Tuesday, 28 April 2015

Are creditors pushing Greece deliberately into default?

The Greek drama has entered its endgame. The Greek government has to repay loans to the IMF and other public institutions in the near future but does not have the cash to so. The lenders refuse to come forward in providing liquidity as long as the Greek government does not accept the conditions they impose.
We now hear from the finance ministers that the Greek government is unreasonable because it does not want to accept these conditions. These are that austerity be fully implemented and that the structural reforms that have been agreed to by the previous Greek government, be fully carried out.
But are these conditions reasonable?
The austerity measures that were imposed since 2011 led to devastating effects on the Greek economy. They drove millions of people into unemployment and poverty, and produced intense political instability that is responsible for the rise of Syriza. Insisting on further austerity does not seem reasonable when the failures of this strategy have become so obvious. The surprising thing is that ministers of finance continue to hold the moral high ground and preach to the Greek that they should be more reasonable. Being reasonable is equated to accepting the conditions of the creditors even if these conditions have failed to produce positive results. It is even more surprising that most of the media have now accepted this story.
Some of the structural reforms the creditors insist on are badly needed. Tax reform that would lead the rich to pay taxes, is one. But surely this is a reform that the Tsipras government, in contrast to the previous government, is willing to introduce. But other structural reforms are patently unreasonable. The privatization program that was agreed with the previous government and that the creditor nations insist should be implemented does not make sense. A country should not be pushed into disposing of its valuable assets in a forced fire sale. This will lead to very low revenues for the Greek government and will mainly profit the buyers, some of which are companies in the creditor nations.
We are now being told that the responsibility for failure rests entirely with the Greek government that remains unreasonable and unreliable. It is exactly the opposite. The intransigence of the lenders and the unreasonable demands they impose on a country are responsible for the drama that unfolds.
There is a big contradiction in this intransigence. As is well known, Greece has profited from debt rescheduling in the recent past. Maturities on the debt were extended and interest rates were lowered. According to the Brussels think tank, Bruegel, the effective Greek public debt represents only about 60% of Greek GDP. This appears to be sustainable, provided the Greek economy can function normally. Put differently, Greece can be said to be solvent but illiquid.
The lenders, however, keep the money tap closed. As a result, financial markets are now speculating that the Greek government will not be able to respect the next repayment deadline and will be forced to go into default. The interest rates on Greek government bonds have shot up to levels that make the debt service unsustainable and that make it impossible for the Greek government to refinance itself in the bond market. Speculation has become self-fulfilling and is driving the Greek government into default. But note that this is the outcome of the decision of the creditors not to provide liquidity to the Greek government. It is precisely because the lenders do not want to provide liquidity that Greece may be forced to default.  It looks like the creditors are pushing Greece deliberately into default.
The ECB is carrying a great responsibility.  By providing liquidity it could unlock the stranglehold the Greek government is kept in. Refusing to provide liquidity would make the ECB the single most important actor responsible for a Greek default and a possible Grexit.


  1. More than Grexit, the creditors want Syrizaexit. Economic criteria are not the main drivers here, it is pure ideology.

  2. Exactly! To put it more bluntly, this type of austerity, the type that leads to disinvestment, is like forcing a farmer to sell his tools and equipment to make this year's debt payments. No longer being able to work productively anymore without his tools, how is he supposed to make next year's payments?

    The ECB has prevented Greece and all economically weaker regions of Europe from getting the investment they need to work and get out of their morass. At this point a considerable part of the debt is a direct result of perennial austerity and not caused by the indebted themselves.

    I don't understand why people think the troika has more leverage than Greece in this negotiation. Sure if Greece defaults there will be some pain for greeks for a while, but they get to start anew without debt possibly with their own currency. A properly managed currency could allow for their labor and investment market gridlock to suddenly resolve itself putting a large part of the 25% unemployed back to work. No debt and up to 25% more people working could make them massively better off (If everything goes well).

    Meanwhile the alternative is for Greece to stay in a monetary union hell bent on depressing europe's and the western world's economies through austerity measures? It doesn't seem like a difficult choice to me.

    In a way, Greece is being generous and taking the high road here in offering to pay back some of the debt and only demanding in exchange to be allowed to stay in a dysfunctional monetary union with marginal utility.

    Some people may be afraid that allowing sufficient funds for investment into Greece, may result in the money being diverted into short term spending instead of into long term sustainable investment. To recycle my agrarian metaphor, the lender is afraid the farmer will not buy tools with the money and work but instead buy a vacation in Santorini. But then if there is this much distrust from other members of the eurozone that people in greece are not even allowed to work, there is zero reason to continue the relationship and Greece should default and break off.

    The fact that unemployment is widespread in Europe, not just in Greece tells us that the main source of problems is the damaging monetary situation caused by the ECB, not greek laziness. Greece has already achieved a primary surplus, they went through a huge amount of pain to correct their finances. And they did it while the ECB was continuously throwing sand in their gears, keeping inflation too low and real interest rates above a rate that gets the Europe to an acceptable level of employment. This disproportionately affects weaker regions.


    1. Monetary policy in Europe is run so that only the areas that have natural economic advantages can prosper while investment is sucked out of weaker regions and turned into idle excess fiat. If Greece, through gargantuan efforts managed to be so productive as to offset their natural disadvantage and the European economy started heating up, the ECB would tighten yet again and vacuum investment out of the next weakest region causing a similar crisis there.

      Only when the ECB will have produced an acceptable level of unemployment in the eurozone will you really be able to start blaming individual countries for their economic woes. After the recent reforms in Greece, if the ECB did an half decent job, Greece might well have been able to pay the entirety of their debt without too much pain, and if they still didn't, then you would have had a case for corrective austerity. But you cannot have government austerity at the same time as monetary over tightness (read private sector suffocation). That is just mathematical nonsense.

      To make another darker metaphor, if there is so much distrust and resentment toward the Greeks that people think they should be made into slaves to pay for their debt, even then, it would make no sense to refuse to provide tools and infrastructure to enable them to work. What good are non-working slaves? Of course, the relationship should break off well before we get to this extreme. Sometimes it seems like Germany doesn't mind moving towards this nonsensical non-working slaves scenario.

      The only real solution will have to start with the ECB moving to a higher or better inflation target that doesn't choke their continent's economy and that allows weaker members to work towards recovery.

    2. One wonders why the Greek don't just take the plunge and default on their debt. It is better to cut a limb quickly then to leave it rotting and poisoning the whole body. The way they are set the whole Greek society will just wither away with the complicity of ECB. It is better for them to default, take the hit, exit the EU and rebuild. I think you put forth so aptly the main considerations.

  3. The next question of course is why the creditors would rationally push Greece into default, when simply advancing the agreed €7.2 billion would forestall losses to the IMF and EZ of up to €318 billion (see Dor http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2599558)?

    The reasons seem to be entirely political: to deter other anti-austerity movements in Spain (Podemos, Ciudadanos), Ireland (Sinn Fein), Italy (Five Stars) and even France (Front National) from toppling incumbent governments and reneging on the bailout programs and austerity.The game does seem to be worth the candle, at least to Wolfgang Schäuble and his understanding of austerian solidarity.

    See http://silverberg-on-meltdown-economics.blogspot.de/2015/04/the-writing-on-wall-grexit-graccident.html and

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  5. Oh, i see, there much more sprit of conspiracy than in Spain! What a pain!

  6. The original creditors of Greece were large banks. But as you say, most Greek debt is now held by European governments. So the banks have been saved while no-one has had to publicly defend supporting banks with more money.

    A famous EU politician said "we know what to do, we just don't know how to get re-elected if we do it". It sounds like they've found a way to do just that!

    If my suspicion is right, the current brinkmanship is just a show. It will be followed by a deal that sounds far more austere than it really is.