Greece – Now Starring in, “As the Euro Turns”

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Greece – Now Starring in, “As the Euro Turns”

Thursday, 17 September 2015 by arlissbunny

Reposted from Daily Kos 20 February 2015

I should begin by telling you that as I write this I have my browser open to the website of The Guardian because, quite literally, there are updates every few minutes on the exceedingly dynamic crisis between the Eurozone (EZ) and Greece. Throughout the day, as much as possible, I will add updates at the very bottom of this diary. Finally, I (aka Arliss Bunny) am the Finance News and Monetary Policy Burrow Chief for Netroots Radio and on The After Show I have covered the topic of Greece several times in recent weeks including here and here. I also went into great detail today regarding the developments of the past week. That podcast will be posted around 8PM EST today and I will add the link here when it is available. Will McLeod covers the political side of Greece on The After Show here and here. Will combines both passion and knowledge so his podcasts are not to be missed.

Keep hopping for background and a play-by-play round-up of events which I have named, “As the Euro Turns.” It is an incredible story full of drama and suspense so join me. I do recommend taking a break right now to get a snack as it’s going to be a long read.

[Speaking of “snack,” I discovered this week that there is a World Carrot Museum. A CARROT museum…!!! BEST. THING. EVER.]

Background

It is easy to think of Greece as a small country and it is but as deflation rises and austerity continues throughout Europe, Greece finds that it is not as alone as one might imagine. Greece, Spain and Italy collectively have a population of 100 million which is one-third the population of the entire Eurozone. In Spain and Italy, in particular, upcoming elections are favoring the anti-austerity parties and current governments have not failed to notice. On 24 January, the day before the Greek elections, the leader of Podemos, the one year-old anti-austerity party now leading in the polls in Spain, made a speech that should have kept all the austerians in the EZ awake all that night and the next as well. The current government in Italy has also been signaling ever-closer sympathy for Greece. Even in Portugal, Ireland and France, where the governments remain pro-austerity, the people and opposition parties are increasingly eschewing austerity. Loudly.

If you have not been following the Greek crisis, here are some general statistics that will baptize you instantly into the “Wow! It’s hard to believe the EZ could be so wrong and STILL remain unwilling to drop austerity” club. Since the imposition by the Troika (the European Central Bank, aka the ECB, the International Monetary Fund, aka the IMF and the European Commission aka EC) of starvation austerity onto Greece, the Greek gross domestic product (GDP) has fallen by 25%, general unemployment has risen to 26% and youth unemployment has skyrocketed to 55%. Even more chilling, of the €254.4bn in loans from the Troika between 2010 and 2014, €29.3bn has gone into Greek operating needs and the Greek contribution to the EU stability mechanism while the other €225.1bn has gone to pay debt. So, of the loans made to Greece, only 12% has gone to the citizens of Greece. The rest has gone to pay German, Dutch and Austrian banks as well as the Troika. When you hear people talking about a Greek bailout they could not be more wrong. This is a bailout of the creditor banks, pure and simple and it means that German Prime Minister Angela Merkel has a €320bn gun to her headso how ever tough she wants to sound, Greek bankruptcy and Greek exit of the Euro (known as “Grexit) would splash her sticky, bloody brains all over Germany. Don’t imagine, whatever the rhetoric, that Merkel is unaware of the consequences.

On 25 January, by huge margins, the Greek people put a new party, SYRIZA (it’s an acronym) into power and while SYRIZA is called a “radical leftist” party they actually are not. They are a center, progressive party. What makes them seem “radical” to the northern Eurozone is that they have accepted and proclaimed the reality that austerity does not now and will not ever work…in Greece or anywhere else. Also widely misunderstood, SYRIZA does not want to leave the euro or the European Union (EU). They simply want the freedom to implement proven growth strategies (rather than disproven austerity) in order to reverse the destruction of their economy.

The new Prime Minister of Greece is Alexis Tsipras and I love this quote from him,
“(my party) is not a ‘threat to Europe’ but instead a force for change in its policy direction.” Tsipras and his Cabinet are planning to lead not only Greece but to blaze a path for other seriously jeopardized EZ member nations…and THAT is why the Germans fear him. Tsipras is, btw, a thoughtful, dynamic, strategic thinker and deserves an entire dKos diary dedicated to him and to the rise of SYRIZA. That will, however, not be a diary written by this rabbit as I am more of a monetary policy wonk than a political junkie.

The new Greek Finance Minister is Yanis Varoufakis. If I had my way I would confer sainthood on this guy right now. He is breathtaking in both his deep grasp of the real mechanisms of monetary and fiscal policy (he advocates the same positions as modern monetary theory) but the essential understanding that the core issue is not money, it is people. Varoufakis describes austerity as “fiscal waterboarding.” He repeatedly uses the term of art, “humanitarian crisis,” when he refers to the citizens of Greece. And he is not wrong. In keeping with Tsipras’ lead, of the EZ Varoufakis has said:

“If it is in my power to determine…Greece will neither want to leave the euro nor threaten to do so. We should not have entered the euro–that is crystal clear, but once in, it is disastrous to remove one’s-self from the Eurozone voluntarily.”

Because Varoufakis is so central to all that is happening right now I will add a bit more detail about him so that you can get a clear picture of who he is. First of all, immediately following the Greek elections, he started a whirlwind of meetings in EZ capitals with his counterparts. He never wears a suit or even a tie even when speaking at the House of Lords. It caused a flurry of glee in the British press when he showed up to meet with British Chancellor of the Exchequer, George Osborne wearing black jeans, an untucked shirt open at the collar and a leather jacket. The Guardian happily pronounced his attire “something Putin might wear on a bear hunt.” The Guardian further speculated that a suit would have conveyed “get comfortable I want to join the club” and that Varoufakis does NOT want to join. The Guardian surmised that Varoufakis wants them terrified and that this is the Greek way of signaling, “You can’t get blood from a f$&^ing stone so get real.” (This latter is my interpretation of their thought.) Varoufakis later said, in an interview with Stern, that he isn’t comfortable in suits or ties, he has never worn them and he isn’t about to start now.

Varofaukis is an economist (specializing in game theory) but he has been careful to say, in an oped piece he wrote that ran in the New York Timeson 16 February,

“If anything my game theory background convinced me that it would be pure folly to think of the current deliberations between Greece and our partners as a bargaining game to be won or lost via bluffs and tactical subterfuge.”

[If you want to keep apprised of the Greek crisis, do NOT read the New York Times. Seriously, their economics/business writers remain dedicated to their twin objectives to learn nothing about economics and to share that yawning stupidity with everyone. …You have been warned.]

He has both Greek and Australian citizenship and has taught in Athens and Australia but most recently was teaching at the University of Texas at Austin. All of this change is so recent that his wife is still in the States packing and making the arrangements to move back to Greece with their son. The Varoufakis family moved to Austin following a death treat made, via phone, to Varoufakis wherein the life of his son was threatened. Varoufakis had been involved in unearthing bank fraud and corruption prior to the threat.

Varoufakis runs a popular blog and intends to continue to do so though with shorter posts. He is also extremely active on Twitter (@yanisvaroufakis) and is a great follow.

Another new member of the Greek government is Deputy Minister of Labor and Social Solidarity, Rania Antonopoulos. Until her appointment Ms. Antonopoulos was a senior scholar at the Levy Institute of Bard Collage, one of the true homes of modern monetary theory (this is a different link than the last one). Antonopoulos has also been an advisor to the UN Development Program. One of Antonopoulos’ areas of expertise is job guarantee programs. The program she has designed for Greece over the past two years is the one that SYRIZA will be putting in place under her direction. The Levy Institute has been deeply involved with SRIZA over the past several years and its director, Dimitri Papadimitriou, has been flying to Greece every few months to lend advise.

Still hanging in there?…Perhaps a refreshing sip of carrot juice is called for. I’ll wait.

The core principle of the SYRIZA Plan is to put ordinary Greeks first. They mean to prioritize the 99% over the 1% and they have minced no words on that score. Among the ways they are planning to generate additional taxes is by clamping down on the off-shoring of income by the wealthy. They have a huge database already warmed up and they mean to use it. They are also going to break-up cartels and clamp down on criminal banks. And they aren’t just saying this, they are already preparing the first steps.

On 4 February Varoufakis officially announced that Greece is bankrupt. The conservatives of the EZ gasped and were SHOCKED, shocked I say! As Matt O’Brien, of The Washington Post, wrote on 18 February,

“The problem is the one thing Greece won’t compromise on is the one thing Europe won’t admit: that the bailout has failed, and needs to be scrapped.”

To elaborate on that point, on 17 February, Austrian Finance Minister Jeorg Schelling said,

“There won’t be a meeting (on Friday) where we have to listen to how the world is working.”

In other words, while clamping his hands over his ears and loudly saying “lalalalalalala” he really means,

“There won’t be a meeting on Friday where we have to listen to reality and facts.”

I feel better already.

Many have seen the SYRIZA plan to refuse to accept further bailout loans as a sign that they will not only declare bankruptcy, as indeed they already have, but that they follow-up by defaulting and will exit the euro immediately. This is a misreading of their clearly and repeatedly stated intentions. Tsipras has said, to Bloomberg News among many others,

“Greece will repay its debts to the European Central Bank and the International Monetary Fund and reach a deal ‘soon’ with the euro-area nations that funded most of the country’s financial rescue.”

And,

“…it means that we need time to breathe and create our own medium-term recovery program…”

They remain strongly committed to their ECB and IMF loan obligations though, in carefully worded statements, Tsipras seems to be speaking less to the loans made by other nations and while this infuriates the creditor banks, when in bankruptcy having clear priorities is always wise. From the beginning SYRIZA has been fully transparent regarding its actions and intentions so stating their priorities out loud is an expression of their commitment to deal honestly. As far as debt goes, the breakout is as follows: €142n is owed to the EZ/IMF fund (these are speciality instruments raised only for the purpose of resolving various crisis), €53n to individual countries, €20n to the ECB in Greek government bonds and another €50b is owed by the Greek National Bank to other national central banks through the EZ payments system. If you are interested in knowing how Greece got into this situation in the first place and you guess international corporate terrorists Goldman Sachs you would be a long way to right. I did a podcast on that too and it is here.

Among the most astute commenters on Greece is Frances Coppola writing for Forbes and others. She is also an excellent Twitter follow at @Frances_Coppola. Here she is summing up the Greek position nicely,

“Greece has no intention of leaving the Euro or the EU (But others might force it out.)Greece has no intention of defaulting on its debts to primary official creditors. (But others might force it to.)

Greece is committed to pursuing policies that promote economic stability and recovery of Europe. (But others might not be.)”

While many/all believe that it is impossible for Greece to service their crushing debt load, there are some considerations that most fail to notice. (Again, hat tip to Frances Coppola for this analysis.) Greek debt already sits well below market rates and has a very long horizon for repayment. In fact, no principle payments are required on the European Financial Stability Facility bonds (EFSF bonds), mentioned above as speciality instruments, until 2022. Debt service for these primary creditors is 2.6% of GDP, so not entirely unaffordable. The current debt load is, however, 175% of GDP and some EZ idiot (achtung! pardon my sneeze) insisted that the 2012 agreement between the EU and Greece require that Greece reduce its debt load to 120% of GDP in three years! This already impossible task is made even moreso because as the Greek economy shrinks (it’s down 25%, remember) the debt to GDP load naturally floats up.

The real problem for Greece is not debt service but what is being called the “current program,” (aka “structural reforms”) the conditions Greece is required to fulfill in addition to repaying its debt. This is the tool the Troika used to impose “fiscal waterboarding”, to steal Varoufakis’ descriptor, on Greece. The “current program” includes the % of GDP requirement noted above and, even more damaging, the random edict that Greece must run a primary surplus (meaning not including interest payments) of 3% this year and 4.5% in 2016. I’ll say it again, that is the equivalent of a $720B surplus in the United States and it is insanity. In fact, it’s worse than that, it is built-in failure and everyone knows it. The 2012 agreement, to which the Germans are attached as firmly as a crustacean to a boat hull, was never intended to work. Oh, and the so-called Troika monitors, that the IMF and ECB are foisting upon the Greeks because the Troika are determined to treat Greece as a junior, less-than, not-quite-partner.

Which brings me to the Troika. The Troika’s position is that Greece is not in bankruptcy rather it is in a “temporary liquidity shortfall” and lending more money will allow it to meet debt service obligations while “structural reforms” will lead to renewed growth.In reality Greece is in a debt deflationary spiral (a condition when income is falling and debt is rising.) William Black, in an excellent post at New Economic Perspectives, notes,

“The troika overwhelmingly provides loans to Greece. The troika rages repeatedly about what it claims is Greece’s excessive debt. The troika is shocked that extending more debt (rather than aid) to a nation it claims is in disaster because of its excessive debt levels has not transformed Greece into a neoclassical paradise. The troika loans roll over existing Greek debt or bail out banks (and their owners and creditors). Many of those banks, owners, and creditors are foreign. The troika will make money on its loans to Greece unless the terms of those loans are renegotiated or Greece defaults on the loans. The horrific price to Greece of the troika’s loans is brutal austerity.”

Mario Draghi, President of the ECB, adds this useful tip,

“But for growth to pick up, you need investment. For investment, you need confidence. And for confidence, you need structural reforms.”

…and unicorns.

For confidence you need LOTS of unicorns.

In my book, I refer to this as the “Wussing, Wussie, Wusses – Business Confidence” problem. Folks, write this down on the inside of your eyelids; business never leads. Business follows. Business NEVER hires a single employee it does not desperately need at that very moment. Period. RABBITS have figured this out. You plant a carrot seed and when it sprouts we eat the top off. You plant another seed and we eat another sprout. It’s not a carrot until it’s a carrot, people.

And just in case my word isn’t enough, in Davos the infamous New York Times tracked down the even more infamous Kenneth Rogoff who said,

“Much bigger steps need to be taken to fiscally stimulate the hardest hit European countries,” Mr. Rogoff added. “Primarily,” he said, “steps should be taken to significantly lighten the government debt of these countries, with a view to giving space and freedom for governments to spend more.”

HOLY CRAP! Even Kenneth (I can’t manage an Excel spreadsheet) Rogoff gets it. How much more simple can it possibly be?!?!

And now on to Germany… (This would be a good time to take a drink. I’m recommending the Rombauer Chardonnay but that’s just me.)

Given its action in the EU, the German point of view is neocolonialist, at best, a new Reich, at worst. The current German surplus far exceeds even the upper limit for surplus as recommended by the ECB and this is important….

Because there is ALWAYS BALANCE German surplus = debt for others. Period. It’s accounting and we all know you don’t screw with the Math Gods.

German banks are up to their eyeballs in bubbles of the worst kind, right now, this very minute, all over Europe but particularly in Greece and Spain. If you remember nothing else in this endlessly long diary (and I have already said it once) remember this:

Greek loans are all about bailing out Germany.

Only 12% of the 2012 bailout monies went to Greek operations and the Greek people, the other 89% went to cover loans. In a classic example of NYT stupid they assert,

“While Greece sees itself as being punished by creditor’s demands, Germany and a host of European officials have argued that Greece and other troubled nations in the eurozone must clean up the high debts and deficits at the root of Europe’s crisis. They say Athens has failed to make enough progress on structural reforms seen as necessary to stabilize the economy, and they are pressing Greece to raise billions of euros through more budgetary cutbacks and taxes.”

Meaning TINA (there is no option to austerity). Back in the real world, austerity is the proven cause of the continuing Greek decline – not debt, not deficits. In fact, the deficits are too small. A significant fiscal stimulus is essential for Greece to move forward. SYRIZA understands this.

Meanwhile, from their lair under a volcano, top German politicians are demanding that Greece sell islands in order to bail out German creditors. Bwhahahaha.

I’ll close this section with a couple of quotes from another first-rate article by Frances Coppola:

“The history of Europe is long and blood-spattered. It is nothing like the United States, which is a young country with a common language, clear boundaries and a single political structure. Yes, the USA fought a civil war to achieve its current degree of political unity, and there are no doubt still stresses and strains. But Europe–if you must regard it as one entity, which is problematic in itself–has fought HUNDREDS of civil wars. We do not have a single language, we still cannot agree on where our boundaries should fall and national interest always trump “European” politics. You can’t overturn tribal and cultural identities that go back thousands of years at the stroke of a few politicians’ pens.”

“The Euro is the biggest threat to peace in Western Europe that I have seen in my lifetime.”

And Now…”As the Euro Turns”…

Monday, 2 February: Varoufakis begins his meetings with EU finance Ministers and makes news by wearing a leather jacket to meet UK chancellor of the Exchequer, George Osborne

Wednesday & Thursday, 3 & 4 February: meetings and speculation

And these two excellent tweets:

This from @Frances_Coppola

“The ECB is engineering bank runs.”

And this from @AndrewLainton

“Circular logic → possible grexit → withdrawal of collateral backing → bank run → grexit”

Thursday, 5 February: Storm clouds began to rage in the EZ when SYRIZA kicked out the Troika monitors who had been deployed to watch over the shoulders of the Greek government dispensing discipline and austerity at will. SYRIZA had promised, during the election, to throw the monitors out and they did so. The ECB, in a tantrum rage and without required consultation, immediately “lifted the waiver” under which Greek government bonds had been allowed to trade. Prior to this the ECB had agreed to accept Greek government bonds even though Greece did not meet the ECB minimum requirements. A formal waiver was in place to allow the transactions and it was this waiver that was pulled by the ECB in a fit of pique.

Friday, 6 February: the ECB clarifies that Emergency Liquidity Assistance (ELA) funding will still be available to the Greeks but, of course, the strings on that money are many and short.

Saturday to Tuesday, 7 February to 10 February: more meetings, more speculation

Wednesday, 11 February: the first (emergency) meeting between the EZ Finance Ministers is held, in Brussels, and they get…nowhere

Thursday, 12 February: The ECB raises the Greek ELA allowance; Tsipras makes his debut in a meeting, also in Brussels, between EU Prime Ministers, and they get…nowhere

Saturday, 14 February: Varoufakis says that he believes Athens will reach agreement with the EU “even at the last minute.” and that many issues are agreed but privatizations & labor (meaning the SYRIZA promised minimum wage increase & pension repayments) remain the sticking points. Also, it is confirmed that exiting from the EZ does mean exiting from the EU and that the EU determines the “arrangements for a member state’s withdrawal.”

Sunday, 15 February: EC President Jean-Claude Juncker (of Luxembourg) announces that he has taken a “personal stake” in the negotiations and is making a “last-ditch” effort to resolve the differences. Tsipras and Varoufakis seem confident that they will come to agreement with EU finance ministers based upon the draft communique they have been given by European Commission’s Pierre Moscovici, called, cleverly, “the Moscovici Draft”. The Moscovici Draft contains no commitment to the “current program”, and instead refers to a “new arrangement”. The Greeks say they are “happy” to sign this “splendid” draft immediately. Moscovici calls upon EU finance ministers to be “logical and not ideological”. Ummm…fat chance.

Monday, 16 February: Fifteen minutes before the start of the meeting with the EU finance ministers, Varoufakis is handed a revised communique by Jeroen Dijsselbloem (the Dutch Finance Minister) and the language from the Moscovici Draft has disappeared and been replaced by the “current program” language which the Greeks remain unwilling to accept. All reference to “new arrangement” has been removed. The talks break down early in the day as Greeks are furious over the bait-and-switch. In the evening a third draft, the “second Moscovici communique” is released which combines elements of both previous drafts but retains the “current program” language. Both the second and third drafts essentially say,

“Give up your silly ideas of recovery so we can continue to pretend that everything is fine.”

Because things are not already screwed up enough, the third draft is translated, by the Eurogroup, to include “in line with” language but Greeks have been given a translation that means “along with”. Obviously, these are two completely different meanings.

Meanwhile, the following Very Serious People make the following statements:

Itallian Finance Minister Pier Carlo Padoan,

“ Greece leaving the EU is out of the question. I’m not worried. I am convinced that we will ultimately reach a common ground and a common decision.”

Here’s the part he didn’t say but everyone heard,

…because otherwise the Germans will be right back here again with my country after our elections.

Dijsselbloem equivocates,

“Within the program there is room to discuss.”

I call bulls*%!

Varoufakis leans in,

“In the history of the European Union nothing good has ever come out of ultimatum.”

Tsipras softens the line,

“We are ready and willing to do whatever it takes to reach an honorable agreement over the next two days.”

Tuesday, 17 February: Because Germans complained that they hadn’t, the Greeks release their own draft IN GREEK and it is mis-translated by the Financial Times. Chaos ensues. The Greeks also release all the documentation from the Monday meeting proving that the German claim that they had made no credible offer had been “economical with the truth.”

Greeks reiterate that they are willing to accept 70% of the “current program” requirements while a “bridge program loan extension” is put in place for a maximum of 6 months during which time a new agreement can be hammered out. As per the “current program” Greece is willing to: reduce bureaucracy (part of addressing EU corruption concerns), strengthen independence of tax administration, create a new efficient and fair system of tax litigation, modernize bankruptcy laws, reform the judicial system (another corruption issue), and dissolve cartels. BUT they make no offer to complete the other 30% of the current program – and that is one of Varoufakis’ “red lines.” In his oped in the NYT the previous day, Varoufakis had said,

“Faithful to the principle that I have no right to bluff, my answer is: the lines that we have presented as red will not be crossed. Otherwise they would not be truly red but merely a bluff.”

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