If I was Greece I would default and devalue this Christmas

As we start on what I notice some are calling Christmas Eve Eve I thought that today I would present you with something expected but also something that is very much unexpected. The something expected is what has become called the Santa Rally where share prices rise towards the end of the year. One could easily argue that there were few cases for one this year but nonetheless it seems to have put in an appearance.

If we look at the US Dow Jones Industrial Average it has risen from a recent low of 11,735 on the 19th of this month to close at 12,169 last night. If we look back to 2011 overall it was only a month ago we dipped back to 11,257. So we have seen a Santa Rally and it means that we are also higher than the 11,573 of a year ago. In a year of so much worry and concern? In there I think that we find the rub which is that markets are prone to excessive short-term optimism and pessimism in these times and we do tend to swing from one to the other but as I have pointed out before we are somewhat rangebound if you look on a longer-term perspective.

Some hope for more than a Santa Rally

In essence for the United States it come here in these numbers.

In the week ending December 17, the advance figure for seasonally adjusted initial claims was 364,000, a decrease of 4,000 from the previous week’s revised figure of 368,000. The 4-week moving average was 380,250, a decrease of 8,000 from the previous week’s revised average of 388,250.

If we look back over 2011 we were at times discussing numbers considerably over 400,000 and then using 400,000 as a threshold itself. Now we can see that there has been a sustained break below it if one uses the 4 week average and everyone who wishes for the best should hope that this trend continues.

Care is needed with this on two counts however as whilst this is better it does not resolve the US unemployment/employment issue. Whilst things have stopped getting worse we are a long way from them getting better and then moving forwards and dealing with the amount of long-term employment. I notice also that those who told us ( there was a considerable number) that the US economy would grow by 3.5/4% in 2011 seem to be back and are telling us it is growing at that rate right now. Perhaps they have been on a course at the Bank of England.

So as I discuss one expected issue I have provided another the extraordinary optimism which is on a Dr.Pangloss level of some commentators where reality never seems to intervene. Look at US third quarter economic growth which has gone 2.5%, 2% and now 1.8% as it has been successively revised ( care is needed as these numbers are annualised). It must have come as a shock to even them when the first quarter of 2011 was revised down from 1.9% to 0.4%!

The Unexpected: A Greek default over Christmas?

Over the past week or two I have considered the possibility of this. Why? If you consider the implications of a default and a devaluation then a lot of organisation and actual work is required. At the simplest level you need to have printed a new currency and there are many other changes that would be required. So if you consider the many issues involved in a default and devaluation you need as long as possible to make these changes and the longest period around is a Christmas break that comes with a weekend so that you get four  successive days of closed markets. The same Christmas break that starts at the close of business tonight. If you needed more time then taking an extra three days at a quiet time of year would also give you an extra weekend and New Years Day.

Why would I even think this?

As I have been writing for some time on this blog Greece has moved from recession to depression under the Euro zone/IMF austerity mantra. Unfortunately there is little sign of the supply side reforms that I feel would help to give some hope for an improvement. If one looks at two pieces of news from today the picture is clear. From Kathimerini

According to an estimate by the National Confederation of Hellenic Commerce (ESEE), turnover from retail this festive season will only amount to 9 billion euros, down from 13 billion last Christmas. This constitutes a 30 percent decline.

A massive 99 percent of Greeks say the country’s economic situation is bad, while 76 percent believe that the worst is still to come, according to a Eurobarometer survey published in Brussels Thursday.

The private sector involvement talks have according to the Greek Finance Minister “great difficulties” so the debt haircut move is in serious trouble. The new technocratic government is in trouble too as it has failed to get a deal on auxiliary pensions this week and speculation is growing about early elections.

Financial Markets tell an interesting story too

It is little publicised these days as much of the media has moved on but if we take the (Bloomberg) Greek one-year government bond yield we see that it has risen to 379%! The 2 year is 152% and the 10 year is at 35.1%. As the one-year yield started the week at 330% one can see that those who back their actions with money rather then rhetoric are worried too.

I think that these moves are especially significant if you consider how much effort (489 billion Euros) that the European Central Bank has made this week to shore up the system. for those who have not followed this matter as banks and countries have become so entwined we have a situation where supporting the banks also supports the countries. Those doing it hope that you do not notice that it is the taxpayers bankrolling all this in a rather circular game which in many respects is similar to the children’s game of pass the parcel. The only real difference is that this game is played with instructions that the music must never stop.

I do not recommend this lighly as there are many costs and risks in such a move and I realise that there are hundreds if not thousands of commentators who reject the very idea. However if we move from rhetoric to reality we see in my opinion a situation that is so desperate that we may already be seeing a nation in a 1930s type depression. Accordingly if I was involved I would put it on the agenda for tonights meetings and I would vote yes.

I have no inside knowledge and I do not expect this to happen but if you look at the logic it should happen in my opinion. In other words it is time in my view for Greece to find out if the lyrics in the song Hotel California were correct about the Euro.

We are programmed to receive.
You can checkout any time you like,
But you can never leave!

What Greece needs to do is follow this part of the song.

Last thing I remember, I was
Running for the door
I had to find the passage back
To the place I was before

 To all my readers may I wish you a Merry Christmas and for those of you closing up shop a Happy New Year. I will be unlikely to post on Monday or Tuesday next week but do plan at least one post over the other days so will wish those of you who are around a Happy New Year then.



This entry was posted in Banks, Euro zone Crisis, Eurozone, General Economics, Greek Financial Crisis, The US Economy. Bookmark the permalink.
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  • Mike

    May I wish you a very Happy Christmas and a Happy & Healthy New Year Shaun.
    Your blogs here have been interesting, enjoyable and truly informative. In fact they are the best out there. Thank you very much indeed.

  • Anonymous

    Merry Christmas Shaun.  Thanks again for your excellent blog.  A voice of logic and reason amongst a cacophony of nonsense and unsupported speculation.

  • Anonymous

    Shaun – another highly informative piece. For you and those around you I also wish you a very happy Christmas and (a more) prosperous New Year. Please continue the educating process. My thanks again. 

  • http://www.facebook.com/people/Alex-Eames/100000616574757 Alex Eames

    Happy Christmas Shaun.

    Thanks for another year of excellent analysis and commentary.

  • Rods

    Hi Shaun,

    Excellent blog as always.

    Over a year ago I can remember you recommending that there should be a Greek haircut and about 6 months ago, going through the Icelandic experience on this and how they had recovered and made their first successful bond issue and that Greece should follow the same path. I guess this Greek tragedy will continue to run and run with ever worsening conditions, until either the Greek people have had enough and force their own solution or the politicians actually stand up in the hole they are continuing to dig, look over the parapet and realize there are other plausible paths to follow. Unfortunately, my guess is they will only do this once they have dug a hole so deep that they hit bedrock, can go no further, and they have no alternative but to seek alternative solutions.

    Thank you for all you hard work over the last year on producing this blog and answering our questions and comments, it is very much appreciated by me. You incite and analysis is unique, and in my opinion by far the best on the Internet, you are also the only economist on the Internet that seems to be consistently ahead of the curve. I have learnt ever such a lot from reading your blogs and I thank you for that.

    Finally, may I wish you a great Christmas, a happy new year and a healthy and prosperous 2012.

  • Andy Zarse

    Happy Christmas Shaun, thanks for the words of wisdom and insight this blog provides. Looking forward to what appears to be a very interesting new year!

  • Anonymous

    Have a good one, Shaun. Reading Mervyn’s speech yesterday as Chair to the ESRB I just thought I would list the abbreviations for the ring of protection he describes : EBA,EU,ESMA,IFRS,ECB,LTRO,ECTR,EFSF,ESRB,G20,CRDIV/CRR,EMIR,IMF,FSB,CGFS – sleep safely everyone, the cavalry has just arrived !

  • Hugo Williamson

    Season greetings Shaun, a most addictive and informative blog, I have learnt an enormous amount by following it.

  • Stuart

    Thanks for the great blog Shaun. I have learnt a lot over the past year that is sadly lacking in the mainstream media.

  • Zak

    Shaun, I would just like to add my personal thanks to all of those that have already posted. Reading your blog has become a part of my daily routine & I have truly learned so much from your excellent posts.

    Happy Christmas to one and all.

  • Roy

    Very much agree with the sentiment of this post Shaun and have tried to summarise a rough outline plan of how Greece could go about this. Would welcome your thoughts and those of others who follow you. Who knows, together we may come up with something !

    1. Recognise that the current IMF/EU/ECB plan has been a cmplete failure and will not extricate Greece from the crisis, but instead will lead to 10 more years of austerity and impoverishment and no improvement in the living conditions of Greek people2. President to tell the IMF/EU/ECB that Greece is abandoning the plan, and ask for the support of the troika in arranging for an orderly default.3. Default on bank loans. Freeze loans from the IMF and ECB on the basis that the country can no longer afford to pay capital or interest on them. Pass risk back to the creditors.4. Remove immunity from prosecution on Greek MPs5. Establish an audit comission in partnership with other countries to iinvestigate any sums of greater than $1m which have left the country in the last 5 years, and freeze and repatriate the assets of any persons who cannot prove they built these up by legal means6. Continue to work with the EU task force on fundemental reforms of Greek institutions. Computerisation, reform of tax collection system, changes in laws governing commercial disputes, closed shop professions, beauraucracy preventing businesses being started up etc.7. Stigmatise corruption. Make it a fastrack criminal offence punishable by imprisonment and freezing of assets to accept fakelakia (envelopes containing bribes) and encourage the public to report doctors, civil servants or elected officials who have accepted them.8. Put together a national strategy for growth. Whether it’s through oil exploration, alternative energies, service industries, tax free zones, export led industries – decide what it is that will make the economy grow again.9. Establish an environment which encourages diaspora Greeks, local Greek entrepenneurs and foreign investors to invest in the country possibly under special investment schemes10. Establish capital controls to prevent any further capital leaving the country11. Establish a safety net for all people laid off from private or public sector roles, such that families with nobody working can receive a basic subsistence level of unemployment benefit12. Work with international bodies to draft a law which stipulates that all contracts in Euros are to be transferred into drachmas AT THE RATE established at the time of default.13. Establish a transition plan for moving the population from the Euro to the drachma. A fixed exchange rate will apply, until such a time as which new drachmas can be distributed to Greek banks14. Establish the drachma as the legal currency for Greece, and temporarily ban all transactions in Euros in any commercial premises or for payments in Greece15. Start again, live within means, allow the currency to devalue, control money supply and rebuild within means until such a time that Greece is able to go to the international markets and borrow at reasonable commercial rates again.16. Call for national elections

    Repeat as many times as necessary for Ireland, Portugal and others

  • Mac


    Merry Christmas.  

  • ChrisO

    Really enjoy the blog, i have read every one from the start on not a yes man economics. I dont feel informed enough to post comment, I am more of an enthusiast, but your explaination provides a window into what otherwise would be an opaque world. 
    Best wishes for Christmas and the New Year! 

  • Nicholasrlewis

    Shaun i echo everyone else sentiments in the quality and consistency of this blog which is eargerly awaited every day

     wishing you sesons greeting

  • outsider

    If Greece does not follow Mr Richards’ advice, it may be because Mr Papademos it is waiting for the winning entry in Lord Wolfson’s How-to-leave- the- euro competition, which I assume you are entering.

  • Anonymous

    Thank you Stuart and welcome to my part of the blogosphere.

  • Anonymous

    Hi Roy and welcome to my part of the blogosphere

    You have obviously put a lot of thought and time into this and I will consider it over the next day or two. But I do have some initial thoughts.

    1. Unfortunately I feel that under current plans ten years looks like an optimistic view of the timescale here.

    2. Thank you for discussing an orderly default. Many parts of the media ( the BBC is very guilty of this) keep obsessing about a disorderly one and they therefore present a partial view.

    12. This will not be easy as I remember some aspects of “Euro law” which stipulate that certain debts have to be repaid at their Euro value. I will try to remember the source for this…..

    16. Sometimes rulers get forgetful about this issue….

  • Anonymous

    Thank you and welcome to my part of the blogosphere.

  • Anonymous

    When I see all those acronyms a song by the Kaiser Chiefs comes to mind.

    “Oh my God, I can’t believe it………”

  • Anonymous

    Thank you and welcome to my part of the blogosphere.

  • Anonymous

    Hi Chris

    A general welcome does not quite work does it? So a welcome to the comments section anyway! And thank you for the compliment.

    For others out there who read this but do not comment please feel free to do so. The comments are a strength of this blog and provide many interesting viewpoints.

    I never pretend to think of everything and the replies on here regularly come up with alternative ways of looking at things.

  • Peter Crawford

    Shaun, thank you for an excellent blog,read every day, an oasis of reality & lucidity in the vast deserts of self-delusion, incompetence and obfuscation which pass for policy-making these days, as your blog makes all too clear.
    Very best wishes to you and yours for a happy Christmas and sucessful 2012.

  • Whitstablian

    This is my only comment since offering my best wishes of the season to Shaun and contributors back in the first year of notayesman. I would rather skip breakfast (and lunch) than miss Shaun’s daily dose of sanity. It truely is the best blog on the internet; it’s perpective and opinion enable a non-economist to read ALL other economic reports and commentary with an appropriate level of understanding, suspicion, derision, despair, ….

    Well done one and all.

    If only Shaun and others like him had more influence.
    Merry Christmas and a happy new year.

  • Stevie

    Have a great Christmas and a happy new year. I have not missed a single blog since you started on notayesman, and have found them all a very good read. I don’t feel qualified to comment, but will continue to read every single one. Many thanks for the knowledge that you have shared.

  • Jim Manning

    Season’s greetings from one of the layman lurkers at this excellent blog. Been hanging here for a coupla years now (emigrated from notayesman), and have found your writing a welcome expression of frustrated outrage at the sheer incompetency and inadequacy of the political response to the economic realities. Whether such incompetency masks a greater disingenuity is the question! 
    You may have until the New Year to answer that little conundrum!  ’Tis the holidays after all!  ;-)
    FWIW, and being aware of your liking for contemporary cultural references,my own view is well-expressed by Sir Richard Clive Mottram, remarking on an unrelated occasion:
    “We’re all f*cked. I’m f*cked. You’re f*cked. The whole department is f*cked. It’s the biggest coc*-up ever. We’re all completely f*cked”
    And on that happy note, I wish all here a Merry Christmas and I look forward to learning more from you all (ATL and BTL) in the New Year.

  • Critic Al Rick

    Bring on the defaults. Better late than never.

    Merry Xmas to all.

  • Rods

    Roy, good practical thoughts on leaving Eurozone. I have thought this further and would add the following:

    1. Have a 2-3 week time limit for converting Greek Euro cash into New Drachmas. After this Greek Euro no longer legal tender.

    2. Limit the maximum exchange of Euro cash per adult to New Drachmas at banks to €1000, unless they can prove tax has been paid on larger sums. All other Euros can be paid into a bank account for conversion but will be taxed at 50%. This will recover unpaid tax plus a penalty on Euros cash payments sitting under mattresses.

    3. Allow businesses to pay in maximum of 10 days average takings in Euros cash into banks, per week, during the conversion time. All other Euro amounts paid in will be taxed at 50%. This will prevent businesses converting most  undeclared un-taxed money and also stop citizens spending excessive amounts of un-taxed Euro cash savings, with the hope of selling goods bought for more than 50% of value to save tax.
    4. Have an agreement with Eurozone / EU countries / All other possible countries to report all Greek Euro cash payments made into Euro bank accounts. Same conditions will apply as per my rule 2.

  • Anonymous

    Euro notes are printed by the ECB – Euro coins are minted nationally.
    So point 1 could only apply to Greek coinage.

    Euro notes remain legal tender across much of Europe and they are accepted in most Eastern European shops and petrol stations outside the eurozone. Trying to tax suitcases of euro notes will fail because cash transactions will go unreported in the black economy.

    For an orderly default I would suggest that Greece defaults, continues to use the Euro and applies an internal devaluation on all government spending. I think that adopting a new Drachma would cause great price instability and chaos. Sarkozy can shout insults until his head smokes but he cannot kick Greece out because the Greek PM has a veto.

  • tony graham

    Absolutely Shaun….You are the voice of sanity.

    I have land in Greece,I love these people for all their faults.They are being crucified….and for what reason?…the politicians since the day’s of the general’s have been nothing more than swindelling,nepotistic,grasping,corrupt,traitorous scum.

    They are never going to be country that produces luxury car’s..or computer’s..Ipod’s..be a major financial centre.
    Just a beautifull country that can rest on its laurell’s having had a supreme culture thousand’s of year’s ago,that gave the rest of the west, the building block’s of science,language,democracy,that some would use to make great nations.

    We can’t all have the Teutonic brilliance at industrial wonder production.We can’t all be the world’s best innovator’s.

    Greece need’s to default.Greece need’s to get shut of its ex-Golman/sach’s placeman government,Greece need’s to get its self respect back.

    They-especially on the island’s will alway’s eat.
    That’s something the Brit’s won’t do if it all goes to hell.

  • Dvwonline

    Shaun.  I think that Greek debts will have to be reduced by some means as the current debt level is clearly not going to be repaid in full.  This will almost certainly have to involve the ECB taking a loss on its Greek holdings, with the consequent solvency problems on this capital hit.

    However, the actual mechanics for a default seems fraught with difficulties, especially if they were to leave the Euro.  John Hempton discussed the possible circumstances on his blog some time ago http://brontecapital.blogspot.com/2011/09/models-for-greek-sovereign-default.html and looking through his thoughts it doesn’t look easy.  As soon as the plan for leaving the Euro was leaked to the press, there is the potential for chaos with the Greek people trying to get as many Euro notes as possible and taking them out of the country.