The entire thing is worth reading, but the key take away:
"Regulatory mistakes and agency issues within banks encouraged poor credit decisions. Spanish banks lent into overpriced real estate, and German banks lent to a state they knew to be weak. Current account imbalances within the Eurozone — persistent and unlikely to reverse without policy attention — implied as a matter of arithmetic that there would be loan flows on a scale that might encourage a certain indifference to credit quality. These were European problems, not national problems.
But they were European problems that festered while the continent’s leaders gloated and took credit for a phantom prosperity. When the levee broke, instead of acknowledging errors and working to address them as a community, Europe’s elites — its politicians and civil servants, its bankers and financiers — deflected the blame in the worst possible way. They turned a systemic problem of financial architecture into a dispute between European nations. They brought back the very ghosts their predecessors spent half a century trying to dispell. Shame. Shame. Shame. Shame."
So we just ignore the fact that the Greek government misrepresented their economic state, failed to implement the necessary changes and then puts up a completely bogus referendum?
Greek here. This is an understatement. While I’ve mentioned in other posts that our economy is faulty, arguing that we didn’t do anything to fix it is awfully wrong. We did a lot. We managed to move from a 14% deficit to a 1% surplus in just four years. Four. Fucking. Years. No other country in the developed world has done such a feat in such a short time. The effect of that was tremendous for the population, 50% of young people are unemployed.
So while we admit our wrongdoings (well at least some of us do) we’d also appreciate if EU could cut us some slack. The reason radicals like Tsipras came into power is the lack of flexibility from EU leaders.
The tip of the iceberg is the report that was published last week from IMF that pretty much described the Greek dept as unsustainable. The report was known to various EU leaders for months but they chose to suppress it. I don’t need to tell you how this looks from our side. It’s preposterous to say the least. They say they don’t trust our government, and I don’t blame them for it, but how could anyone trust them. They’re all cunts.
>We managed to move from a 14% deficit to a 1% surplus in just four years. Four. Fucking. Years. No other country in the developed world has done such a feat in such a short time. The effect of that was tremendous for the population, 50% of young people are unemployed.
yep, man, those sacrifices would mean that some bondholders in Germany will get their half-percent... I'm really feeling for your people - i myself lived through pretty devastating (or as it happened - transforming) years 25 years ago in USSR/Russia and such things are brutal to regular people.
Anyway, just compare - having your own currency, you could have covered the 14% deficit just by printing those money - it would have caused a few percent of inflation, like 5-6%. Few years ago US had like 3 times bigger deficit than that Greece's deficit (and FY2014 US deficit is about the same as Greece's) and just kept printing the money with official inflation less than 2% or something like this. And unemployment situation is among all times best today.
> just compare - having your own currency, you could have covered the 14% deficit just by printing those money
Perhaps most glaring is the ECB's current Quantitative Easing effort to the tune of 1 trillion euros, buying assets and bonds in every country but greece [1]. This devaluing of currency is paid for by all users of the Euro, including greek. And yet it is used to prop up the same banks and countries greek lends from on conditions of austerity?
I actually sympathize with the Tsipras guy. He took on an impossible job and in my opinion he is actually making the best of it. You see, Greece has to default. We all know that. All that is needed now, is a sufficient number of face-saving gestures that will allow everybody to come out of this heads up high. Angela Merkel is grumbling and fumbling in the back, but she can be talked in to accepting a new deal, on the condition that the deal is both complicated and ambiguous enough, that she can sell it as a great victory back home. Problem solved.
Trying to collect WW2 "debt" from Germany? Using "insulted dignity" as an argument in financial negotiations? Deliberately setting up the referendum after the deadline and then "pleading" for extension? Really? He is pulling all the stops, granted, but they are nothing short of sleazy and obnoxious. If EU are to cave in, it would basically mean that EU is susceptible to blatant manipulation. So they won't.
The only way out of this mess is for the referendum to resolve with Yes, for Tsipras to step down and his replacement to agree to whatever the last EU proposal was. Tsipras tried the unorthodox approach and it didn't work, not much left he can do now but to leave.
There are two kinds of debt claims relating to WWII. One is war reparations. We didn’t received any from Germany and chances are we never will. I assume you have no idea to the extent of damages done by Germans in Greece during the war. They destroyed 80% of our infrastructure. Besides Poland, Greece suffered the most damages during the war. But given that all that happened 70 years ago we should bury the hatchets and stop making claims.
The second debt relates to an official loan that Hitler took in gold from our central bank. It is documented and is considered a state loan. We have every fucking right to claim it. It is somewhere between 8 and 12 billion Euros by today standards.
By the way, back in 1954 the Greek government agreed to write off a big part of the German debt owed to us [1]. Those are state loans completely independent to war reparations. So while we did it for them they deny it to us. And we did it while our economy was in a far worse state than German economy is today.
The problem we have with Germans is that they’re ungrateful pricks.
> war reparations. We didn’t received any from Germany and chances are we never will
Incorrect. West Germany paid 115 million Deutschmarks to Greek victims of Nazi crimes in 1960 (a lot more than the $45 million reparations that were demanded by the 1947 Paris Peace Treaty), while victims of the forced labour camps were also compensated individually.
Concerning Greece paying up, you have no choice: they can't. Read my lips: They have no money. The EU proposal was simply not realistic. Any proposal that contains the idea that Greece would be paying up, is a dead-end, non-starter.
Concerning Greece remaining in the EU and the Euro, you do have a choice. It would be short-sighted to expel Greece. You see, everybody just has to learn their lesson. In the future, don't let your commercial banks buy too much Greek debt paper, because you will end up paying instead. It takes two to tango. There's no point in blaming just one side of the equation. The other side is responsible too.
That same report says that failure of the economy to recover is caused by the failure of the government to implement the necessary changes, worsened by the current government during the past 5 months.
That’s one way to put it. The other is that besides the government IMF fucked up too by setting unrealistic goals, like a 4% surplus by 2016 which led Tsipras denying continuation of the program to avoid further damage to the economy (those goals were eventually reduced but it now seems too little too late). Everyone is looking for a scapegoat. The government is blaming ECB and the Germans, EU is blaming the government, and IMF is blaming everyone including Lagarde who can’t seem to get her head out of her ass. Then there is US who see what a clustefuck this whole situation is but can’t do anything but nagging the Germans to become a bit more flexible and in order to put some pressure on them decided to make the report public just when Tsipras abandoned negotiations.
There is a Greek proverb saying that when too many roosters sign the dawn comes late.
Well, IMF has to explain why it threw billions of dollars to an unsustainable debt.
But there are deeper issues too. What the creditors really want is to micromanage Greece while they do not understand our economy and culture. They want to change everything in a couple of years. Change takes time, you can't turn a Greek into a German or an American in 3 or 5 years.
In order to do this and protect their interests, they support the previous, crooked goverments. These people acted like lapdogs, signing everything the creditors threw at them, whilst implementing only what didn't touch their rich friends.
The creditors did not only got binding agreements through them but also protection. Siemens for example, the German conglomerate that accounts for a large percentage of Germany's GDP has spent over 2 billion euros (!) in bribery to Greek politicians and public servants. If this case ever reached the court, both our politicians would face jail and Siemens wouldn't be able to work with the European public sector again (think from traffic lights, to trains, hospitals, energy, etc). Thus the creditors prefer a goverment that looks like an obedient and honest goverment, whilst it only applies austerity measures for the weak and protect themselves.
Our new goverment seems genuinely interested to make things better, but it asks for the freedom to implement their own ideas in order to reach the targets set by our creditors and also a debt restructure so that our debt becomes sustainable.
Just for the record I have to say that as a fellow Greek I totally disagree with that line of thinking, which is popular amongst many Greeks. Neither IMF nor EU did anything to cover our corruptive politicians. But they can’t substitute our constitution or our courts. Neither is their duty to govern Greece. Their duty is to set goals and check whether we implement agreeable reforms. Everything else is just conspiracy theories or pure speculations. They don’t have executive jurisdiction to enforce implementation of this or that policy.
You mentioned the Siemens scandal for example, by the way your numbers are off by an order of magnitude. This is a typical example of a cover-up from our part. We let the key witness escape to Germany where he is protected from extradition. It’s not their fault, we shouldn’t have let him leave in the first place. Taking responsibility for our mistakes would be a first step in overcoming our inefficiencies. And the previous government was anything but obedient, as a matter of fact all three governments that were called to implement reforms resisted as much as they could.
So please, let’s just stop the speculation about EU wanting to rule Greece through puppet governments. I’m sure they have better things to do.
The creditors ( banks ) are part of "moral" game here too.
If the Euro cannot handle Greek ( and Spanish , Italian, Portuguese , Irish ) default then members of the Euro must share the imbalance.
As an american tax payer it hurt to watch bank bailouts here. In europe I keep hearing countries names, but this is a bank bailout fundamentally.
Sticking the debt on national governments while also forcing austerity ( defacto shrinking of GDP ) leads to a lose:lose.
The EU was never to be a transfer union, this setup was required to get the large economic countries to accept the weaker countries being admitted. National pride would mean political suicide for any leaders who suggest sending money out in the form of welfare.
While I am quite willing to lambast the banks in the states for the mess they got into I am not so willing to do so with regards to their lending to Greece. Someone would have stepped forward regardless because state actors are supposed to function properly with fiscal restraint when its apparent their economy cannot sustain their spending.
The real fault here is the past and current Greek administrations which decided to pass the buck to the point we have a new government which is effectively trying to blackmail the EU.
The IMF is pulling back because they were overly generous giving the Greek government far more support that rules generally permitted. Under normal conditions the rule is 200% of a countries quota which is based on each countries contribution to the IMF with a 600% cumulative total. In 2010 Greece got a 3208% (three thousand two hundred an eight) percent infusion.
Greece has the highest military spending vs GDP of any NATO nation second to the US. What the IMF and EU lenders and such have done is force Greece to raise taxes to the point its near impossible to do business. Forcing many out of the legal economy if not out of Greece itself. This is the fault that can be assigned to IMF and others.
Basically the businesses and people of Greece are paying a tax load so high that profit and therefor growth is nearly impossible.
Then there should never have been a single currency. This is a case of wanting to eat their cake and have it too.
>While I am quite willing to lambast the banks in the states for the mess they got into
Doesn't sound so much like you are, actually. Where is all the hate for Commerzbank for lending money to Greece and then shifting all the losses on to the German government?
>I am not so willing to do so with regards to their lending to Greece. Someone would have stepped forward regardless because state actors are supposed to function properly with fiscal restraint when its apparent their economy cannot sustain their spending.
Everybody is supposed to act with restraint when it becomes apparent that they cannot finance spending.
Nonetheless the Greek government that got Greece into this mess is long gone (and I don't hear you calling for their members to be imprisoned on charges of fraud and negligence).
>Basically the businesses and people of Greece are paying a tax load so high that profit and therefor growth is nearly impossible.
Businesses didn't get that bad a deal out of austerity. They got to cut their wage bill in half and their tax bill still hasn't really budged. So they're the first people you feel sorry for?
>The EU was never to be a transfer union, this setup was required to get the large economic countries to accept the weaker countries being admitted.
Not compensating economically weaker countries in a currency union is completely unjust and immoral. Weaker countries give up the ability to control exchange rates. And they have to deal with trading in stronger currency than they would if they were going it alone. This makes their exports relatively unattractive.
> The IMF is pulling back because they were overly generous giving the Greek government far more support that rules generally permitted.
I think the IMF is pulling back because they can't stomach this crap anymore.
> Greece has the highest military spending vs GDP of any NATO nation second to the US.
Right so French and German defense contractors bribed previous Greek politicians to buy weapons systems on credit. And the ECB etc are dead set that that part of the Greek budget continue as usual.
> Right so French and German defense contractors bribed previous Greek politicians to buy weapons systems on credit. And the ECB etc are dead set that that part of the Greek budget continue as usual.
There are no "previous Greek politicians": Greece is a sovereign state that elects its own leadership. That sovereignity comes with responsibility, too. So, in the end, people should think more when voting, not blame others...
Lending money is always a transaction between two parties. Both should be responsible. The financial state of a country is easier to evaluate than that of a person, they shouldn't have faller for the tricks of Goldman Sachs.
> According to investigative reports that appeared in Der Spiegel, the New York Times, BBC, and Bloomberg News from 2010 through 2012, Blankfein, now Goldman Sachs CEO, Cohn, now President and COO, and Loudiadis, a Managing Director, all played a role in structuring complex derivative deals with Greece which accomplished two things: they allowed Greece to hide the true extent of its debt and they ended up almost doubling the amount of debt Greece owed under the dubious derivative deals.
So, EU and IMF didn't catch that, they lent money in a stupidly criminal way and now they want it back at any cost to Greece. They lent Greece money when Greece didn't need it, and now request it back when they are down.
Of course Greece bears the brunt of blame here, but collective punishment at the level of a country is cruel. There are lots of innocents paying now for the financial dealings of the older generation.
It's sad to see EU reduced to this kind of relationships between us. Maybe EU isn't ready to exist as it is. They allowed countries into the union and Eurozone that didn't need to be there. Instead of having a corruption-reducing effect, corruption was allowed to go on without scandals for years. EU should have had a civilizing effect on its poorer and more corrupt countries. As it is now, it's a money-shark.
So accepting the fact that both are responsible, what should the EU do with their relations with Greece? They can demand the money back, but that isn't helping. They can expect no money back, but what to do then? Kick Greece out of the euro, and accept failure of the principle that once in the eurozone, you stay in the eurozone? Basically accepting failure.
Option 3 is to implement a proper fiscal union. It's not clear how best to go forward with that (and as much as I'm in favor, it looks politically unrealistic right now), but it is clear that it's the only option for long-term survival of the Eurozone.
On some level the current problems stem from the EU growing too fast, both in area and in features. Adding yet another feature will not work, it will only ensure the eventual breakdown of the system. What's needed is to pause the expansion and the degree to which nation states are forced to give up their sovereignity and when (if?) the kinks are ironed out of the current setup to review what the best next step is and then to implement that step very very slowly with signficant buy-in of the various states in the union. Only then will the trend be reversed.
I would expect that austerity would shrink the GDP. After all, if a business is only viable if it receives constant infusions of cash, then shutting off that cash would shut down the company, and its output would no longer contribute to the GDP.
Just not one large enough to satisfy creditors. That means, without the debt payments, Greece would be free and clear and wouldn't have any budget issues. The only reason Greece needs 'constant infusions of cash' is to pay off these debts, which becomes more difficult as more austerity is demanded.
No, they probably /don't/ have a primary surplus. They briefly did, but that was before Syriza.
Most of the recent infusions of cash were part of the ELA -- so /not/ to pay off debts but to compensate for illiquid (or insolvent...) banks and the stave off bank runs.
The debt payments are /not/ in any way big or difficult -- the EU took over most of the debt and in the process forced through a large haircut on the debt + Greece got artificially low (very low!) interest rates + enormous maturity extensions. Greece also got (much) deferred payments for that debt, especially for the interest.
Well, Greece implemented a lot of changes, and it's one of the few Eurozone countries that successfully implemented internal devaluation (salaries halved).
What you call "necessary changes" actually turned out to be "bad changes", and everybody with a grain of salt would say there was no way they could get Greece up again on its feet.
Greece, like many other countries, messed up or not, began sinking after joining the Eurozone. One may wonder a bit before blaming them.
"Well, Greece implemented a lot of changes, and it's one of the few Eurozone countries that successfully implemented internal devaluation (salaries halved)."
I wish more pro-Eurozone people would consider this one. The creditors were very plainly less concerned with getting paid back than they were with waging a brutal class war.
This is a classic principal/agent problem. The Troika negotiators are not playing with their money, they are playing with taxpayer money. Hence the debt is more of an excuse to push for the reforms that their friends want, irrespective of the very real negative effect it has on Greek solvency.
This, if for no other reason, is why the debt should never be paid back.
"Hey, these austerity measures are tanking the Greek economy even harder, making it actually impossible for them to survive without more loans... you know what, I think we should force them to do even more of it in order to fix things!"
As the wise man says: doing the same thing over and over, and expecting a different result, is insanity.
In either way it could have gone back in 2010, the profligacy of the Greek state would not have been ignored. Had it defaulted to the private creditors at the time, the country's borrowing costs would have shot through the roof. People hear "default" and think that it's a get out of jail free card. It's not. Money would be harder to come by for the state to fund its operations, which may have provided the backpressure needed for meaningful reforms to take place without shrinking the national income by 1/3.
But since they didn't default, and instead the banks holding the bad debt were bailed out indirectly though loans to Greece (a tiny fraction of which remained in Greece, mind you), national income did shrink by 1/3 because of many of the changes that the institutions insisted take place _did_ take place. Now the likelihood of those loans getting paid back is as close to nil as non-failed state can get. So, to look to the future rather than the past, everybody should be trying to figure out how to repay the institutions as much money as possible. Shrinking national income further isn't going to do that.
With respect to the "completely bogus referendum", not gonna bite.
Forgiving all the debt to Greece causes a worldwide financial collapse.
Greece's debt was restructured to be drawn out into longer payment terms at a lower interest rate and at a reduced principal to be fair to them and to prevent a financial collapse.
It's containment. It's been 5 years of containment now, and it's working to some extent as nations within the eurozone are much less exposed to the greek situation than they were 5 years ago.
Why? They should have never been in the Euro. Any econ major knows that you can't have monetary union without either fiscal union or prudent governments.
Check this prescient article from 18 years ago by one of the best macro minds of recent years (Rudi Dornbusch):
He talks about excluding Italy, Portugal, Greece, Spain, etc. So what happened? Standards got relaxed and they accepted e.g. Spain. And then other countries completely falsified their numbers and also got in due to that (Greece).
I don't even know why are they still thinking about keeping Greece in the Euro. They don't even have the internal political capital to make the deep reforms they need (labor mkt reforms, an IRS with bite, retirement at a much older age, etc). It would have been better for everyone on the first place to assume Greece will devalue, and to start planning for that.
They default, have maybe half a year of real pain, and then they get back on their feet albeit with financial autarky.
I totally agree. Prudent governments don't allow banks to lend huge amounts of money to dubious states that are in a bubble. Prudent states don't ask poor people to pay private debt that was made public by corrupt governments.
As for your question. If Greece leaves the Euro then it is the end of the euro zone. When Florida was going to default the federal reserve paid for them. That way people has confidence in the dollar. If when a European country is going to default every body screams and runs people knows that they shouldn't have any confidence.
Forgiving all the debt to Greece causes a worldwide financial collapse.
No. Greece is too small for its default to be that important, especially given that the vast majority of debt is actually now in the hands of governments and government institutions.
Yes, pretty much. The author's argument is that everybody knew that their economic state was misrepresented, so the banks should have never lend them money in the first place.
The mismanagement leading up to the financial crises was of course the fault of the Greek government. However, the reforms that the EU has proposed/enforced since then seem to have been more about punishing the Greeks than about actually building a properly functioning economy. That might feel justified (and because of that it has the support of many voters) but long-term it is not a viable solution to the problem.
The reforms are the only long term solution. They're reforms like, maybe Greeks should retire at the same age that other people in Europe do. Maybe hairdressing should not be considered a 'dangerous profession', thus unlocking various benefits. Maybe Greek train drivers should not be paid $130,000 a year to drive near-empty trains. Maybe Greece should be able to grow its own food instead of importing more than half of it.
Greece is hosed because, as the article points out, it is an incredibly screwed up and corrupt country. The EU is desperately trying to make it a few percent less screwed up, and mostly getting nowhere. Greece absolutely isn't hosed because of those awful European creditors who deserve to be punished for their naive belief that maybe Greece would improve.
I mean, just go take a look at the garbage that has been pouring out of Greece and ordinary Greek people about German in recent times. Allusions to Hitler seem to fall from their mouths every single day. The idea that maybe Germans should not be paying for Greeks is not fascism, yet they routinely act as if it is.
Greece has no real alternative but to adopt severe reforms and that means severe "austerity", whereby "austerity" of course what people mean is shrinking the Greek state to a size more appropriate to the size of its economy.
No reforms in the world will allow Greece to meet the current liabilities, even the IMF says so. The bigger the surplus the Government runs (to pay back the creditors) the more the economy will shrink and the further more they will miss their target by.
Germany isn't paying for Greece, it (well the troika but Germany is significantly calling the shots) is effectively governing Greece by a series of manufactured crises every 6 months in which they can impose conditions (detailed policy requirements on internal issues including pensions and taxes) for the next payment (which is 90% transferred to creditors rather than going to Greece itself).
Whether fascism is the right word or not there is something profoundly undemocratic about the situation and there are several valid comparisons with fascism. Singling out a groups as scapegoats for all blame and the aspect of collective punishment. Sensible people trying to maximise the return on their loans would restructure them to take some loss but to enable Greece to recover to be able to pay the bulk of them. Instead the focus seems to be punishment for irresponsible lending.
Singling out a groups as scapegoats for all blame and the aspect of collective punishment
In line with many on the right, you are singling out Germany as a group as a scapegoat! Indeed Syriza's approach to the negotiations was to run a divide-and-conquer on the EU, trying to pit the rest of the EU against Germany. This backfired badly.
Germany isn't paying for Greece
In what sense? Greece owes Germany €88.7 Billion.
Sensible people trying to maximise the return on their loans would restructure them to take some loss but to enable Greece to recover to be able to pay the bulk of them.
Which is of course exactly what the troika is trying to do (however imperfectly), and much debt has already been written off or rolled over, but the Syriza government is blocking this as much as possible.
there is something profoundly undemocratic
Greece is perfectly free democratically to decide to ignore the troika, and default on all debt. Greece is also free to other other countries to pay for its debt, e.g. Japan, the US, Venezuela. But Greece has no unconditional right to other people's money. Why should Latvia and Lithuania, who are much poorer than Greece, finance a ridiculously bloated Greek military? There are much poorer countries still, Cambodia, Malawi, Niger, Angola. Why is it so vital that the rest of the world blows billions on fairly wealthy Greece, rather than these much more needy countries?
This happens all over Europe. All unionized and high profile workers successfully demand earlier and earlier retirements.
Check the numbers. Greece' average retirement age is above the EU average age.
> Greece has no real alternative but to adopt severe reforms and that means severe "austerity", whereby "austerity" of course what people mean is shrinking the Greek state to a size more appropriate to the size of its economy.
Greece has a perfectly workable alternative in a Grexit. It would help them enormously and not require austerity but there are political reasons that won't allow it.
If Greece was using the drachma, this would not be a problem.
The other problem with austerity measures is that they have a tendency to inhibit growth or even shrink the economy; shrinking the government further certainly doesn't help that situation.
EDIT: I forgot to add that Greece has a primary budget surplus - meaning that if it wasn't for the debt they owe, they'd be doing fantastically budgetarily.
As a purely economic solution, a Grexit combined with a default might work. However, who would step up and finance the ongoing deficit? Interest rates even for short term borrowing would be unsustainable. What would happen in the meantime, until such a Grexit could actually be performed? The banks don't have money any more, there's no infrastructure to print new bills, there's no plan on how to actually do that. It's the choice between austerity because the lenders want it or austerity because there's no money left.
On top of that, would Greece leave the EU? There's a lot of greek living and working abroad under the EU residence/work rules. Would such a vote not be perceived as a "No" to europe, effectively pushing greece out of the EU at least on a temporary basis?
I'm not convinced that the Grexit is a workable alternative in a larger context.
> As a purely economic solution, a Grexit combined with a default might work. However, who would step up and finance the ongoing deficit?
As I added in my edit, Greece has a primary budget surplus. There would be no ongoing deficit.
Existing debt would be paid off with the expedient of default and currency devaluation, just as other countries have historically done. A little rough patch and then things look up. Seems a much healthier alternative than decades of economic suffering due to more and more austerity and the consequences thereof.
> there's no infrastructure to print new bills
I can't imagine that is a very hard problem to solve.
> On top of that, would Greece leave the EU? There's a lot of greek living and working abroad under the EU residence/work rules. Would such a vote not be perceived as a "No" to europe, effectively pushing greece out of the EU at least on a temporary basis?
Does leaving the Euro mean leaving the Eurozone? That's an honest question. I don't think it does, but I've heard this said before.
On your final point, I don't disagree: at least right now leaving the Eurozone is politically untenable. But I suspect that economically it might be the most sensible thing to do, and not just for Greece. Unless Europe forms a real fiscal union, this kind of madness will happen over and over.
> Existing debt would be paid off with the expedient of default and currency devaluation, just as other countries have historically done.
All current debts are held in EUR or other foreign currencies. Currency devaluation won't help with the existing debt. I doubt a single creditor would accept exchanging EUR denominated debts to New Drachme.
> I can't imagine that is a very hard problem to solve.
Even the greek finance minister considers that a major roadblock.
> As I added in my edit, Greece has a primary budget surplus. There would be no ongoing deficit.
Greece had a primary surplus, it's tethering on the edge of not having a surplus any more. Greece desperately needs money to invest and kick-start its economy. And then there's still the IMF debt and the IMF always wants and gets its money. Even Argentina treated the IMF debts preferential. Who would step up and cover that?
At this point the European contracts are such that a country can only leave the Euro if it leaves the EU.
However, I think it would be possible for the EU to agree to amend the contracts to allow Greece to leave the Euro while staying inside the EU, if Greece so wishes.
> How will a country that has no money and terrible credit do when it needs to import 50% of its food?
Greece, and Greeks, do have money. I am not sure what you mean. It's not as if Greece is the only poor country which imports most of its food.
Food prices have already been skyrocketing. As the article points out, austerity has tanked the Greek economy despite repeated predictions by European 'experts' that any minute now, austerity would cause Greece to turn a corner. Why do you think food prices would get substantially worse?
> has a perfectly workable alternative in a Grexit
Its not "perfectly workable" in a country that imports >>50% food, has practically zero foreign currency reserves, and is already considered a bad lender.
The reforms may be a long term solution, but pushing austerity to far makes the end solution push out in time and actually make it less likely that the loans are able to be paid back in a reasonable time frame.
> The reforms are the only long term solution. They're reforms like, maybe Greeks should retire at the same age that other people in Europe do.
What's the retirement age of the other people in Europe, excuse me?
62 like in Germany? 67+ like in Italy?
> Greece is hosed because, as the article points out, it is an incredibly screwed up and corrupt country.
Japan is often ranked as the most corrupted country in the world, but still is going fine. It resisted many crises, and it's one of the most powerful economies in the world. You may guess that corruption is not part of the equation then. Isn't USA corrupted? Isn't China? The whole idea that economies fall down because of corruption is non-sense. As long as money stealed by corrupted people stays in the country the economy does not suffer that much. Corruption issue is about social justice more than everything else.
I certainly don't think of Japan as corrupt in the more common way, but in terms of being institutionally compromised, the Japanese government is effectively in the business of maintaining and giving money to the institutionally corrupt construction industry, permanently and forever, no matter how unnecessary and unwanted the construction is. They have got some outstandingly unnecessary and unwanted construction programmes.
Certainly by no means one of the most corrupt, though.
I think you're looking at corruption in a one dimensional way. Corruption generally acts as a tax on the economy, a drag factor. Most countries experience corruption, but mitigate it with dynamic economies, productive work forces, abundant natural resources or whatever. Greece hasn't really mitigated corruption, and has compounded it with a range of other problems. Corruption is prt of the Greek problem, not the sum of it.
Maybe they could put some islands up for sale? They have tons of them. That kind of restructuring would make it easier to maintain their living standards.
The part that led to 25% drop in GDP and three times the unemployment rate. The part that took a 50bn problem and made it 330. You can say whatever you want about the incompetence of Greek governments, but the wise foreign advisors managed to be even worse in every respect (e.g. using wrong multipliers to calculate impact of reforms and even making growth assumptions in an economy they themselves dried up from investment.)
There is an additional reason that makes the 'Cadastre' extremly difficult project for Greece. A lot of the land in northern Greece is claimed (with documents) by people who are now citizens of Republic of Macedonia. Greece will break some EU laws if it doesn't honor those documents, but that land is used for more than 60 years by other people or the Greek state.
The derivatives that underwrote the debt made it all ok though. Same thing happened with the mortgage bubble. It's an easy way to turn a bunch of garbage into a bunch of AAA prime credit stuff. When the whole thing collapses, all the bankers get 100 cents on the dollar courtesy of central bank printing and sticking it to the taxpayer.
The key difference here is that the banks have already been bailed out (when international institutions like the IMF and ECB took over the loans), and now those institutions are demanding that instead of the taxpayer picking up the bill, the Greek pensioner do so. Shame.
The reforms were not "punishing", they just were never implemented in full due to resistance from the people. Even today, the majority prefers a clash and chaos to reforms.
I am leaning towards yes, because it was well known a long time before the crash that Greece was messed up. The incentives were wrong and encouraged irresponsible ledning. The Greek government just happened to be the worst borrower.
When you're lending out billions of dollars, you don't take the debtor's statements at face value. You do very thorough due diligence, and employ very capable people to do it for you. There is no excuse for Deutsche Bank, et al, not to have known exactly how tenuous the strength and solvency of the Greek economy were.
The notion that no-one knew the Greek government was lying about the state of their economy until it was too late is ludicrous on its face.
Just a heads-up that the concept that the creditors must accept risk is a very anglo-saxon perspective. The German view is that debts are to be paid back, period. If you don't pay them back you're a morally deficient scoundrel. If you're ever bankrupt then the legal system will permanently brand you. German economics is a mix of Austrian school economics and strict morals.
It doesn't excuse the largely international banks a la Deutsche, but it does explain the Germanic outrage.
There shouldn't have been /any/ debt after WWI (except to Belgium, who didn't ask to be a battle field in the self defense of Germany).
Russia, France, Britain, and the US should have paid reparations to Germany, not the other way around.
Why? Because Germany /didn't/ start the war. It just ended up as one of the losers.
Germany had huge territorial losses after both wars, parts of Germany were under forceful occupation for a long time afterwards, and they paid heavily in terms of manufacturing equipment and money afterwards. I'd say they paid.
>Just a heads-up that the concept that the creditors must accept risk is a very anglo-saxon perspective. The German view is that debts are to be paid back, period.
It's neither Anglo-Saxon nor German. It's a creditor perspective.
The same perspective that brought us debtor's prisons, and even (in Roman times), the notion of bankruptcy meaning "selling yourself into slavery".
News articles from back in 2003 openly said that the dealing Greece had with Goldman-Sachs were a way of playing with the numbers to present an "acceptable" deficit. It wasn't hidden.
Also, from 2004, long before any Troka: "Greece admits fudging euro entry"
"Katinka Barysch, chief economist at the Centre for European Reform, said the announcement would not be a surprise for Brussels insiders.
"Quite a few member states did something similar because of the political imperative to join the euro as soon as possible. Greece has just gone a bit further," she said."
I remember Jim Cramer (not exactly an economic luminary) was able to identify on air that Greece was a joke a decade ago. Funny that the German and French bankers couldn't figure it out.
The responsible states in Europe all benefited from the excesses of countries like Greece, so they let the good times roll.
I think what msabalau is saying is that there are many issues at multiple levels of this system and instead of addressing them as a whole they turned on a single instance.
The implication is that Greek's issues were used as a scapegoat for a systemic problem.
I guess a lot of the analysis being offered recently is showing that the Greeks, if not being encouraged to lie, we're certainly being given a wink
and a nod. At least, the current crisis should be seen as two separate issues - poor Greek governance, and poor bank governance.
there are three pre-crisis article in the first paragraph that are cited as evidence that it was no secret. creditors were (apparently) not blind to the fact.
I just read this Duke law paper[1] saying that in 2012 Greek creditors took a 64% haircut. I had not realized they had received such debt relief already. From the report:
"Within the class of high- and middle-income countries, only three restructuring cases were harsher on private creditors: Iraq in 2006 (91%), Argentina in 2005 (76%) and Serbia and Montenegro in 2004 (71%). There are a number of cases of highly indebted poor countries, such as Yemen, Bolivia, and Guyana, that imposed higher losses on their private creditors. However, the Greek haircut exceeds those imposed in the Brady deals of the 1990s (the highest was Peru 1997, with 64 per cent), and it is also higher than Russia’s coercive 2000 exchange (51%)....the 2012 Greek exchange was exceptional in size, exceeding the next largest sovereign credit event in modern history, which to our knowledge wasRussia’s default on 1.7 billion British pounds in 1918, equivalent to just under 100 billion in 2011 Euros. The Greek exchange also easily surpasses the German default of 1932-33, the largest depression-era default on foreign bonds, comprising 2.2bn US$ at the time, or approximately 26 billion in 2011 Euros."
TFA is arguing the private creditors got off far too easily. Having made the loans of their own accord, pocketing the interest payments up to that point, you can be sure the private creditors were quite happy to have the debt off their hands in 2012. This is the largest transfer from private credit to public credit in history, right? These are the same loans Greece is now actually completely unable to service.
The paper talks about creditors taking haircuts, but then in the next paragraph that this resulted in very little actual debt relief for Greece? If private credits really had to absorb 50% haircuts on $100 billion of debt, point me to the massive string of bankruptcies? If I understand correctly, the "haircuts" are projections based on net present value using some arbitrary high discount rates (the paper mentions 9% !!!) so you have to appreciate that with a different discount rate you could claim the private debt holders were actually being paid even > 100 cents on the dollar.
Using this 5 per cent discount rate to compare old
and proposed new debt flows, the debt relief
implied by the July 2011 financing offer would
have been approximately zero – indeed, slightly
negative. Using the “risk free” discount rate of
about 3.5 per cent (not shown in the table),
would indicate an *increase* of Greece’s debt burden by
about 11-15 per cent [over] the July 2011.
That's from your quoted article! Doesn't sound like such a great haircut to me... Any time private banks are being bailed out, I'm going to assume that they are being well enriched in the process. Just the way of the world. People will just play with the numbers to suit a given narrative, so it's hard to even find a "truth" in all this. A 9% discount rate for sovereign debt is insane though. Almost any NPV analysis is going to look like shit against a 9% discount.
EDIT: I read further down into the paper, and the actual discount rates used to arrive at the "59 - 64%" haircut range for the 2012 restructuring were 15.3% - 18.7%. Just WOW. So, yes, creditors were NOT paid the full NPV on over a hundred billion of dollars of debt being carried through maturity at rates higher than my credit cards. This should surprise exactly no one.
I don't think you understand NVP and debt. You seem to be suggesting Greek debt be discounted at something close to the risk free rate?
These discount rates are correct. The value of a promise of future cash payments from the Greek government is worth far less than one from the US or German governments for example.
If you actually believe that Greek debt should be discounted much less, I'll happily swap any amount of (say 10 year) Greek bonds with you if you give me the equivalent face value of 10 year US treasuries or German bunds. Since you think the NVP should be similar, you should be happy to take the deal.
Nope - haircuts are calculated relative to current asset values.
For example, when discussing the haircut on a 100m greek bond that's currently trading for 60m, giving the holder 60m for it does not constitute a 40% haircut.
That's a good point, actually. There was a fairly generous haircut, and if the Greek economy had been allowed to grow from that point on, we wouldn't be in the mess we're in now.
As I see it, the problem was that the troika followed fairy-tale economics, forcing the obviously flawed doctrine of "expansionary austerity" onto Greece. In a large part, this was probably motivated by the desire to set a harsh example as a threat to other countries who might follow in Greece's footsteps.
Of course, "expansionary austerity" cannot work, and it especially cannot work inside a currency union, and so Greece's economy declined even further, making also the remaining debts unsustainable despite the haircut.
Greece supporters do not seem to care about facts at all. Same for the GDP numbers, they always use the graph from 2008, whereas the graph from 1999 is much more enlightening: https://twitter.com/jmackin2/status/615576571890565121
Even in the boom years, the numbers of Greek patents granted per year is ridiculously low, the number of Greek universities in the worlds top-500 is ridiculously low and Greece's rank in the world banks Doing Business report is still the worst of any OECD country - after 5 years of "reforms"!
"There is one morality tale that says the debtor must repay, or she has sinned and must be punished.
There is another morality tale that says the creditor must invest wisely, or she has stewarded resources poorly and must be punished.
We get to choose which morality tale we most use to make sense of the world. We do, and surely should, use both to some degree.
But if we emphasize the first story, we end up in a world full of bad loans, wasted resources, and people trapped in debtors’ prison, metaphorical or literal.
If we emphasize the second story, we end up in a world where dumb expenditures are never financed in the first place."
Unfortunately, it's neither. The debtors in this case are the people of Greece, yet the ones who got them indebted are politicians, who misled the population into believing that the expenses the government had were sustainable. Even more important is that the politicians were not voted in by 100% of people, which simply means that many people who lost their money didn't agree with the policy that led to them losing their money.
I don't think anyone with a straight face can now say that democracy is the best solution to running our society, when it, in fact, leads to the situation in which half the population (the ones who vote for the policy) unknowingly oblige the other half (and themselves) to lose their money. This situation is not an exception. This is what's going to happen sooner or later to every other country which has a substantial debt. You can't spend more than you earn without consequences.
Reasonable points about democracy but as Churchill said: "Democracy is the worst form of government, except for all those other forms that have been tried from time to time."
> This is what's going to happen sooner or later to every other country which has a substantial debt.
Actually where the country controls its currency the effects are totally different and if the ECB could certainly step in for tiny Greece if there was a will.
> You can't spend more than you earn without consequences.
Actually the reverse is true for Governments which are like banks and create/destroy money. If they run a persistent surplus they cause the private sector to shrink or increase borrowing.
> Actually where the country controls its currency the effects are totally different and if the ECB could certainly step in for tiny Greece if there was a will.
It's the same thing. If you don't have enough money in the bank to make creditors whole, you print more (thus devaluing what everybody has). If you can't print, you cut their deposits. Either way, creditors are robbed. There is no magical solution here. Mathematics cannot be amended at will of any government.
If you spend more than you earn, someone somewhere someday is paying for it. And the longer you conceal that truth, the harder it is going to hit.
If the creditor is a bank, they're also creating money when they loan it out. Who is being robbed again?
In theory, it's either the shareholders, boldholders, or the broader citizenry that carry the risk in the banking system. So far Europe's governments have hung the risk on its citizens because either the banking system is too fragile to handle large defaults, or they want to preserve their bond holder and shareholder friends. probably a mix of both since they convinced €140b worth of bondholders to take a 50% haircut on Greece back in 2012. the hedge funds really were the main case of anyone getting "robbed" but that's what we call "credit risk".
The ECB can't handle Greece on its own because it has much stricter rules than a sovereign central bank would. It's bad financial architecture.
Per your last statement, there are MANY U.S. States, especially in the south, that have spent more than they earn at times during the financial crisis. I don't mean government spending, I mean taxes vs. transfers - wherein the Federal government is keeping the people in that state afloat. You don't read about those as much in the papers because we have a fiscal union and automatic stabilizers designed to help our neighbours out when they have problems. Europe lacks this.
Economics is not a morality play of evil debtors and angelic creditors or vice versa. Creditors can and should be wiped out when they make stupid loans. Debtors can and should be held to account but given forgiveness when they screw up (with limits on their ability and size of future screw ups). Failures to do either lead to systemic failures and/or revolutions. This has happened throughout history and will continue to happen regardless of your political system - monarchy, democracy, oligarchy, and anarchy.
There is one difference. When you have a government, it indebts people, who do not necessarily agree or understand the terms and the consequences. You cannot reasonably argue that because 50% voted for that government, 100% should face the consequences.
In fact is 100% plus their children and grandchildren. The real percentage of people marked by the debt that voted for the corrupt government is much, much, lower.
Actually, I can reasonably argue that. We get the government the majority wants (subject to filtering by the property holding oligarchy). I would much rather have that than a libertarian dystopia, which would be pure oligarchy in practice.
It was an argument: it had premises and a conclusion. The premises happen to disagree with yours.
The premise might expose a preference but that's because we are debating politics, wherein at some points up the chain of logical reasoning, one needs to pick preferences among conflicting principles.
I'd love to see an experiment where democracy was modified. People should get multiple votes, proportional not to their income or their wealth, but to the amount of taxes they paid the previous year.
There would need to be some sort of limit. E.g. nobody gets less than 1 vote nor more than 10.
But something like that would create what some call "skin in the game". Those people who pay the most money will have the most influence on government.
It's been proposed before, but never implemented AFAIK. Still, "the usual stuff isn't working". Why not some experimenting?
Like I said, an "experiment". Really a "thought experiment" since I don't see this being constitutional anywhere in the USA, and I'm not familiar enough with other countries to know where it could be tried.
Here's something simpler: Look at your previous year Federal tax return. If it shows that you paid even $1 in taxes, you get a vote in Federal elections. If not, then no vote. Same with State taxes.
Simple enough? Or would that still give too much representation to "the wealthy"?
Edit: I suppose one could voluntarily pay $1 in taxes just to get a vote. But this would probably be considered a "poll tax", and that has definitely been ruled unconstitutional in the USA: https://en.wikipedia.org/wiki/Poll_tax_%28United_States%29
>Here's something simpler: Look at your previous year Federal tax return. If it shows that you paid even $1 in taxes, you get a vote in Federal elections.
>Simple enough? Or would that still give too much representation to "the wealthy"?
No, but then again it's not substantially different to what we already have, so I don't see the point.
According to one article, 46% of US households didn't pay any Federal income taxes in 2011.[1]
That was the observation that got Romney in trouble. If those people weren't voting, that would be a very substantially different to what we have now. E.g. quite likely Romney would be president. (Let's not debate if Romney would have done better than Obama. Too much of a tangent.)
You're absolutely right about the "quotation marks". :) I went way overboard. Please accept an upvote as an apology.
Edit: I forgot that, to a considerable minority of people, Romney and Obama aren't substantially different. It's easy to think Republican vs Democrat is the entirety of the political spectrum, but it's not.
This is just begs the question of what the tax policy should be. If mainly income is taxed, then the rich get (proportionally) more votes. If mainly consumption is taxed, then everyone else (those who spend their income rather than save/invest it) gets more votes.
Now, let's extend your idea. Everyone can vote with their dollars for what they want to have in their lives! That way, no one is forced to use products or services someone else imposes on them. Now wouldn't that be the fairest system of all?
I've tried a few times to suggest the idea that people should have more say in which sections/parts of the government their tax money goes to. Similar to the HumbleBundle, with of course the "total tax amount" not being an amount people can change at will. I.e. they still pay taxes, just that they determine where to put more/less.
I.e. let's assume all of government is composed of:
Welfare
Education
War/Military
Police/Protection
By default, individuals start off giving in 25% into each bucket. You know, you could even put limits... e.g. "no more than 70% into any single bucket" and "no less than 10% for any single bucket".
These are just examples, obviously it's not perfect and/or ideal. But the fact that in our modern/digital age we haven't even considered and tried such a thing smacks of absolute hypocrisy. We don't "govern" ourselves in any sort of remote way, and to tell us so by virtue of "noble democracy" is an outright smack in the face if you ask me.
How revolutionary! Will be cool to try it for real at least once! Pure capitalism is the form of government that haven't try yet. New Zealand is the closest. The US with 38% of the GDP being public spending hardly/halfly qualify.
"A Primer on the Greek Crisis: the things you need to know from the start until now", Anil Kashyap, University of Chicago, Booth School of Business, June 29th, 2015
1) How did Greece get into such trouble?...
To accompany that:
"Greek Debt Crisis: How Goldman Sachs Helped Greece to Mask its True Debt"
Goldman Sachs helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal that legally circumvented the EU Maastricht deficit rules. At some point the so-called cross currency swaps will mature, and swell the country's already bloated deficit.
Edit: these were not just regular cross currency swaps
> But in the Greek case the US bankers devised a special kind of swap with fictional exchange rates. That enabled Greece to receive a far higher sum than the actual euro market value of 10 billion dollars or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1 billion for the Greeks.
The title was edited from "The best analysis of the situation in Greece" to "Greece". The former title, while baity, is a much better description of the article than just the name of the country. Might as well call it "Blog".
It would have been much better to, for example, delete "the best" and leave "analysis of the situation in" so that readers understand what about Greece is being discussed.
“Greece” is the title of the post, so this follows the standard HN norm. Also, anyone paying any attention at all to world news knows what aspect of Greece is likely to be being discussed.
I've meet a handful of young greeks(Age: 17-29) since 2010 and when asked about their situation, especially the unemployment rate they all said the same thing, young greeks don't want to work unless it's a high paying gov. secure job with 6 hours a day 5 days a week schedule. Ironically all of them were gamers but considering that the unemployment rate is about 50% with young greeks, it's hard to argue with that.
Also one important thing was said many times, most of greeks try to avoid taxes or they don't pay them at all. They've told me this is especially rampant in tourism. It's hard to argue with that, depending on where you traveled you can experience this first hand.
It's so easy to blame everyone else for your own problems, lets not forget how much money has actually been pushed to Greece since 2010 via financial injections and what have they done with it? What good is it to keep pushing more and more money into Greece when the people and it's gov don't want to change and without change how can you expect any progress?
Being greek in the same age group I dare to say that what you support is a blatant and dangerously ignorant lie. There are tons of people that have law or engineering degrees and would be grateful for a supermarket cashier job or flipping burgers. There is a serious problem with greek young people, they are basically a burnt generation, doomed to either chronic unemployment, ridiculously low-paying jobs (<500 euro/mo), or emigration, so I find your assertion deeply insulting.
I'm getting tired of the "lazy, tax-evading, early retiring greeks" mantra being repeated everywhere. I expect generalisations from reddit, but I expected something better from HN.
> You can't deny the fact that in the last decade, greeks have become accustomed to a certain life style that can no longer be maintained.
The point of the article is that the 'moral hazard' of lending and borrowing cuts both ways. What about the lifestyle of European bankers & elites? The lifestyle of elites was funded by their reckless lending, buying up "idiot paper" left and right (not just Greece). They believe themselves entitled to collect high-interest rents regardless of the risk which is priced into the interest rate!
To stretch an analogy, it'd be like Venture Capitalists blaming the startups for failing to earn returns on their investments.Rather than take responsibility for making risky investments, they demonize startup founders and employees, and threaten to break their legs until they pay back the firm.
Its "loan-shark theatre" between governments and central banks, with politicians stoking nationalist sentiment and stereotypes (as politicians do) in the service of elites (i.e. the creditors). Maybe you should read the article, instead of asserting "undeniable facts" (p.s. the greek economy has been in a worsening great depression for the last decade; and your handful of gamer acquaintances are a non-representative sample).
You make good points but it is multifaceted. The money "pushed to Greece" isn't really available for them to squander as you're suggesting... it is used to roll over loans from private European banking institutions that were reckless and stupid to buy Greek bonds in the first place, and place them on the backs of taxpayers instead. Greeks are understandably ticked off that they are being choked out by the conditions of rolling over those loans, for which they see little benefit.
It is so easy to tell people how they should behave from the outside.
I am portuguese and my country is quite similar to Greece. I do know it quite well.
Many of those behaviors have deep roots in our societies. It just doesn't work someone from the outside coming and shouting at us how 10 million people should behave.
Try to leave in our countries for an year, then see how things are.
“Interfluidity has an interesting but quite wrong post on how to think about Greece. International relations simply could not be run on the principles he advocates, most of all in conjunction with democratic nation states. His weakest point becomes evident when he writes:
““Among creditors, a big catchphrase now is “moral hazard”. We cannot be too kind to Greece, we cannot forgive their debt with few string attached, because what kind of precedent would that set? If bad borrowers, other sovereigns, got the idea that they can overborrow without consequence, if Spanish and Portuguese populists perceive perhaps a better deal is on offer, they might demand that. They might continue to borrow and expect forgiveness, and where would it end except for the bankruptcy of the good Europeans who actually produce and save?
“The nerve. The fucking nerve. Lenders, having been made nearly whole on their ill-conceived, profit-motivated punts, now fear that if anybody is nice to somebody who doesn’t deserve it, where will it end? I’d resort to that cliché about chutspa, the kid who murders his parents then seeks leniency ‘cuz he’s an orphan. But it’s really too cute for the occasion.”
“That’s a non-answer, with anger filling in for the required substance as to why Germany and others should allow this. “Your government is making things much worse. If you want to borrow so much more from us, you have to play by the rules and also stop spitting in our face and calling us Nazis and terrorists while negotiating” is more relevant — and yes relevant is the right word here — than any point he makes.
“A political program has to be something that voters could at least potentially believe, and international negotiations therefore cannot stray too far from common-sense morality, including when it comes to creditor-debtor relations. That is the point which today’s progressive economists are running away from as fast as is humanly possible. And for all the Buchanan-esque and public choice points about “rules of the game” this one about common sense morality unfortunately has ended up as the most important.
“Look at this way: if you lost a public relations battle to Germany, you are probably doing something very badly wrong.”
"Among creditors, a big catchphrase now is “moral hazard”. We cannot be too kind to Greece, we cannot forgive their debt with few string attached, because what kind of precedent would that set?"
They already set that precedent by refusing to punish the individuals involved in the fraudulent misrepresentation that led to Greece entering the Eurozone.
Still not too late for the creditors to make amends for that mistake.
Interfulidity is one of the best economics blogs out there. Last year he did a five-part series on welfare economics[0] that, while quite lengthy, was very well-done. Anybody that's interested in political economy, but has a more traditional Econ 101 background, it's a good place to start.
I'm not encouraged by statements like this: "There is nothing inherently more scientific about using an ordinal rather than a cardinal quantity to describe an economic construct. Chemists' free energy, or the force required to maintain the pressure differential of a vacuum, are cardinal measures of constructs as invisible as utility and with a much stronger claim to validity as 'science'."
Utility is ordinal not out of some deep desire on the part of economists to "appear scientific" but because it reflects a simple empirical fact about humans. "Utility" is a measure of value to someone, and human values are ordinal: I value my children more than my cats, and no number of cats will ever equal the value of my children. It would be incoherent and wrong to say I value my children ten times more than my cats, and no cardinal relationship between them could possibly represent reality.
This is not mysterious or esoteric. The ordinality of human values is what makes rational choice under uncertainty such a difficult problem, because we can't compute expected values from ordinals (unless there happens to be a market in the things we value, in which case we can get cardinality through prices... but there is no market in children or many other things we value.)
By making it sound like economist's interest in publicly testing ideas by systematic observation, controlled experiment and Bayesian inference--which is what the discipline of science actually is--is some kind of inexplicable fetish instead of a perfectly reasonable goal for anyone who wants to say anything meaningful or interesting about the world, the author does everyone a great disservice.
>Utility is ordinal not out of some deep desire on the part of economists to "appear scientific" but because it reflects a simple empirical fact about humans. "Utility" is a measure of value to someone, and human values are ordinal: I value my children more than my cats, and no number of cats will ever equal the value of my children.
Utility is a bullshit non-measurement that is defined self-referentially. It's not better than phlogiston.
I believe Von Neumann showed that any consistent ordinal utility can be mapped to a cardinal utility. As long as you can rank your preferences, for cats, children, or whatever, you can come up with an equivalent cardinal utility.
So I think Waldman's statement is technically correct, the two are equivalent, and one isn't more scientific than the other.
There is this notion that it's bad form to say, a rich person gets less marginal utility out of a dollar than a poor person, or sum up utilities across people. And it's bad form to quantify the value of a human life for instance.
You can, however, say the rich person values leisure at more dollars than the poor person.
If you could sum up utilities across people I'm sure it would lead one to very bad conclusions, unlike some of the other simplifications economists make, which only lead to useful conclusions. <cough> Actually, I'm not really certain what it would change, if anything.
In any event it would appear that humans aren't very consistent with their preferences, c.f. behavioral economics, hence the notion of utility may lead one astray whether one views it as an ordinal ranking or cardinal quantity.
I largely agree with this article. It is still very dubious to me how anyone thinks that things like increasing VAT at the moment are going to help anyone.
However I don't really understand the author's reasoning here:
> I’ll end this ramble with a discussion of a fashionable view that in fact, the Greece crisis is not about the money at all, it is merely about creditors wresting political control from the concededly fucked up Greek state in order to make reforms in the long term interest of the Greek public. Anyone familiar with corporate finance ought to be immediately skeptical of this claim. A state cannot be liquidated. In bankruptcy terms, it must be reorganized. Corporate bankruptcy laws wisely limit the control rights of unconverted creditors during reorganizations, because creditors have no interest in maximizing the value of firm assets. Their claim to any upside is capped, their downside is large, they seek the fastest possible exit that makes them mostly whole. The incentives of impaired creditors are simply not well aligned with maximizing the long-term value of an enterprise.
The argument he disagrees with here is that the creditors are actually not so much interested in getting back their money but in keeping leverage over the government to enact reforms [0].
He believes that this cannot be the case, because as creditors their incentive is not the long-term good of the nation, but only their short-term recovery of the debt.
I don't think this is necessarily true.
In the end, the goal of the EU should be (I hope) to allow Greece to become a prosperous nation with a sustainable economy, to form a stronger union overall. Whether or not the actual debt ever gets fully repaid should be secondary to that. So aren't the incentives in this case, unlike for corporate debt, actually quite well-aligned?
To me the idea that the creditors do not want to give up all their leverage (the debt) makes perfect sense to me. The Greek government has shown time and time again that it is unable to enact the reforms it needs to. Properly reforming the political structures and getting rid of clientelism and waste is going to require some external factor forcing them to act.
Until/unless the rich European countries are willing to subsidize the poorer countries, as a financial union, the Euro is just a complete non-starter since the fiscal policies these states need are so far apart.
The notion that a country like Greece needs a different currency or fiscal policy to Germany isn't really true. Ultimately whether they print New Drachma and hyperinflate themselves into poverty or whether they accept massive pay cuts/import drops doesn't make much difference - they are two roads that lead to the same outcome.
Greece could become competitive without leaving the Euro. However, it means actually telling people they're going to receive large and frequent pay cuts. As nobody likes doing that, easier to ignore the problem until the whole thing comes crashing down. Then when salaries are redenominated in ND and suddenly ND becomes worthless, it's not the bosses fault see - the boss didn't cut anyone's pay. It's just the darn currencies fault.
Psychological tricks aren't what Greece needs right now though.
On a zero-based forecast the two are equivalent. It is different though to keep your stocks high while taking your flows down as if you keep a euro balance sheet and a de-valued euro p&l. They are two roads in the same direction but with totally different outcomes.
Devaluation actual has real, not psychological impacts in debt repayment and import/export.
Whether printing more money would lead to a liquidity trap is above my pay grade, but empirically (the past 5 years, and every single austerity program in history), imposing austerity has been to shown, to not work, and it's a precondition if they want to keep using Euros. Based on current/future loan terms, Greece will never be able to grow their GDP to meet their repayment schedule.
These EU regional aid subsidies are too insubstantial to counteract the huge imbalance of payments between the core and periphery. The whole EU budget is only 1% of GDP and half of that goes on farm subsidies.
When the Greek government originally borrowed their debts, they did so mostly from commercial banks in other EU countries. Therefore, the first Greek crisis was systemically dangerous. It had the potential of dragging the entire EU banking system into the mud. In the meanwhile, these commercial EU banks have been able to offload their Greek debt paper onto their own governments and onto supranational EU organizations. Today, a Greek default would no longer put the EU banking system in jeopardy. It is the European Financial Stability Facility (EFSF) and similar organizations at national and international level that would see a hole appearing in their financial paperwork, if Greece defaulted.
Therefore, the point of view of Alexis Tsipras, the Greek prime minister, makes a lot of sense. Let Greece simply default and let the current debt holders dump the Greek paper on the open market, where it will trade at cents to the Euro. Inasmuch as Greece finds more money in the future, the Greek government can try to buy back debt paper in order to destroy it. The current holders of Greek paper would indeed lose money but in fact they have lost that money already. If they simply had the courage to let the open market value their holdings, they would see today already that most of the value has already gone. Nobody has any hope of seeing the money back represented by the Greek debt paper. Why not just admit it?
Historical lesson: Borrowing large amounts from EU banks is a one-way bet. Their governments will not let these banks go bankrupt and therefore, if need be, they will take over the debt. Since these governments cannot collect the debt either, they will eventually have to forgive the debt.
> "The world is full of unworthy and unscrupulous entities willing to take your money and call the transaction a “loan”. It always will be. That is why responsibility for, and the consequences of, extending credit badly must fall upon creditors, not debtors. There is one morality tale that says the debtor must repay, or she has sinned and must be punished. There is another morality tale that says the creditor must invest wisely, or she has stewarded resources poorly and must be punished. We get to choose which morality tale we most use to make sense of the world. We do, and surely should, use both to some degree. But if we emphasize the first story, we end up in a world full of bad loans, wasted resources, and people trapped in debtors’ prison, metaphorical or literal. If we emphasize the second story, we end up in a world where dumb expenditures are never financed in the first place."
This is great. What, then, about a middle road? Absolve greece of its debts. Write off its liability as a sunk cost, let bygones be bygones. Then cut it off from the ECB. Let the government figure out how to run a sustainable economy, and when they're ready, bring them back in.
The balance can involve slamming the individuals in jail who enabled Greece to misrepresent its finances before it joined.
Unfortunately, actually prosecuting fraud seems to be a minority view, whereas punishing entire countries (primarily those on a low income, too) for the sins of a few is the norm in Europe.
Some of these individuals were greek and are under greek jurisdiction. None were prosecuted. It would give the moral position of the greek government a huge boost if they started doing that, just like Iceland did in its default.
> I’d only add that the corrupt elites were not only overspending, but they were involved in vendor finance scams. Hundreds of millions in bribes on some single deals. The credit came through to sign the contracts, and the bribes were rolled into the contracts. On one deal alone, Siemens, you had the Greek defense minister take hundreds of millions to approve a tens of billions deal. He is in jail, so are members of his family, but then there are 64 others being prosecuted as well for this one deal. Think about it, hundreds of millions spread to 64 people (who probably doled out more themselves).
"They had knowingly and purposefully brought weak states into the Eurozone, because they genuinely, even nobly, wished to build a large, strong, United Europe."
For folks who know Europe/Europeans well, is this true?
Absolutely. The pro-European movement that's been going on for many many decades has as an ultimate goal to unite the peoples of Europe so we can live in peace. United in diversity, as the EU motto claims. A great % of Europeans you met before 2008 would agree with this.
There's now —sadly— little left going around of the "Alle Menschen werden Brüder" that our shared anthem sings (all men become brothers under the gentle wing of joy).
A bunch of unscrupulous cronies sold both northern and southern Europeans up the river just to make a profit for themselves and their friends. No damn statesmanship to be seen anywhere. Long gone are the times Schroeder and other much-more-respectable leaders, we now have to put up with the likes of Lagarde and Juncker. And, of course, Tsipras and Varoufakis, amateur hour, who have been absurdly reckless in their handling of the negotiations and PR.
Schroeder?
You mean the one that is the one of the best friends with Putin and was put by him chairman of the shareholders' committee of Nord Stream. Which was basically created by those two. Corruption at it best, I would strongly object to such "respectable leaders".
Note I said more-respectable, it was just comparative and not absolute. Politicians are politicians: it's never white, it's just shades of gray. Schroeder at least had some decency when it came to the bigger picture, which these gutless lawyers we chose as of late lack completely.
Patents are indicative of an IP based economy, Greece is much more dependent on tourism than on IP and technology than Austria or Finland. Economic productivity is not accurately measured by looking at the number of patents granted for any country, though it does reflect how large the tech/ip sector is for that country.
I am from France and I've lived in Bulgaria for a while. It's true fortunately/unfortunately. Ie., one of
the condition of Bulgary entry in Europe Union was the shudown of two nuclear reactor that was the same model than Thernobyl ones...
How do you call this an analysis? This is pretty blatant political polemic. It isn't an "analysis" but a rant. The Greeks lied about their financial condition in an effort to support a pension system that lets people retire far earlier than the rest of Europe. Bring the pension system and other spending in line in exchange for some haircuts on the debt- that's the fair answer. Not this crud about how the other European countries "betrayed" Greece. Man that' some offensive nonsense.
> The Greeks lied about their financial condition in an effort to support a pension system that lets people retire far earlier than the rest of Europe.
This is incorrect: the average age of retirement in Greece is not lower than every other country in the EU; in fact for men it is exactly the same as in Germany.
The TROIKA GDP Forecast graph is great! I think from now on I am going to send it to any investor who thinks asking pre-revenue companies for projections is a reasonable thing.
I had a good chuckle at that. It instantly reminded me of the Itanium sales forecasts[1]. It's like people are afraid to say "I don't know" (especially when money is involved) and just end up telling people what they want to hear.
I really don't know that much of the details of this particular situation, I've grown tired of hearing about this sort of thing. I RTFA and it was interesting, but then it's always interesting, isn't it.
I was surprised that a CTRL+F "Icelend" in this thread turned up nothing. While I'm sure there were many differences in their situation, I bet there were a lot more similarities. My crude analysis of this situation is, it is yet another example of "men behaving badly while playing with other people's money". And when I say men, I'm not using it in the gender agnostic sense.
When this sort of thing happened to Iceland, they had the choice of "doing the right thing" (aka do what they were told by the international banking industry), or go it on their own. After some "public discussions", it was decided they would go it on their own. And a key learning that came out of that public discussion was to ensure females were involved in the process:
And by most accounts, Iceland is now doing generally "ok".
By the way, I have no idea if that article is at all authoritative on the topic of Iceland or females role in its recovery, I did a 5 second google search. My point is, as the author of the article (that is the topic of this post) clearly pointed out, the original deal with Greece was built on a fair amount of lies, that everyone knew were lies. I particularly liked the reference to this term: http://www.urbandictionary.com/define.php?term=IBGYBG
And my experience (as a man), dealing with other men for many decades now is: a certain subset of men have absolutely no moral qualms about lying in the pursuit of power; other men of the same personality type, even if seemingly enemies, are happy to go along, and the collusion between these opposing actors who share the same mindset often results in them all rising into positions of extreme power, and they eventually blow the whole place up. It's probably always been this way in a sense - in the good old days, it resulted in war - nowadays, it results in financial markets blowing up.
I know there are all sorts of holes in my "theory of the world", and I don't even care, because this same shit will continue to happen indefinitely, and it will always be men running the show, but there's no way to prove causation because it will always be men running the show.
Iceland is quite a different story:
1. It isn't a part of the eurozone
2. Its economy actually works
3. The debt was not in the slightest a people's fault
BMW wants to sell more cars to greeks. Greeks don't have enough money so they can't buy. Deutsche Bank (DB) gives "free money" in loans. (And of course DB knows that greece isn't exactly "strong" economically.) We are talking about a greek population that never ever had a loan before, while the prime minister talks about the "powerful (economically) greece". They also thought that the world "stock markedt" was some kind of chinese recipe. Greeks, with "free money", buy BMWs. BMW is happy. Profits. Eventually, of course, TSHTF.
And then, would you expect that?
THE PRIVATE DEBTS BECOME PUBLIC.
That means the bad loans of DB become the burden of all the taxpayers of europe. Germans pay, greeks pay (decimated basically, with ~-20+% GDP, +5x taxation, etc), italians pay, french pay, etc. The TAXPAYERS.
The billions that greece "got" as "help", it never saw. They went ~98% back to foreign creditors.
Basically:
The politicians (cue, under the table payments for Mrs. Merkel, Mr. Schauble, Mr. who-was-PM-of-greece-then), took money from all european taxpayers, and gave profits to BMW and DB. (With their cut.) Now, they sell a nationalistic "those southern states are lazy".
PS: It was german and french private banks, and german and french industries. It's just that DB was the biggest, and BMW is big and symbolic.
Truth. German and Greek taxpayers are paying back rich creditors that made dumb loans. The Greek people get especially screwed. The current shot-callers have little interest in long-term political stability and the well-being of citizens. They just want their money back and are glad to turn this into a morality play. What makes it worse is that Germany is just about the worst actor to be preaching from the pulpit of economic morality. They have benefitted multiple times in the past from debt forgiveness and the chance to rebuild. There was a time when the world realized the error of exacting retribution through economic penalties. Hence the willingness of allies (primarily the US) to dump tons of capital into rebuilding Germany, even after they started WWII. Then a ton more debt was forgiven later since Germany could NOT afford to service their debt and build their economy- a deal Greece would kill for. Instead Greece wants to run a slightly lower surplus so they can provide services, a social safety net and some stimulus... bastards /s.
One problem with this conveniently simplistic good and evil narrative is the timescale - chosen i presume to be able to blame the Germans. Greece hasn't balanced its books since 1974. Greek levels of government debt has risen faster than the EU average for 30 years.
Secondly unless 20% of the Greek adult population are driving brand new BMWs, your thesis does not explain what Greece spent the borrowed money.
Yes there was a transfer of private debt to governments but this took place after applying one of the steepest haircuts to holders of government dept in recent times. The only way the other governments could help Greece without having the money swallowed by interest payments was to take over the debt and slash the interest rate on it. You seem to be suggesting the other governments should have stood back and allow Greece to implode with a messy default just so private bondholders take a hit. The fact is they did take a huge hit.
We are now seeing the results of two different approaches: one involved painful cuts (austerity) and reform but supported by your economic partners and one (screw all the creditors) resulting in banks running out of cash, economic freeze, looming shortages of medicines and fuel, imminent IOUs instead of money for government workers, etc. Neither pleasant options admittedly but the latter is a catastrophe for the ordinary Greek.
I agree. Bringing back those ghosts from the past, is just bad taste. We all have learned our lessons from that, and it is time to move on now. That is why I don't like it when they throw around the "nazi" argument, every time Germany is is being mentioned the debate. Why not mention Goethe instead?
Are you trying to say that the current Germany is not the direct descendant of the Nazi Germany? Then how did it come into existence? Is it a brand new nation conjured out of thin air after the Yalta and Potsdam conferences?
Pay attention please that I did not say that it is the same nation, but that it is the direct descendant. Surely the majority of living Germans had nothing to do with NSDAP, because they were born after 1945.
I thing that inmigration played a role. Unless you count the 2 millions of german-turkish people and 200.000 german jews as nazis in disguise of course (This will explain the big suspicious moustaches, otherwise). And italian, spanish, greeks... lots of croats also.
"Regulatory mistakes and agency issues within banks encouraged poor credit decisions. Spanish banks lent into overpriced real estate, and German banks lent to a state they knew to be weak. Current account imbalances within the Eurozone — persistent and unlikely to reverse without policy attention — implied as a matter of arithmetic that there would be loan flows on a scale that might encourage a certain indifference to credit quality. These were European problems, not national problems.
But they were European problems that festered while the continent’s leaders gloated and took credit for a phantom prosperity. When the levee broke, instead of acknowledging errors and working to address them as a community, Europe’s elites — its politicians and civil servants, its bankers and financiers — deflected the blame in the worst possible way. They turned a systemic problem of financial architecture into a dispute between European nations. They brought back the very ghosts their predecessors spent half a century trying to dispell. Shame. Shame. Shame. Shame."