franc and other “safe havens”
    4. Use of Emergency Liquidity Assistance by the central banks of Greece, Ireland and Belgium

    So that is ongoing and has already been on a large scale.

    As to Germany I agree that is an alternative solution which is perfectly valid but the Euro zone has no stomach for losing a “key” member…

  • Anonymous

    Hi Nointerest (Graham?)

    That may be a problem but it will be a problem in any real attempt at a solution so I think that it is time for Greece to muster her courage and intellect and learn along the way if necessary….

  • Anonymous

    Hi Mike

    Let me add the other thoughts I was having that I did not put in the post as I did wanted to keep it relatively concise.

    1. I looked at an ECB chart which showed that overall the Euro had fallen in recent times. So there had already been a boost there.

    2. ECB competitiveness data showed an approximate 10% or so improvement in Greek competitiveness from what has happened so far which in essence is lower wages.

    So my overall change would be higher and more like 40% overall compared with a recent times ago.

    Also in the short-term in particular the currency move would be likely to overshoot and here we move from rationality and elements of maths and science to psychology and guesswork!

    My plan would also be for a reform agends for Greece which sadly has not got off the ground in the UK.

  • Anonymous

    Hi KnaveOfHerts and welcome to my part of the blogosphere.

    A while ago when discussing the policies of Ben Bernanke the chairman of the Federal Reserve I started a debate on here about his claim that he was 100% sure he could control inflation. My contention was that none of us are 100% sure of anything.

    Accordingly I look to move Greece for a world of low percentage chances to high percentage chances…

  • Anonymous

    Hi GES

    Thank you and welcome to my part of the blogosphere.

  • Anonymous

    Hi Kostas

    If that works out to be true under my proposed scenario then I will be very happy as it will give it a very good chance of success.

  • Anonymous

    Hi Ioannis and welcome back

    I do not understand Greek politics in your detail and as you know I avoid them here but one thing I will venture is that “expect the unexpected” can happen in it too as the Tories and the Lib Dems who comprise the current UK coalition are far from natural bedfellows…

    As for Greece the future looks very bleak and in my opinion ther ei sno time to waste.

  • Anonymous

    Hi Ray

    It is something I would be looking to do quickly actually,ideally overnight or more realistically a weekend (it’s a shame Xmas was missed as I pointed out then…) so I would be heading in the other direction the faster the better.

  • Anonymous

    Hi economymad

    You are entirely correct and let me plagarise myself from an earlier reply above. 

    1. I looked at an ECB chart which showed that overall the Euro had fallen in recent times. So there had already been a boost there.2. ECB competitiveness data showed an approximate 10% or so improvement in Greek competitiveness from what has happened so far which in essence is lower wages.So my overall change would be higher and more like 40% overall compared with a recent times ago.But in the end there would be offsetting elements as you say which means that we move from maths to guesswork to some extent and hopefully a following wind..

    After that a reform agenda would begin to pick up the slack.

  • Anonymous

    Hi Jason

    The first bit is easy I can’t! A credible plan will help with this but as first the currency could easily overshoot.

    As to Greek production she does export and more to the non Euro zone than one might think, what she needs to do is more of it. In the short-term tourism cam help and if she stays as she is I see more trouble ahead deterring tourists.

    As you say the easy solutions have gone and in fact because of the false statistics were a mirage but there was a time when it would have been easier than this.

  • Anonymous

    “Greece’s exports will earn less per unit and her imports will cost more per unit because of the 25% devaluation” On a point of order,you are really only allowed to use one currency for this valuation. Whichever it is, one side moves adversely and the other stays (broadly) the same. 

    More importantly, withdrawal from the euro would be horribly complex unless the “new drachma” was introduced as a parallel legal tender currency, iniitially for denominating and paying all Greek government transactions (tax, spend and debt) on a one for one basis. This would also  make it far easier to calculate the right level of drachma money supply. .

  • Anonymous

    I think you should give the French some credit for the insistence on this bailout. when the former Greek PM suggested a referendum on the bailout in Greece, it wasn’t just Madame Merkel screaming “interdit”

  • chrisszbond

    Dear Shaun,
    I respectfully disagree with your opinion.
    My guess would be: Should Greece return to the previous currency and declare bankrupcy, then the new currency would suffer a higher inflation than what you would predict.

    By renouncing European help, they would most likely stick to their previous governmental overspending and would be inclined to print currency to remedy that. Sound fiscal policy is not what Greeks are known for. So I disagree with your hopefull scenario, that leaving the Euro will be better, than accepting German and French help.

    At the end of the day, they will continue to use the Euro as currency, because of its stability, just that wages will drop uncontrollably and probably divided unfairly for the population. While in effect the local tender will still be the Euro.

    By looking at the default of other nations like Argentine I’d rather have them try everything they can to avoid it.

    Best regards
    Chris

  • Anonymous

    Hi Shaun, regarding 6., my apologies but I thought capital controls would be a necessary albeit temporary measure to protect the fledgling drachma. Good discussion and if I were Greek I would want to look at this very carefully now.

  • Anonymous

    ‘Germany’s Carthaginian terms for Greece

    The last time Germany needed a bail-out from world creditors, it secured
    better terms than shattered Greece last week’

    http://en.wikipedia.org/wiki/Carthaginian_peace

    http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9077586/Germanys-Carthaginian-terms-for-Greece.html

  • http://www.facebook.com/jason.aris Jason Aris

    Thanks Sean I agree no easy way out. The thing that amazes me is how hood-winked ordinary people are in Greece, everyone wants to turn the clock back to the halcyon days pre-2008 (don’t we all!) but that was a mirage (probably longer even than the Euro as vast sums were spent by EU structural funds almost from Greek entry to the EU).

    Bottom line, if you want German healthcare, welfare and standard of living then you need to work productively (and more importantly pay taxes!) like a German you cannot square the circle

  • Anonymous

    Hi Chris and welcome to my blog

    There is no compulsion to agree with me on here and thanks for your reply. However the “European help” has ended up with GDP shrinking by 7% in 2011 on the latest figures and looks likely to do the same in 2012.

    Accordingly Greece needs to get off that treadmill in my opinion.

  • Anonymous

    Hi Outsider

    Apologies for “Greece’s exports will earn less per unit and her imports will cost more per unit because of the 25% devaluation” which I did have a mental block on. Thank you for pointing it out.

  • David Lilley

    Shaun,

    Another excellent post. We are so lucky to get your research, be able to comment on your posts and even receive dedicated replies.

    I first got involved in the “debt crisis” when the UK had the worst debt in the world some three years ago and proposed a global solution to a global problem. I took my lead from the first G20 “coordinated interest rate cuts” that prevented a second Great Depression and contained it as “the great recession”. My proposal was for coordinated QE, the extension of interest rate cutting. This would reduce the debt bar helping Greece and the UK whilst boosting the funds of those with a sovereign wealth fund to be able to buy good quality assets in the West.

    The problems in the global economy were well known; an ageing population and the rise of the East with their low labour costs and naked capitalism.

    Post the bursting of the dotcom bubble in 2001, Alan Greenspan reduced the base rate 11 times in a row to a mere 1% and the world followed. This combined with demutulisation of our building societies (giving them the opportunity of fractional reserve lending) and the introduction of mortgage securitised bonds led to unlimited credit, a property boom across the world and massive personal, corporate and sovereign debt. The UKs being the worst combined debt in the world.

    There was a giant “circular ponsi”. House prices tripled in the UK, tripling the size of banks, tripling the size of the demand for tier 2 capital, tripling the demand for sovereign debt (the banks had decided to put all their tier 2 into sovereign bonds at Basle 2). And with the growth in GDP (down to borrowing and spending including £400b of home equity release) rather than real growth, we could of course increase sovereign debt in proportion. The PIIGSs were all doing the same.

    There was massive demand for sovereign debt, no questions asked, boom and bust was history, Germany’s rates were available throughout the EZ. The Greek government, I use the term loosely, bought votes by offering handouts that the ponsi scheme could well afford. But in 2009 they lost power and the incoming socialists found a much bigger mess than that left by Liam Birne in the UK. Deficit was not 3% but some 9%, and 100% structural (no bank bailouts), and here forever. Wages had doubled in the last 5 years, wages were 32% higher than in Germany, retire at 61 years, huge growth in the public sector, professional pay no tax, you sell houses for cash, massive corruption and all the wellfare state provisions that can only come from competitiveness.

    They get 130b Euro from the 440 Euro fund, 211 Euro provided by Germany and much provided by poorer EZ members. They are the only ones to get a free lunch from private bond holders worth 100b Euro. But they still don’t get their house in order. No thanks, no tax rises, 50% youth unemployment is fine.

    Please Mr. Greece, get a business plan together.

  • Ravenwyn

    I WONDER … all this recovery for Greece seems to be predicated on growth. I have enough money to buy 1 jar of olives I will still only need one jar after Greece devalues, as an unemployed person in the EU they are not expensive NOW, in fact I won’t buy any more even if they are cheaper – spanish and italian olives are reasonably enough priced. Are most people like that?? What else does Greece sell that could bring in more money? And if cheaper?

    Then there is the fact that everywhere else in the EU seems to be in deep economic decline – so who is going to spend more on Greece?? – They have not so far and that is why Greece did not meet its growth targets and thus repayments in the last year (although 13th months, early pensions, paying anyone in Greece more than minimum wage and any kind of defence budget are all more money that could be saved to pay off Greek debts owed by the Greek people – as we are seeing now with the proposed cuts). 

    Money could also be raised from selling Greek islands to rich people and seizing some of the Greek works of art and heritage treasures and selling them. Some of individuals’ assets could also be taken like computers, cars, boats etc. – but I would guess that the cost of taking those would be more than the money you’d get for them. 

    A devaluation only makes sense if Greece will sell more. Although it does have the effect that Cuba went through with a  Green Revolution when they lost USSR money – so environmentally it could be quite good. I also think many people will leave the country and wonder about the social implications in their destination countries.

    But pretty good that you looked to practicalities of what may happen Shaun.

    There is just one thing – I still don’t see why Greece cannot default and still stay in the euro. Nor why the value of the euro is affected by a Greek default.

  • David Lilley

    Shaun,

    Further to my comment above on the “circular ponsi” that I consider the cause of the “debt crisis” of which the banking/financial crisis was just a downstream consequence.

    1. If the Greek NMW is reduced by 22% to 600 Euro per month and this had repercussions for all Greek wages then this would be the equivalent of a 22% devaluation whilst still being in the Euro. Actually much better as exports would be enhanced whilst import costs would not be affected. At the same time they would still have a lifeline and a debt write-off equal to 9,000 Euro per man, woman and child due to PSI. There are only 11m Greeks.

    2. The 130,000,000,000 Euro bailout that they have already consumed could, if divided equally, have put 12,000 Euro in everyones’ pocket, or 24,000 Euro into every working person’s pocket. It would take 3.3 years on 600 Euro per month to earn 24,000 Euro. Where has the money gone? It is not an austerity issue but a bad management issue.

    3. If the next bailout is drip-feed it might also be as well to pay it directly to every working individual on NMW rather than to poor management. The 50% youth unemployment would immediately reduce and the biting the hand that feeds you nonesense might stop.

  • Anonymous

    Hi David

    I agree wholeheartedly with point two. One issue of where the money has gone is in debt costs and we hit the fundamental problem of repaying debt with other debt! That does not improve a solvency issue particularly when a country needs to borrow more. But then of course estimates of future borrowing were kept down by over-optimistic economic growth forecasts. And so on…

    Also the “rescue” money was always borrowed and never cash given. Indeed until the ESM starts (if it does…) no actual capital has been deployed.

    Say the money had existed and been given to Greece but in return for a share of GDP as in an  actual investment in her future….

  • Anonymous

    Hi Ravenwyn and welcome to my part of the blogosphere.

    I have a couple of comments. Firstly is what you describe below not the same as asset-stripping?

    “Money could also be raised from selling Greek islands to rich people and seizing some of the Greek works of art and heritage treasures and selling them”

    As to the last paragraph I am one of those who thinks that a Greek default will not be a big deal to the value of the Euro. However a badly handled affair with fears that other countries might be forced to do the same is much more likely to unsettle the Euro’s exchange rate.

  • 12many

    I have a question about the money that was lent to Greece.
       How much of it actually existed as unencumbered cash, and how much was rehypothecated/ made up out of thin air?
       I have often wondered why the Greeks ( and for that matter all hyper indebted countries)don’t write off the debt that was fractionally banked or loaned into existence, and just pay back the money that existed (10% anyone?) and the interest on the whole sum. ie real money and “loaned into existence” money.
       The bank gets back it’s principal (the 10%) and the interest, so is happy, (‘cos if debt is money, then the money that was loaned into existence is destroyed when paid back again)
         The Greeks are happy because they now have a managable debt mountain (by the way, what happened to all the olive mountains and wine lakes etc. that the good old taxpayer paid them to grow?)
       You may have guessed that I’m not an economist, just curious how money that never existed can be lent to someone who can’t afford to repay it; and others who have no direct interest in the matter can make a bet on whether or not the debtor will pay it back.
     And another thing!
    No, I’m kidding, I’m done asking questions now.
     

  • Ravenwyn@gmail.com

    Yes it is asset stripping the same way the Louisiana Purchase, Alaska from Russia to USA were asset stripping When the land and people living there changed nationality. The french and Russian treasuries gained money for various uses. Another model could be the renting as was done by The British Empire of Hong Kong.

  • SPS-expat

    Nice to see someone understands reality. Plain and simple, if you take a risk on roulette or an investment, it’s your responsibility whether you’re a blue-collar worker or an international bank. Neither should ever be bailed out.

    Nursing the boil that is Greece’s debt just lets it grow before it bursts. Lance it now and start the healing. The sooner Greece makes its bankruptcy official, the better.

    Very soon the issue will no longer be economic, but social – in the worst sense.

  • SPS-expat

    The self-righteous blinkered attitude of those Europeans who are insisting on insane austerity measures is perhaps the most dangerous factor in this mess. Grinding an economy into the dirt will simply make Greece less able to repay any of the funds these people foolishly invested in expectation of big profits.

    Time for the Germans, French, Brits et al to open their eyes and see reality, take their losses and move on. Otherwise they will be dealing with a humanitarian crisis rather than an economic one.

  • Anonymous

    Hi 12many and welcome to my part of the blogosphere.

    To answer your question all of the Euro zone/European Union bailout money provided to Greece has been money which has had to be borrowed. One of the flaws of the arrangement has been that rather than provide capital they have set up organisations (apologies for the acronyms but EFSM,EFSF) to borrow money to loan to Greece.

    They hoped that by so-doing they would be able to avoid including the money in their own national statistics but Eurostat to its credit spotted this and stopped it by counting it. I think some were silly enough to think that if they did it like this it wouldn’t really matter or count.

    To answer your other  question the driving force behind all the arrangements so far has been to provide a bank bailout so as your scheme would mean collapse for quite a few banks it would require a complete change of course….

  • Anonymous

    Hi SPS-expat

    Thank you for the compliment and welcome to my part of the blogosphere.

    Unfortunately for Greece so many “experts” have invested so much of their “intellectual capital” in the Euro project that they either cannot or will not see what is right in front of their eyes. I have been writing for some months now that Greece is in an economic depression and it has been plain that whilst it is unpleasant to think of the social consequences it needs to be done to try to limit and improve them.

    Sadly the “experts” seem to have learnt nothing at all in many cases…

  • Anonymous

    Hi Ioannis

    This bit was the subject of Paul Masons latest BBC Newsnight report on the Greek situation last night. Whilst he does not feel the need to hold a politically independent view as I do, to be fair he also made the point that the far-left was splintered. Perhaps he read your paragraph here!

    “Of course, due to the nature of the left-wing parties here, I do not expect them to unite and form a government (although they could do that, a possible coalition of Coalition of Radical Left, the Communists, and Democratic Left would actually command more votes than a PASOK-N.D. coalition nowadays), mainly because they have deep rigidities rooted in their attitude towards other leftist parties.”

  • Anonymous

    Shaun, I must confess that I do enjoy your part of the blogosphere and much enjoy both the contributions from others and your individual replies.
    I think there is a consensus that Greece is skint! Where all the money has been squandered is anyone’s guess but squandered it has. I feel it would be hard for an investor to pour good money after bad (unless, of course, he’s bribed!), yet they (Troika, Greek government et al) are all running round like headless chickens in pursuit of some form of face saving. Most of the contributors seem to agree with you that the “Stay with the Euro” camp is financially unviable bordering on insanity. The biggest problem I see is that there is no evidence that Greece / Europe is prepared for Euro exit and the transfer back to the Drachma. The confetti that I rant on about, is an feeble attempt to smuther any possiblity of [a] contagion. Who’s fooling who. The economic mismanagement that is rife across Europe, as a result of the Euro project, is compounding due to the fiscal differences and spending habits of each member. We are now witnessing further attempts to patchup these discrepancies in their quest for federality. This was not addressed at the outset and we are witnessing the resultant mess.

    I do hope we pay more respect to the Greek people who ultimately are going to bear the brunt of this fiasco.

  • 12many

    Thanks for your reply.
       My understanding of fractional banking was that banks “loan” money into existence based on an underlying asset.
      ie If Bank A has £1000 in cash deposits, it can lend out £9000 at interest, and when the loan is repaid, the ”loaned” money is destroyed and the bank keeps the interest.
       Isn’t that the reason so many Building Societies became banks, to increase the amount of money they could lend?
      So, if Greece only repaid the fraction that already existed, plus the interest (the banks profit) all sides get along without the Greeks having to go on eating air pie.
      Have I over simplified it (fractional banking/lending) or missed something?
       My “knowledge” of this  is based mostly on the Jeckyll Island book, so I may be seriously misinformed.
      Cheers,
    12many

  • Anonymous

    We’re also having people in the EU saying that elections in Greece should be postponed, with the present discussions about Trioka permanent presence  this is all quite chilling.  Democracy in Greece is being overthrown.

  • Eleni Tsigante

    Hi ExpatinBG

    In answer to your question, each Greek MP receives €8000+ per month – excluding perks, which are massive, including 24/7 chauffered cars etc.. Until 6 months ago they received 18 of these salaries per year.
     
    Meanwhile before 2010 all greek employees, public and private sector, and pensioners, received 14 salaries/payments a year – the normal 12 plus 1 extra at Christmas, .5 at Easter, .5 in August for holidays. This practise arose to compensate for severe wage capping in the 1990s.

    In 2010 the government cut the 13th and 14th salaries for all public employees and pensioners. Now the EU demands that the 13th and 14th salaries in the private sector be cut too [to be given to the state/EU]. Salaries in Greece before were not high compared to the rest of the EZ – a senior lyceum headmaster was paid 1200€ a month, the head of Orthopaedics in a state teaching hospital [equivalent to St. Thomas in London] the same. Both shall receive €800 as of this month.

    However the 360 MPs didn’t touch their salaries until autumn 2011, when with enormous self-congratulation they cut the 17th and 18th. They are still receiving 4 extra salaries please note = 32,000€, on top of their 12 month 96,000€.

    The President of Greece, Christos Papoulias, has stopped his salary altogether. Man of a different stamp.

  • Anonymous

    Thank you for the numbers Eleni and welcome to my part of the blogosphere.

    Greedy aren’t they?

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  • Conormills23

    Hi, very interesting post, sorry this is probably a very basic question but can someone explain how much the Greek people would get in your example in the New Drachma in return for their Euros? 

    If for example you had 100 Euros in your account would this simply now become 100 Drachma and therefore with One New Drachma being worth 0.75 Euros you are effectively losing 25% of your savings and all of your possessions are worth 75% of what you paid for them? 

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  • Rods

    The easiest way would be to make €1 = 1 New Drachma, so you can stamp the current Euro notes with the Greek prefix to designate them as New Drachma notes. It would be very difficult to keep secret the printing of a new currency and would take months to do. When it leaked out you would have an immediate run on the Greek banks and massive capital flight.

    When the change is made it needs to be announced when the banks are shut, all ATMs would be switched off, capital controls would have to be introduced immediately, with manned border crossing points, to stop capital flight.

    Once the banks reopened all Euro accounts would then be redesigned as New Drachma with the same balance, and prices in the shops would be New Dracma, all Euro notes held by the banks and authorities would over-stamped New Drachma, with the non-stamped having a limited period to be paid into banks to be redesignated, before they were no longer legal tender. The non-Greek Euro notes in Greece, would have to remain legal tender and likewise the Greek Euro notes in Europe, would have to removed from circulation once they are paid into a bank, presumably the central banks would then swap these notes.

    This is a link to the papers by the 5 finalists of Lord Wolfson’s prize for the best solution for exiting the Euro, which contain much interesting information for exit strategies:

    http://www.telegraph.co.uk/finance/financialcrisis/9182956/Debt-crisis-11-year-old-Jurre-Hermans-wins-100-for-pizza-and-pancake-Greek-euro-exit-plan.html 

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